How Does Schedule II Apply to ULIP Taxation?
Schedule II, Table Sl. No. 2 is the main provision for checking ULIP tax exemption under the Income-tax Act, 2025. It states that any sum received under a life insurance policy, including bonus, may be excluded from total income if the prescribed conditions are met.
For ULIP taxation, the most important conditions are:
- Premium to sum assured ratio
- Aggregate premium limit
- Policy issue date
- Whether the amount is received on death
- Whether the policy is issued by an International Financial Services Centre Insurance Office
For ULIPs issued from 1 February 2021 to 31 March 2023, the aggregate premium for all such ULIPs in any tax year during the policy term should not exceed ₹2,50,000. For ULIPs issued on or after 1 April 2023, the aggregate premium for all such ULIPs in any tax year during the policy term should be less than ₹2,50,000.
This means ULIP taxation should not be checked only policy-wise. If a taxpayer holds multiple ULIPs, the aggregate premium condition must also be reviewed.
When is ULIP Tax Exemption Available?
ULIP tax exemption may be available when the ULIP satisfies Schedule II, Table Sl. No. 2 of the Income-tax Act, 2025.
A taxpayer should check the following:
- Whether the ULIP falls within the prescribed issue period
- Whether the premium to sum assured ratio is within the permitted limit
- Whether the aggregate premium limit is satisfied
- Whether the policy is not a Keyman insurance policy
- Whether the receipt is eligible for exclusion from total income
- Whether the amount is received on death, maturity, surrender or redemption
For many policyholders, the most important point is the aggregate premium limit. If the premium limit is crossed, ULIP tax exemption may not be available and ULIP maturity tax may apply.
When Does ULIP Maturity Tax Apply?
Where a specified ULIP does not qualify for exemption and its proceeds are taxable under Section 67(5), the capital gain is computed according to Rule 49 of the Income-tax Rules, 2026.
For the first receipt, the computation generally considers the amount received, including applicable bonus, less the aggregate premium paid up to the date of receipt. Separate computation provisions apply to subsequent receipts to prevent the same premium or receipt from being counted more than once.
The applicable capital gains tax treatment should be determined under the relevant provisions based on the policy and transaction details.
If the taxable ULIP proceeds are treated as capital gains, taxpayers should understand the difference between short-term and long-term gains. For more clarity, read Ebizfiling’s guide on short-term and long-term capital gains.
What is High Premium Life Insurance Tax?
For specified non-ULIP life insurance policies issued on or after 1 April 2023, the aggregate premium condition generally requires the applicable annual premium total not to exceed ₹5,00,000 in any tax year during the relevant policy term.
The exemption is also subject to the applicable premium-to-sum-assured ratio and other conditions under Schedule II, Table Sl. No. 2. Where multiple policies are held, the prescribed aggregation provisions must be examined.
How is Life Insurance Maturity Tax Calculated for Non-ULIP Policies?
For non-ULIP life insurance policies, taxability is covered under section 92(2)(l) of the Income-tax Act, 2025.
Section 92(2)(l) applies where any sum, including bonus, is received under a life insurance policy other than a ULIP or specified excluded policy, and the amount is not excluded from total income under Schedule II, Table Sl. No. 2. In such a case, the taxable amount is generally the sum exceeding the aggregate premium paid during the policy term, to the extent such premium was not claimed as a deduction.
This means high premium life insurance tax is different from ULIP maturity tax. ULIP maturity tax is linked to capital gains under section 67(5), while life insurance maturity tax for non-ULIP policies may be taxed under income from other sources.
Difference Between ULIP Taxation and High Premium Life Insurance Tax
|
Particulars
|
ULIP
|
Non-ULIP Life Insurance Policy
|
|
Main exemption provision
|
Schedule II, Table Sl. No. 2 |
Schedule II, Table Sl. No. 2 |
| Main taxable provision if exemption fails |
Section 67(5) |
Section 92(2)(l)
|
|
Tax head if taxable
|
Capital gains |
Income from other sources |
| Key premium threshold |
₹2.5 lakh aggregate premium limit for specified ULIPs |
₹5 lakh aggregate premium limit for specified non-ULIP policies
|
|
Death benefit
|
Treated separately under Schedule II conditions |
Treated separately under Schedule II conditions |
| Main tax issue |
ULIP maturity tax |
Life insurance maturity tax
|
This difference is important under tax rules 2026 because many taxpayers apply one rule to all policies. ULIP taxation and high premium life insurance tax should always be checked separately.
Tax Treatment of Death Benefit, Maturity Benefit and Surrender Value
Death Benefit: Amounts received on the death of an insured person are generally protected from the specified premium-limit restrictions under Schedule II, Table Sl. No. 2. However, the nature of the policy and other statutory exclusions must be examined before treating a receipt as exempt.
Maturity Benefit: Maturity proceeds are exempt only when the applicable conditions under Schedule II are satisfied.
Surrender Value: Surrender proceeds must also be assessed under Schedule II. Where exemption is unavailable, the applicable tax treatment depends on whether the policy is a specified ULIP or a non-ULIP life insurance policy.
TDS on Taxable Life Insurance Policy Proceeds
Under Section 393(1), Table Sl. No. 8(i) of the Income-tax Act, 2025, TDS at 2% generally applies to the income component of taxable life insurance policy proceeds where the applicable payment threshold of ₹1,00,000 is crossed, subject to the statutory conditions.
TDS is not the final income-tax liability. Taxpayers should verify the policy proceeds, income computation and tax deducted using Form 168 (Annual Tax Statement) while preparing their income-tax return.
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