The Ulip paradox: Its tax perks come with unexpected long-term trade-offs.

Subscribe to enjoy similar stories. The government brought unit-linked insurance plans (Ulips) under the tax net in 2021 to discourage their sale as investment-only products and to bring some parity with mutual funds, an investment product they are often pitted against. Now, maturity proceeds from high-value Ulips are taxed as capital gains under the current rules.

So, if you purchase a Ulip with an annual premium of at least ₹2.5 lakh, the maturity proceeds are now taxed as capital gains. In other words, your gains will be taxed at 12.5% after the first ₹1.25 lakh. For lower-ticket Ulips, the maturity proceeds will remain tax-exempt as long as the sum assured is at least 10 times the annual premium.

Death proceeds—or money the nominees get—remain tax-free regardless of the ticket size. While high-value Ulips have come under the tax radar, they continue to enjoy certain advantages over mutual funds purely from a taxation standpoint. First, the capital gains tax is a flat 12.5% and does not vary even for debt exposure within a Ulip.

Second, you do not incur capital gains tax when switching between fund options within the same Ulip. This also explains why Ulips are increasingly adopting a mutual fund-like approach, launching new fund offers and mirroring the categorization seen in mutual funds. But before you choose a Ulip for its tax advantage and fund switching flexibility, understand the product limitations and why a simpler route of mutual funds may still offer a more hygienic approach to investing.

Ulip is a bundled investment product that comes with a wrapper of life insurance. Unlike traditional products, the costs are transparent. Upfront costs like policy allocation charges are deducted from the premium that you