Budget 2025: Understanding New Taxation Rules for ULIPs
7 February, 2025
Synopsis
- Finance Minister Nirmala Sitharaman's Budget 2025 presented significant changes to Unit Linked Insurance Plans (ULIPs) taxation.
- ULIPs with annual premiums exceeding ₹2.5 lakh will be treated as capital assets and subject to capital gains tax.
- Tax exemption under Section 10(10D) continues for ULIPs with annual premiums below ₹2.5 lakh.
The Union Budget 2025, presented by Finance Minister Nirmala Sitharaman, has introduced significant changes in the taxation of Unit Linked Insurance Plans (ULIPs). These changes aim to provide clarity on how ULIPs are treated under the Income Tax Act, particularly regarding their classification as capital assets and their taxation under capital gains.
What is ULIP?
ULIP (Unit Linked Insurance Plan) is a financial product that combines insurance and investment. When you invest in a ULIP, a portion of your premium goes towards life insurance coverage, while the remaining amount is invested in equity, debt, or hybrid funds based on your choice. This makes ULIP a unique product offering both protection and potential market-linked returns.
How Were ULIPs Taxed Before Budget 2025?
Before the Budget 2025 clarification, ULIPs were primarily tax-exempt under Section 10(10D) of the Income Tax Act. The exemption applied if the annual premium paid did not exceed ₹2.5 lakh (for ULIPs issued after February 1, 2021). If the premium exceeded this limit, the returns were subject to taxation. However, there was ambiguity regarding how these taxable ULIPs should be categorised - whether they should be taxed as capital gains or income from other sources.
The Finance Act 2021 introduced key changes:
Premium Threshold for Exemption: Any ULIP issued on or after February 1, 2021, with an annual premium exceeding ₹2.5 lakh, was not eligible for tax exemption under Section 10(10D).
Aggregation Rule: If an individual had multiple ULIPs, the total premium across all policies was considered to determine tax exemption eligibility. If the combined premium exceeded ₹2.5 lakh, none of the policies qualified for the exemption.
Treatment of Non-Exempt ULIPs: ULIPs that did not qualify for exemption were to be treated as capital assets under Section 2(14), meaning any gains from their redemption would be taxable.
Tax Rate: If a non-exempt ULIP was redeemed:
> Long-Term Capital Gains (LTCG): Gains from ULIPs held for more than 12 months were taxed at 10% under Section 112A.
> Short-Term Capital Gains (STCG): Gains from ULIPs held for less than 12 months were taxed at 15%.
5. Security Transaction Tax (STT): The sale, surrender, or redemption of such ULIPs was subject to STT, similar to equity-oriented mutual funds.
How Will ULIPs Be Taxed After Budget 2025?
The Budget 2025 has now provided clear guidelines:.
ULIPs Not Covered Under Section 10(10D) Will Be Treated as Capital Assets: If a ULIP’s premium exceeds ₹2.5 lakh per year, it will be considered a capital asset.
Taxation as Capital Gains: Any profits from redeeming such ULIPs will now be taxed under capital gains instead of being classified under income from other sources.
Tax Rate:
> If held for more than 12 months, it will be taxed at 12.5% as long-term capital gains (LTCG).
> If held for less than 12 months, it will be taxed at 20% as short-term capital gains (STCG).
4. ULIPs Issued Before Feb 1, 2021, Are Also Affected: Previously, taxation was unclear for these ULIPs, but now they will also be categorised under capital gains taxation.
Why Did the Government Change the ULIP Tax Rules?
The government introduced these changes to prevent high-income taxpayers from using ULIPs as a tax-free investment instrument. Since a large portion of ULIP premiums is invested in the stock market, it was deemed unfair that they continued to receive the same tax benefits as traditional insurance products. By aligning their tax treatment with equity-oriented funds, the government aims to ensure fair taxation.
The Budget 2025 has brought clarity on how ULIPs will be taxed going forward. While tax-exempt benefits still exist for ULIPs with annual premiums under ₹2.5 lakh, those exceeding this limit will now be subject to capital gains tax. This move makes ULIPs more transparent and aligns them with other investment instruments like mutual funds. If you have invested or plan to invest in ULIPs, understanding these new rules will help you make more informed financial decisions.
*Disclaimer: Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.