Taxability of Single Premium ULIP Policy proceeds

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Sunil Sharma (Querist)
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19 August 2024 Invested in Single Premium ULIP policy in 2005 Rs.1 lakh with coverage of same amount. Current Value is around 18 lakhs. What are the tax implications on partial or full withdrawal. If the withdrawn amount is taxed, it will be taxed under which head. Is there an opportunity to set off Short/Long Term Capital Loss or Business Loss against such withdrawals

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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12 August 2025 Here's a detailed explanation of the taxability of Single Premium ULIP (Unit Linked Insurance Plan) policy proceeds under Indian tax laws as of 2024:
1. Basic Facts:
Single Premium ULIP purchased in 2005 for Rs. 1 lakh.
Current fund value: approx Rs. 18 lakhs.
Sum assured (coverage) = Rs. 1 lakh (same as premium).
Query about tax on partial/full withdrawal.
Query about setting off capital loss/business loss against such withdrawals.
2. Taxability of ULIP Proceeds
a) Premium paid in 2005:
ULIPs purchased before 1st February 2012 have favorable tax treatment.
Under Section 10(10D) of the Income Tax Act, proceeds from ULIP policies issued before 1 Feb 2012 are exempt from tax, provided the premium does not exceed 20% of the sum assured.
Since your sum assured and premium are both Rs. 1 lakh (i.e., 100%), this exceeds the 20% limit.
Hence, the exemption under 10(10D) will NOT apply.
b) Tax on full withdrawal / maturity proceeds:
Since exemption under 10(10D) does not apply, the amount received on full withdrawal or maturity will be taxable as capital gains.
The capital gain = (Sale consideration or proceeds) – (Cost of acquisition).
3. Treatment of Partial Withdrawal
Partial withdrawals are generally allowed after 5 years from policy commencement.
For pre-2012 policies where 10(10D) exemption doesn’t apply, partial withdrawals are also taxable as capital gains.
Each withdrawal is treated as a transfer of the proportionate units, attracting capital gains tax.
4. Short-Term or Long-Term Capital Gains?
For ULIPs, units are considered as capital assets.
Holding period starts from the date of purchase.
If units are held for more than 36 months (3 years), gains are Long-Term Capital Gains (LTCG).
Otherwise, Short-Term Capital Gains (STCG).
Since your policy is from 2005, holding period > 3 years — so any gains are LTCG.
5. Capital Losses and Set-Off
If you incur a capital loss (for example, if a withdrawal is at a value lower than the cost proportion), the loss can be:
Set off against capital gains (both short-term and long-term, as per rules).
Capital losses cannot be set off against business income.
Capital losses can be carried forward for 8 assessment years to set off against future capital gains.
Withdrawals from ULIP are treated as capital gains transactions, so losses therefrom are capital losses.

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