The 2025 Budget has introduced significant changes to how Unit-Linked Insurance Policies (ULIPs) are taxed.
If the total premium paid for a ULIP exceeds Rs 2.5 lakh in a year, it will no longer be eligible for tax exemption under Section 10(10D) of the Income Tax Act.
Instead, these ULIPs will be treated like equity-based mutual funds.
This means the maturity or redemption proceeds from such policies will be taxed in the same way as capital gains from equity investments.
Impact on ULIP Holders After Budget 2025
With the new changes, ULIPs that don’t meet the criteria under Section 10(10D) will be considered capital assets.
This will lead to any profits from these policies being subject to capital gains tax, similar to how equity mutual funds are taxed.
According to the Income Tax Department’s FAQs, if a ULIP does not qualify for the exemption, it will be taxed as capital gains. The tax rate depends on how long the policy has been held:
Long-Term Capital Gains (LTCG): For policies held longer than 12 months, the tax rate will be 12.5%.
Short-Term Capital Gains (STCG): For policies held less than 12 months, the tax rate will be 20%.
What is Section 10(10D)?
Section 10(10D) of the Income Tax Act provides a tax exemption on the amounts received from life insurance policies, including ULIPs. However, this exemption is subject to certain conditions:
1) The annual premium should not exceed 10% of the sum assured.
2) ULIPs purchased after February 1, 2021, with premiums over Rs 2.5 lakh are not eligible for this exemption.
