Indexation on ULIP Capital Gains

Indexation, in the context of capital gains taxation, is the adjustment of the cost of acquisition for inflation using the Cost Inflation Index (CII) notified by the Central Board of Direct Taxes, so that only the real (inflation-adjusted) gain is taxed rather than the nominal gain. The treatment of ULIP maturity proceeds underwent a structural change with the Finance Act 2021 and was further refined by the Finance Act 2024. For ULIPs issued on or after 1 February 2021, where the aggregate annual premium across all ULIPs held by the taxpayer exceeds ₹2,50,000 in any year of the policy term, the maturity proceeds lose the Section 10(10D) tax exemption and the gain is taxed as a capital gain.

Equity-oriented ULIPs (where the underlying funds invest at least 65% in listed Indian equities) are taxed as long-term equity capital gains — at 12. 5% above the ₹1,25,000 annual exemption (post Finance Act 2024) on gains from holdings of more than 12 months, with no indexation benefit because indexation does not apply to equity-oriented assets. Non-equity-oriented ULIPs (debt or balanced) are treated under the long-term capital gains regime applicable to such assets — under the post Finance Act 2024 rules, long-term capital gains on transfers from 23 July 2024 onwards on most non-equity assets are taxed at 12.

5% without indexation, while gains on transfers before that date had the option of 20% with indexation. Worked example: Karan invested ₹3,00,000 a year for 12 years in an equity-oriented ULIP issued in 2022, totalling ₹36,00,000 of premium. At maturity in 2034, the fund value is ₹95,00,000.

Because his annual premium exceeded ₹2,50,000, the policy lost 10(10D) exemption. The capital gain is ₹95,00,000 minus ₹36,00,000 = ₹59,00,000. As an equity-oriented ULIP, the gain is taxed at 12.

5% above the ₹1,25,000 exemption — tax payable is roughly 12. 5% of ₹57,75,000 = ₹7,21,875. No indexation is allowed because equity gains do not get indexation.

A common misconception is that ULIP gains are always indexed. They are not — equity-oriented ULIPs have never had indexation, and post Finance Act 2024 even non-equity ULIPs and most other non-equity capital assets have lost indexation. The indexation benefit on ULIPs is largely a relic of the pre-2024 regime.

Another common misconception is that the ₹2,50,000 threshold is per-policy. It is per-taxpayer aggregated across all ULIPs issued from 1 February 2021. Spreading the premium across multiple ULIPs to stay under the threshold per policy does not preserve the exemption if the aggregate breaches ₹2.

5 lakh. Related: section-10-10d, ulip, gst-on-insurance-premium.