The 2025 Budget has introduced important changes to the tax rules for Unit-Linked Insurance Policies (ULIPs) where the total premium paid in a year exceeds Rs 2.5 lakh.
In simple terms, ULIP plans that don’t qualify for tax exemption under Section 10 (10D) of the Income Tax Act will now be treated like equity-based mutual funds.
This means that the redemption or maturity proceeds from these policies will be taxed similarly to capital gains from equity investments.
Impact on ULIP Holders Post-Budget 2025
The changes made in Budget 2025 mean that ULIPs not eligible for exemption under Section 10(10D) will be considered capital assets.
This will subject any profits earned from their redemption or maturity to capital gains tax, just like equity mutual funds.
According to the Income Tax Department’s FAQs, if a ULIP does not meet the conditions under Section 10(10D), it may be taxed as capital gains.
For ULIP holders, this means that the tax treatment of their policies will depend on how long they hold them.
Long-term capital gains from such policies (for holdings over 12 months) will be taxed at 12.5%, while short-term capital gains (less than 12 months) will be taxed at 20%.
What is Section 10 (10D)?
Section 10(10D) of the Income Tax Act allows tax exemptions on amounts received from life insurance policies, including ULIPs.
This exemption applies to the maturity or claim amount received by the policyholder or their nominee, provided certain conditions are met.
One such condition is that the annual premium should not exceed 10% of the sum assured. Additionally, ULIPs purchased after February 1, 2021, with a premium exceeding Rs 2.5 lakh are not eligible for this exemption.