The Union Budget 2025 has introduced a key amendment in the taxation of Unit Linked Insurance Policies (ULIPs), bringing much-needed clarity to how proceeds from these investments are taxed. Until now, ambiguity surrounded the tax treatment of ULIPs where premiums exceeded certain thresholds, creating confusion for investors. The latest clarification ensures that such ULIPs will now be classified as capital assets, with proceeds taxed under ‘capital gains’ instead of ‘income from other sources’.
This move aligns ULIP taxation with other investment instruments and is expected to streamline financial planning for policyholders. Experts believe the change will enhance transparency, improve investor confidence, and reinforce ULIPs as a structured, long-term wealth-building option.
Taxation of Unit Life Insurance Policy Proceeds
Section 10(10D) of the Income Tax Act provided exemption for any sum received under a life insurance policy, including bonuses, subject to below conditions:
a) Premium payable for any of the years during the terms of the policy (life insurance or ULIP) issued on or after 01.04.2012 should not exceed 10% of the actual capital sum assured; and
b) The amount of premium or aggregate amount of premium payable during the term of such policy or policies should not exceed Rs 2,50,000 (for Unit Linked Insurance Policy) or Rs 5,00,000 (for other policy) for policies issued after certain dates.
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If the above conditions are not fulfilled, the sum received under an insurance policy may be charged to tax as capital gains (for ULIP) or income from other sources (for policies other than ULIP).
Clarification on Tax Treatment of ULIPs and Non-ULIPs:
In the present provisions, in the case of Unit Linked Insurance Policy, even where payable premium exceeded 10% of the sum assured, the sum received on redemption was not being charged to tax as ‘capital gain’ under sub-section (1B) of section 45(1B). Even though it was not exempt, there was ambiguity regarding the head of chargeability. “The current amendment has now made the tax treatment given to all ULIP policies consistent,” said CA (Dr.) Suresh Surana.
Thus, if exemption under Section 10(10D) does not apply, the sum received under both ULIP and other insurance policy shall be chargeable to tax under the head ‘capital gains’ or ‘income from other sources’,
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