Unit Linked Insurance Plans (ULIPs) were sold to Indians and NRIs for 20 years on a single tax slogan: "Maturity is 100% tax-free under Section 10(10D)." That slogan stopped being universally true on 1 February 2021. The Finance Act 2021 carved out a category of ULIPs that lose Section 10(10D) exemption — and the category it carved out is exactly the high-ticket annual-premium ULIP that insurance agents prefer to sell to HNI NRIs. The maturity proceeds of such ULIPs are now taxed as capital gains. The cliff is at ₹2.5 lakh aggregate annual premium. Below it, the old rule still holds; above it, ULIPs lose their structural tax advantage and now compete with term + mutual fund on after-tax math — a comparison they typically lose. Here is the 2026 honest NRI ULIP picture, why the NRE-vs-NRO premium source matters for both tax and repatriation, and the three scenarios in which a ULIP still genuinely makes sense.
The Section 10(10D) rule before and after Feb 2021
| ULIP issue date | Annual premium | Maturity tax treatment |
|---|---|---|
| Before 1 Feb 2021 | Up to 10% of sum assured | Tax-exempt under Sec 10(10D) |
| Before 1 Feb 2021 | Above 10% of sum assured | Maturity taxed as income from other sources |
| On or after 1 Feb 2021 | Aggregate annual premium across all post-Feb-2021 ULIPs ≤ ₹2.5 lakh AND premium ≤ 10% of sum assured | Tax-exempt under Sec 10(10D) |
| On or after 1 Feb 2021 | Aggregate annual premium across all post-Feb-2021 ULIPs > ₹2.5 lakh OR premium > 10% of sum assured | Taxed as capital gains — equity ULIP at 12.5% LTCG above ₹1.25 lakh; non-equity ULIP at slab rate |
The ₹2.5 lakh is aggregated across all ULIPs issued on or after 1 Feb 2021 held by the same person. Holding three post-2021 ULIPs at ₹1 lakh each = ₹3 lakh aggregate = the entire payout from all three loses Section 10(10D). Pre-Feb-2021 ULIPs are grandfathered — they retain Section 10(10D) regardless of premium size (subject to the original 10%-of-sum-assured rule).
What the cliff actually costs
NRI A buys a post-Feb-2021 ULIP with annual premium ₹3 lakh and sum assured ₹30 lakh. Over 10 years, total premium paid: ₹30 lakh. Maturity value at 11% gross fund return after ULIP charges: ~₹52 lakh. Gain: ₹22 lakh. Pre-Feb-2021 treatment: tax-free under Sec 10(10D). Post-Feb-2021 treatment (premium > ₹2.5L): treated as equity capital gain — 12.5% on ₹22 lakh minus ₹1.25 lakh exemption = ₹2.59 lakh tax. The cliff costs ₹2.59 lakh of post-tax wealth — about 12% of the gain.
For a comparable strategy of term insurance (₹30 lakh cover, premium ₹4,000/year) + 10-year SIP in a flexi-cap mutual fund (₹296,000/year, the saved premium minus term premium): ~₹52 lakh maturity at the same gross return; LTCG on equity MF at the same 12.5%; effective tax close to the post-2021 ULIP. The structural ULIP advantage has shrunk to near-zero at this premium level.
NRE vs NRO — which account funds the premium
An NRI can pay ULIP premium from either NRE or NRO. The source matters for three reasons:
- Section 80C deduction — ULIP premium qualifies for 80C up to ₹1.5 lakh. NRI eligible for 80C only to the extent the premium is paid from Indian-source income (NRO). Premium paid from NRE (foreign source) does not give 80C against India-source income.
- Repatriability of maturity proceeds — premium paid from NRE → maturity / surrender proceeds can be credited to NRE → fully repatriable. Premium paid from NRO → proceeds credited to NRO → repatriable only within the USD 1 million / FY cap with Form 15CA + 15CB.
- FEMA documentation — bank records of premium source matter for the proceeds-routing rule above. Maintain clean transaction trails; many NRIs pay first from NRE, second from NRO mid-policy and complicate the repatriation later.
For a working NRI with no India-source income, the pragmatic answer is: pay from NRE, accept loss of 80C (which has no Indian tax to offset against anyway), and preserve full repatriability on maturity.
The ULIP cost stack — why headline returns mislead
Even before tax, ULIP charges materially reduce the headline fund return reported by the insurer:
| Charge | Typical 2026 rate | When applied |
|---|---|---|
| Premium Allocation Charge | 0-5% of premium (often 2-3% in early years; tapering) | Deducted from each premium before investment |
| Mortality Charge | Age + sum-at-risk dependent; ₹150-₹2,000+/year per ₹1L cover at age 30-50 | Monthly deduction from fund value |
| Fund Management Charge | 1.0-1.35% per annum (IRDAI cap = 1.35%) | Daily NAV adjustment |
| Policy Administration Charge | ₹50-₹500 per month | Monthly deduction from fund value |
| Surrender Charge (early exit) | Up to 6% of premium in year 1, tapering to 0 by year 5 | On surrender within 5-year lock-in |
Net effect: the published 11-12% gross fund return becomes ~8.5-9.5% after charges in the first 7-10 years. A pure equity mutual fund with 0.5-1.5% expense ratio captures more of the underlying market return.
Repatriation of ULIP proceeds for the NRI
Maturity, surrender, or death-benefit proceeds from a ULIP held by an NRI are paid in INR. Repatriation rules:
- Premium paid from NRE / inward remittance — proceeds can be credited to NRE; fully repatriable, no cap, no CA certification.
- Premium paid from NRO / India-source income — proceeds credited to NRO; repatriation subject to USD 1 million / FY cap with Form 15CA + 15CB.
- Death benefit to foreign-resident nominee — IRDAI permits insurer to remit to the foreign nominee's account directly; FEMA Master Direction permits up to USD 1 million per FY without RBI approval; beyond that, RBI approval required.
For NRIs planning the inheritance route — NRI policyholder + foreign-resident nominee — explicitly note the premium-source rules in family documentation. Nominee claims have been delayed for months when the bank could not reconstruct whether the premium came from NRE or NRO.
US-resident NRI — the PFIC layer
For US-resident NRIs (Green Card, H-1B, US-citizen), Indian ULIPs almost certainly trigger PFIC characterisation on the underlying equity unit-linked portion. The IRS treats foreign mutual-fund-like investments as PFICs (see our PFIC tax trap explainer). Some US tax practitioners argue ULIP is structurally insurance and outside PFIC; others treat the unit-linked equity sleeve as a PFIC. The cautious position is to assume PFIC applies and file Form 8621 annually per fund underlying the ULIP. Given Indian insurers do not produce US-tax-basis PFIC Annual Information Statements, QEF election is unavailable. The Excess Distribution regime applies on maturity.
Net US-NRI verdict: ULIPs are structurally tax-inefficient for US-resident NRIs. The same money in a US-domiciled India ETF (INDA, EPI, SMIN) is taxed cleanly at US capital-gains rates with no PFIC overhead.
When ULIP still makes sense for an NRI in 2026
- Pre-Feb-2021 grandfathered ULIP already in force. The original Sec 10(10D) exemption still applies for the original policy duration. Do not surrender to "upgrade."
- Annual premium ≤ ₹2.5 lakh AND ≤ 10% of sum assured. The Sec 10(10D) shelter still applies; the maturity is tax-exempt. The honest comparison is then ULIP charge-stack vs term + MF, which the lower-premium ULIP can sometimes win — especially over 15+ year horizons where the surrender-charge tapering has run its course.
- Disciplined-saver use case. Some NRIs simply will not maintain a separate term insurance + monthly SIP discipline. For them, the ULIP's bundled "premium + insurance + investment" hook delivers behavioural value that compensates for the cost stack. This is a behavioural argument, not a math argument.
- NRO-source premium with intentional non-repatriation. For NRIs who explicitly intend to leave wealth in India (children studying / staying in India, family inheritance plans), the NRO-premium ULIP can be a clean Indian-resident-side estate vehicle that does not need repatriation.
When ULIP does not work for an NRI in 2026
- Annual premium > ₹2.5 lakh — Sec 10(10D) gone; ULIP loses its tax shelter; term + MF is cleaner.
- US-resident NRI — PFIC layer adds annual paperwork cost ($500-1500/fund/year on the underlying); cleaner alternatives exist.
- Sub-5-year holding horizon — surrender charges + premium allocation charges in early years destroy returns; term + liquid debt MF is better.
- Premium burden > 15% of income — ULIP premium is sticky; income disruption risks lapse; term + flexible SIP allows pause-resume.
- Existing pre-Feb-2021 ULIP underway — never surrender mid-stream to buy a "newer-better-IRDAI-compliant" plan; the new plan will be post-Feb-2021 and lose Sec 10(10D) at the premium level the agent will pitch.
Practical playbook for the NRI considering ULIP in 2026
- Decide the premium level first. Above ₹2.5 lakh? Do not buy ULIP — go term + MF.
- Decide the source first. NRE-source preserves repatriation; NRO-source preserves 80C.
- Demand the full charge schedule — premium allocation year-by-year, mortality table, FMC, policy admin. Compute the 10-year and 20-year cost ratio.
- Compare like-for-like. Term insurance of the same sum assured + SIP of the residual is the right comparison. Most comparison tools tilted by agents do not run this.
- For US-NRI: do not buy. Use US-side India ETFs or direct ADRs instead.
- If buying, hold for the full 15-20 year horizon — surrender before then crystallises the charge stack against the return.
Frequently asked questions
Are pre-Feb-2021 ULIPs really safe from the ₹2.5 lakh cliff?
Yes. The Feb 2021 amendment applies prospectively to ULIPs issued on or after 1 Feb 2021. A 2018 ULIP retains the original Sec 10(10D) treatment for its full term, regardless of premium size (subject to the original 10%-of-sum-assured rule).
Can I split premium across multiple ULIPs to stay under ₹2.5 lakh each?
No — the ₹2.5 lakh threshold is the aggregate annual premium across all post-Feb-2021 ULIPs held by the same person. Splitting does not help.
What about traditional (non-ULIP) life insurance plans — endowment, money-back, whole life?
Section 10(10D) for traditional plans has a similar but separate cliff at ₹5 lakh aggregate annual premium for policies issued on or after 1 April 2023 (Finance Act 2023). Same structural logic; different threshold.
If my NRI ULIP becomes taxable, what is the holding-period rule?
For equity-oriented ULIPs (≥ 65% equity in underlying funds), the holding period for LTCG is 12 months; tax at 12.5% above ₹1.25 lakh in the FY. For non-equity ULIPs, the entire gain is taxed as ordinary income from other sources at slab rates.
Can I claim Section 80C deduction on ULIP premium as an NRI?
Yes, if you have India-source income to offset, up to the ₹1.5 lakh 80C aggregate cap. ULIP premium paid from NRO (Indian-source funds) reduces NRO income tax. Premium paid from NRE has no Indian tax to offset — the 80C is effectively unused.
How is the death benefit treated under the new rule?
Death benefit remains tax-exempt under Section 10(10D) regardless of premium level. The Feb 2021 cliff applies only to maturity / surrender — not to death claims.
Sources: Income Tax Act Section 10(10D); Finance Act 2021 amendment to Section 10(10D); Finance Act 2023 amendment introducing ₹5 lakh threshold for traditional plans; IRDAI ULIP product regulations; FEMA notifications on insurance proceeds repatriation; accessed May 2026. ULIP product features and charges vary by insurer — verify the specific policy charge schedule before committing. Editorial research, not financial or insurance advice.