Finance Minister Nirmala Sitharaman made minor tweaks to the capital gains tax system in Budget 2025, following a major overhaul in the July 2024 Budget.
The tax rates and holding periods for different assets remain unchanged, meaning the rules for long-term capital gains (LTCG) and short-term capital gains (STCG) will continue for the financial year 2026 (Assessment Year 2026-27).
Different capital assets — such as listed shares, mutual funds, tax-free bonds, debentures, unlisted shares, and real estate — are taxed based on how long they are held. This determines whether the gains are classified as LTCG or STCG.
Unit Linked Insurance Plans (ULIPs)
From April 1, 2026, Unit Linked Insurance Plans (ULIPs) with annual premiums above Rs 2.5 lakh will be taxed at a 12.5% long-term capital gains (LTCG) rate. This change aims to bring more clarity to the taxation of ULIPs, which combine insurance with stock market investments.
Earlier, there was confusion about whether long-term gains (held for over a year) on ULIPs should be taxed as LTCG or treated as income from other sources. The tax treatment of ULIP gains, especially for high-premium policies, was also unclear. Unlike traditional insurance plans that invest mainly in debt, ULIPs put a significant part of the premium into stocks. This made it necessary to tax them differently from regular insurance policies.
The FM announced that ULIPs with annual premiums over Rs 2.5 lakh will now be taxed like equity mutual funds. This change builds on the 2021 budget, which first introduced taxes on high-premium ULIP returns. However, uncertainty remained about how these policies would be taxed when redeemed, leading to investor confusion.
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The Finance Bill 2025 clarifies this by stating that any amount received from such ULIPs, where the Section 10(10D) exemption does not apply, will be taxed as capital gains. This rule will take effect from April 1, 2026, impacting the assessment year 2026-27 onwards.
LTCG Tax Hike: FIIs and specified funds to pay 12.5% from April 2026
The Finance Bill 2025 proposes raising the long-term capital gains (LTCG) tax rate on certain securities from 10% to 12.5%, effective April 1, 2026. This follows last year’s increase to 12.5% for listed shares,
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