ULIPs for NRIs: The Rs 2.5 Lakh Premium Line That Ends the Tax-Free Pitch, the Charge Stack, and When Unbundling Wins

A relationship manager at your bank in Mumbai calls you in Dubai with a clean-sounding pitch: one product that insures your family, grows your money in the equity market, pays out tax-free at maturity, and can be funded straight from your NRE account. It is a ULIP, a Unit Linked Insurance Plan, and on the surface it solves two problems at once. You are busy, you want India exposure, and bundling sounds efficient.

The pitch has one number it will not volunteer: Rs 2.5 lakh. If your aggregate annual ULIP premium crosses that line, the tax-free maturity the entire pitch rests on is gone, and from April 1, 2026 your policy is taxed exactly like the equity mutual fund you could have bought without the insurance wrapper or its charges. For an NRI, eligibility to buy is almost never the issue. The premium threshold, the charge stack, the lock-in, and (if you file a US return) the PFIC overlay are the issues, and each of them rewards a critical reading before you sign.

The 30-second answer: A ULIP bundles life cover and market investing in one wrapper with a five-year lock-in. NRIs can buy them and pay from an NRE or NRO account; NRE-funded proceeds are freely repatriable, NRO-funded proceeds fall under the USD 1 million per year cap. Maturity is tax-free under Section 10(10D) only if the policy was issued on or after February 1, 2021 with aggregate annual premium of Rs 2.5 lakh or less and premium under 10% of sum assured. Above Rs 2.5 lakh the exemption is lost, and under the Finance Act 2025, effective April 1, 2026 (AY 2026-27), a non-exempt equity-oriented ULIP is taxed as an equity-oriented fund: long-term at 12.5% above Rs 1.25 lakh, short-term at 20%. Charges (allocation, mortality, FMC capped at 1.35%) drag returns. For most NRIs, term insurance plus mutual funds beats a ULIP. US persons should avoid them on PFIC grounds.

This guide assumes you already know what an NRE or NRO account is and how the USD 1 million repatriation cap works; if not, read the NRE, NRO and FCNR guide first. What follows is the part that costs real money: where the Rs 2.5 lakh line sits and what crossing it does, how the Finance Act 2025 turned a non-exempt ULIP into an equity-oriented fund, the four charges a mutual fund never makes you pay, why a US return wrecks the math entirely, and the two worked examples that show the gap in rupees.

The Rs 2.5 lakh line is the whole story, and the pitch buries it

Start with the number that decides everything, because the rest of the ULIP debate is downstream of it. For any ULIP issued on or after February 1, 2021, the Section 10(10D) maturity exemption survives only if the aggregate annual premium across every ULIP you hold stays at or below Rs 2.5 lakh in each year of the term, and separately, no year's premium exceeds 10% of the sum assured. Cross either bar and the maturity proceeds lose their exemption.

Two traps live inside that sentence, and both are designed to catch the high-value NRI investor specifically. The Rs 2.5 lakh is an aggregate, not a per-policy limit: you cannot run two policies of Rs 2.5 lakh each and keep both exempt, because the CBDT adds them together, and where a new ULIP tips the aggregate over the line, it is the new policy that loses the exemption. And the threshold is the one a large NRI investor is most likely to breach, because the whole appeal of bundling is putting serious money to work, which means premiums well north of Rs 2.5 lakh. The product is sold hardest to exactly the people the rule punishes.

Policies issued before February 1, 2021 are grandfathered. They keep full Section 10(10D) exemption on maturity regardless of premium size, subject only to the older condition that premium not exceed 10% of the sum assured for policies issued on or after April 1, 2012. If you hold a legacy high-premium ULIP from that era, none of the new tax machinery touches it. The death benefit stays exempt in every case, before or after 2021, above or below Rs 2.5 lakh. The change is purely about the maturity and surrender side, the investment payout, never the insurance payout.

What crossing the line now triggers: the Finance Act 2025 rewrite

For years the answer to "what happens if the exemption is lost" was vague, and tax preparers argued over whether the gain was income from other sources or a capital gain. The Finance Act 2025 ended the argument, effective from April 1, 2026 (assessment year 2026-27), and the way it did so matters more than NRIs realise.

The amendment changed two sections. It amended Section 2(14) so that any ULIP not eligible for the Section 10(10D) exemption is a capital asset, and it amended Section 45(1B) so the gain on such a ULIP is charged under the head capital gains. The pivotal move is the classification underneath: a non-exempt equity-oriented ULIP is included in the definition of an equity-oriented fund, and the CBDT has confirmed this treatment. That single classification sets the rate, and it sets it to the same rate a plain equity mutual fund carries.

So for an equity-oriented ULIP held more than 12 months, the long-term gain is taxed at 12.5% on gains above Rs 1.25 lakh in the financial year, with no indexation, the same Section 112A-style regime that has applied to equity mutual funds and listed shares for transfers on or after July 23, 2024. Held 12 months or less, the short-term gain is taxed at 20%, mirroring Section 111A. The taxable gain is the maturity or surrender proceeds minus the premiums paid. There is no separate ULIP rate hiding anywhere; the law deliberately collapsed the high-premium ULIP into the equity-mutual-fund box.

Sit with what that does to the sales pitch. Below Rs 2.5 lakh, the equity-fund-like maturity is genuinely tax-free under 10(10D). Above it, you have bought an equity mutual fund with an insurance rider stapled on, taxed exactly like an equity mutual fund at 12.5%, while paying a charge stack an equity mutual fund does not carry. The wrapper that was sold to you for its tax shelter no longer shelters anything, but it still charges you. That one line is the entire critique of the high-premium ULIP, and it is now black-letter law from AY 2026-27.

The four charges a mutual fund never makes you pay

This is where the bundling cost actually lives, and it is heaviest precisely when compounding has the longest runway to lose. A ULIP deducts four charges a direct mutual fund does not, and IRDAI sets ceilings on each, which tells you the regulator knows these can run high:

• Premium allocation charge. A percentage skimmed off the top of your premium before any money is invested. IRDAI caps it at 12.5% per year, and that ceiling is the tell. Modern, regulated ULIPs allocate around 2% to 5% off the top; older and agent-sold policies took 15% to 20% in the early years. This is the charge that does the most damage, because it permanently shrinks the principal that ever reaches the market.
• Mortality charge. The genuine cost of the life cover, deducted by cancelling units. It is priced on your age and the sum at risk, so it rises every year you get older, typically Rs 800 to Rs 3,000 a year in the early years and climbing thereafter. Some insurers refund accumulated mortality charges at maturity; many do not, so read that clause specifically.
• Policy administration charge. A recurring running fee, deducted monthly by unit cancellation, capped by IRDAI at Rs 500 per month. Often a flat figure that escalates annually.
• Fund management charge (FMC). An annual fee on the fund value, deducted daily through the NAV, capped by IRDAI at 1.35% per annum for equity and 1.0% for debt. On an equity fund that sits four to five times above what a direct index fund charges.

Now hold that stack against the unbundled alternative. A pure term insurance plan buys far more cover per rupee than a ULIP's mortality charge, because term is unbundled insurance with no savings component dragging on it. A direct mutual fund or index fund charges roughly 0.2% to 0.5% a year with nothing skimmed off the contribution before it is invested. The defence you will hear, that charges "stabilise over time" and the FMC cap "protects" you, is true and beside the point. Charges stabilising means they were front-loaded, which hurts most when the money has the longest left to compound, and a 1.35% cap is a ceiling, not a virtue, when the alternative is 0.3%.

What the charge drag does in rupees over 15 years

Put real numbers on it. Take an NRI in the UK who can invest Rs 2,00,000 a year for 15 years, with the same equity-market assumption of 10% gross annual return before charges on both routes, premiums invested at the start of each year.

On the ULIP route, assume a representative modern charge profile (real schedules vary, so treat this as illustrative): a premium allocation charge averaging roughly 6% of premium across the term, heavy early and light later, an FMC of 1.35% per annum on the fund value, and mortality plus administration charges that together cancel units worth roughly Rs 8,000 a year on average. The net effect is that the money actually compounding grows at closer to 8% per annum after the FMC, on a base already reduced by the allocation skim and unit cancellations. Run that profile and a reasonable illustrative maturity value lands around Rs 51,00,000 after 15 years.

Now the counterfactual, the unbundled route. Buy a pure term plan first: for a healthy professional in their thirties, Rs 1 crore of cover costs in the region of Rs 15,000 a year, far more cover than the ULIP's typical sum assured for this premium. That leaves Rs 1,85,000 a year for a direct index fund charging 0.3% per annum with nothing taken off the top, so the contribution compounds at roughly 9.7% net. Run that and the index fund grows to around Rs 60,00,000 after 15 years, while you held Rs 1 crore of life cover throughout.

The gap is roughly Rs 9,00,000 more corpus on the identical Rs 2,00,000 annual outlay, with more insurance cover alongside it. Almost all of that difference is the charge drag: the premium that never reached the market in the ULIP, plus an FMC running four to five times the index fund's. Change the assumptions and the figures move, but the direction does not. Unbundling wins because each unbundled piece is cheaper than the bundled version of itself.

When the wrapper is taxed anyway: the high-premium tax bill

The second example shows the worst case, the high-premium ULIP that lost its 10(10D) exemption and now gets equity-fund taxation on top of the charges. Take a UAE-based NRI who bought a single ULIP issued in March 2023 (post-February 2021, inside the new rules) with an annual premium of Rs 4,00,000, funded from the NRE account. Because the annual premium exceeds Rs 2.5 lakh, the policy does not qualify for the Section 10(10D) exemption.

Suppose it matures after 12 years, in 2035, well past the April 1, 2026 effective date, so it falls squarely under the new regime for non-exempt ULIPs. Total premiums paid are Rs 4,00,000 times 12, or Rs 48,00,000. Say the maturity fund value, after the ULIP's own charges, is Rs 90,00,000. The capital gain is Rs 90,00,000 minus Rs 48,00,000, or Rs 42,00,000.

Because this is an equity-oriented ULIP, that is a long-term equity gain. The first Rs 1,25,000 is exempt, leaving Rs 40,75,000 taxable. Tax at 12.5% is Rs 5,09,375, and adding 4% health and education cess (Rs 20,375) brings the bill to roughly Rs 5,29,750 before any surcharge. The "tax-free" wrapper delivered a tax bill near Rs 5.3 lakh, purely because the premium sat above the Rs 2.5 lakh line.

Here is the counterfactual that lands the point. Had this investor instead held a plain equity mutual fund and a separate term plan, the gain on the fund would have been taxed under the identical Section 112A regime: 12.5% above Rs 1.25 lakh, the same Rs 5.3 lakh tax, but with lower charges along the way and full liquidity throughout. So the high-premium ULIP bought nothing on tax that a mutual fund would not have given for free, and it charged the ULIP stack for the privilege. Because the policy was NRE-funded, at least the post-tax proceeds stayed freely repatriable, so the repatriation chain held. But the central verdict stands: a high-premium ULIP is mutual-fund taxation wearing insurance-product costs.

A note on honesty: the maturity values in both examples are illustrative, because they depend on the insurer's exact charge schedule and on market returns. What is not illustrative is the tax mechanics. The Rs 2.5 lakh threshold, the equity-fund classification under Finance Act 2025, the 12.5% long-term and 20% short-term rates, the Rs 1.25 lakh exemption, and the April 1, 2026 effective date are the verified, current rules.

ULIP versus term plus mutual fund, head to head

The choice is cleaner when the two routes sit side by side. This compares a regular-premium ULIP against the unbundled alternative of a pure term plan plus a direct equity mutual fund or index fund.

Dimension	ULIP	Term plan + direct mutual fund
Cost skimmed before investing	Premium allocation, 2% to 5% modern (up to 12.5% cap)	None
Annual investment fee	FMC capped at 1.35% equity	Roughly 0.2% to 0.5% (direct/index)
Other recurring charges	Mortality + admin (admin capped Rs 500/month)	Term premium only, separate and visible
Life cover per rupee	Low; cover competes with savings	High; term is unbundled cover
Lock-in	Five years (IRDAI), full term to amortise charges	None (ELSS aside); redeem any business day
Maturity tax (under Rs 2.5 lakh premium)	Tax-free under Section 10(10D)	LTCG 12.5% above Rs 1.25 lakh on the fund
Maturity tax (over Rs 2.5 lakh premium)	LTCG 12.5% above Rs 1.25 lakh (equity-oriented fund)	LTCG 12.5% above Rs 1.25 lakh on the fund
Switching funds	Limited free switches a year	Redeem and reinvest, taxable event
US person treatment	Basket of PFICs in a non-qualifying contract	Mutual fund is one PFIC; term plan clean
Repatriation	Follows premium source (NRE clean, NRO capped)	Follows account used for the SIP

Read the bottom two tax rows together and the case is stark. Below Rs 2.5 lakh, the ULIP wins on tax (tax-free versus 12.5%) but loses on cost and flexibility. Above Rs 2.5 lakh, the tax rows are identical, so the ULIP keeps the costs and the lock-in while surrendering the only advantage it had. The premium threshold is the hinge the entire decision turns on.

Why a US return changes the answer entirely

For a US-person NRI, the ULIP is not a close call, and the reason is structural, not marginal. Indian ULIPs almost always fail the Section 7702 cash-value accumulation test that US law uses to decide whether something is genuinely life insurance, because the investment component is too large relative to the death benefit. When a foreign policy fails that test, the IRS looks through the insurance wrapper and taxes what is underneath.

What is underneath is the killer. A ULIP's units are invested in Indian mutual funds and stocks, so each ULIP is effectively a basket of Passive Foreign Investment Companies (PFICs), often wrapped inside a non-qualifying insurance contract that the IRS may treat as a foreign trust. That means annual reporting on the "income on the contract" as ordinary income in some readings, the excess-distribution and interest-charge mechanics of the PFIC regime in others, and FBAR and Form 8938 disclosure on the policy itself. The favourable Indian treatment, tax-free maturity below Rs 2.5 lakh or a 12.5% LTCG rate above it, does not survive contact with the US return; the US taxes the wrapper on its own punitive terms regardless.

A plain Indian equity mutual fund is also a PFIC for a US person, so it is not free of trouble, but it is one PFIC with one set of (still painful) elections, not a basket of them inside a non-qualifying insurance contract. The practical instruction for any NRI who files a US return is simple: do not buy an Indian ULIP, and if you already hold one, get specialist PFIC advice before you touch it. The same caution, lighter, applies to the PFIC overlay on Indian mutual funds that US and Canada residents face generally.

Funding, repatriation, and the lock-in trap

On funding, the RBI framework gives three routes, and the choice is not cosmetic because it fixes the repatriation status of every rupee that comes back out. The status of the proceeds follows the source of the premium, not your residency at maturity. Pay from your NRE account or by foreign remittance and the maturity, surrender and death proceeds are freely repatriable, with no USD 1 million cap. Pay from your NRO account and the proceeds are credited to NRO and repatriation runs under the USD 1 million per financial year ceiling, after tax and Form 15CA and Form 15CB compliance. Decide this at the premium stage; you cannot retroactively convert an NRO-funded policy into a freely repatriable one. The practical rule for an NRI who cares about repatriation is to fund from NRE and keep the whole chain clean. The mechanics overlap with paying India insurance from NRE or NRO.

On eligibility, NRIs, OCIs and PIOs can buy ULIPs from Indian insurers with no blanket residency bar; what varies is the insurer's appetite. UK and UAE residents are widely accepted. US and Canada residents meet FATCA-driven caution, so fewer insurers onboard them and the paperwork is heavier, mirroring the pattern with Indian mutual funds.

The lock-in carries a trap worth naming plainly. Every ULIP has a five-year lock-in mandated by IRDAI; you cannot withdraw the fund value during those years, and stopping premiums moves the value into a discontinuance fund earning a low regulated return, with a discontinuance charge, paid out only after the lock-in completes. The trap is the mismatch: the five-year lock-in feels like the commitment period, but the front-loaded allocation charges only pay off if you hold for the full term, often 10, 15 or 20 years. An investor who exits at year five, the earliest the lock-in allows, has paid the heaviest charges and captured the least compounding, the worst possible outcome. A direct equity mutual fund (ELSS aside, with its own three-year lock-in) is liquid on any business day, subject only to a first-year exit load and the tax on the gain. For an NRI whose plans can shift with a job move, a visa decision or a return to India, that liquidity has real value the wrapper takes away.

Edge cases

A few situations where the general "avoid" verdict needs nuance.

Legacy pre-February 2021 ULIPs. A ULIP issued before February 1, 2021 keeps full 10(10D) exemption regardless of premium. Do not surrender it reflexively to "fix" a tax problem it does not have; surrendering may crystallise charges you have already absorbed. Run the held-versus-surrendered math first.

Premium deliberately kept under Rs 2.5 lakh. Keep aggregate annual ULIP premium at or below Rs 2.5 lakh, fund from NRE, hold to full term, and the tax-free maturity genuinely survives. The tax critique falls away. The charge critique does not: you still pay the ULIP stack against a cheaper unbundled route, so the live question becomes whether the single-wrapper convenience and the forced-savings lock-in are worth paying for.

The forced-savings case. Some people genuinely will not invest in equities consistently on their own. For that specific behavioural profile, the five-year lock-in is a feature, not a bug, because it removes the temptation to stop. This is a real argument, but a behavioural one, not a financial one. The cheaper fix is an automated SIP, which an NRI can run from abroad.

The Section 80C angle. ULIP premiums qualify for the Section 80C deduction up to Rs 1.5 lakh, but only under the old tax regime and only against India-taxable income. Most NRIs whose India income is tax-free NRE interest have nothing for the deduction to bite on, so the 80C line in a ULIP pitch usually delivers nothing, the same trap as ELSS. See ELSS tax-saving funds for NRIs for the parallel.

The honest read

The honest read is that a ULIP asks you to pay for a bundle you can almost always assemble more cheaply yourself, and the one historical reason to tolerate that, the tax shelter, now has a hard ceiling sitting at Rs 2.5 lakh of annual premium. The two jobs the product does, protecting your family and growing your money, are each done better by a dedicated product: a pure term plan gives more cover per rupee, and a direct mutual fund or index fund compounds with a fraction of the charges and full liquidity. The bundling does not create value; it creates charges.

So here is the recommendation, committed. For the common case, an NRI in the UK, UAE, US or Canada with real money to deploy, unbundle: buy a term plan sized to your family's needs, fund a low-cost mutual fund or ETF from your NRE account for clean repatriation, and keep the two visibly separate so you can see what each costs. Above Rs 2.5 lakh of premium this is not even a close call, because the tax treatment is identical and the ULIP simply adds cost and a lock-in on top. The ULIP earns its place only in a narrow band: you genuinely will not invest any other way and need the lock-in as discipline, your aggregate premium stays under Rs 2.5 lakh so the maturity stays tax-free, you fund from NRE, and you commit to the full term so the front-loaded charges amortise. If you file a US return, even that narrow band closes, because the PFIC look-through makes an Indian ULIP a reporting nightmare with a poor after-US-tax return. Outside that band, the relationship manager's tidy one-product pitch is tidy for the insurer, not for you.

Related guides

• Building an India corpus as an NRI
• NRI mutual funds eligibility and the PFIC trap
• Tax-efficient investing for NRIs
• Paying India insurance from NRE or NRO
• NRI retirement planning across two countries
• Capital gains tax for NRIs on shares and mutual funds
• ITR filing for NRIs, AY 2026-27
• NRE, NRO and FCNR accounts explained
• ELSS tax-saving funds for NRIs
• All taxation guides
• All banking guides
• All investments guides

Disclaimer

This guide is general information for NRIs, not personalised financial, tax, or insurance advice. Tax rules, including the Section 10(10D) thresholds and the Finance Act 2025 capital gains treatment for non-exempt ULIPs effective from April 1, 2026 (AY 2026-27), can change, and insurer charge schedules and onboarding policies vary by company and by your country of residence. Repatriation limits and the USD 1 million per financial year NRO ceiling are subject to RBI and FEMA rules and require Form 15CA and Form 15CB compliance. US persons should obtain specialist advice on PFIC and Section 7702 implications before buying or surrendering any Indian market-linked insurance product. Verify the current rules and your own policy wording, and consult a qualified chartered accountant or a SEBI-registered investment adviser before acting.