Union Budget 2025: Major Taxation Changes for ULIPs and Life Insurance Policies

The Union Budget 2025, presented by Finance Minister Nirmala Sitharaman, has introduced significant clarifications on the taxation of Unit Linked Insurance Policies (ULIPs) and life insurance policies. These updates impact policyholders, particularly those with high-value ULIPs, by aligning their tax treatment with equity-oriented mutual funds. Let’s dive deeper into what this means for you.

Key Changes in Budget 2025 Related to ULIPs

One of the major clarifications in Budget 2025 is the tax treatment of ULIPs with annual premiums exceeding Rs 2.5 lakh. These policies will now be considered capital assets, making them taxable at par with equity-oriented mutual funds.

Impact on Taxation of ULIPs

The tax rationalization makes sure that policyholders of non-exempt ULIPs pay long-term capital gains tax (LTCG) at 12.5%, making it more favourable than taxation under income from other sources, which would be taxed at the individual’s slab rate.

Understanding Section 10(10D) and Its Conditions

Section 10(10D) of the Income Tax Act provides tax exemption for maturity proceeds received under life insurance policies, including bonuses. However, there are specific conditions that determine eligibility:

• The annual premium should not exceed 10% of the sum assured for policies issued after April 1, 2012.
• For ULIPs issued after February 1, 2021, the aggregate annual premium should not exceed Rs 2.5 lakh to remain tax-free.
• For traditional endowment policies issued after April 1, 2023, the annual premium limit for tax exemption is Rs 5 lakh.

With Budget 2025, these criteria are now explicitly clarified, reducing ambiguity for policyholders and insurers alike.

Also read: Understanding the Key Highlights of Union Budget 2025 Income Tax Reforms and Slab Changes Explained

Why Was This Clarification Needed?

Previously, there was uncertainty in the taxation of high-premium ULIPs, as some tax professionals treated them as capital assets, while others classified their proceeds under ‘Income from Other Sources,’ which attracts taxation at the policyholder’s applicable slab rate. Budget 2025 has now definitively categorized non-exempt ULIPs as capital assets, guaranteeing uniformity in taxation.

Does the Tax Rate Depend on the Type of Fund Allocation in ULIP?

Yes, to qualify as an equity-oriented fund and enjoy concessional LTCG tax rates, at least 65% of the ULIP’s premiums must be invested in equity assets. If this requirement is not met, the gains may be taxed differently, potentially as debt instruments.

Impact on Endowment Policies and Death Benefits

For endowment policies, the taxation remains unchanged. If they do not qualify for tax exemption under Section 10(10D), their maturity proceeds will be treated as ‘Income from Other Sources’ and taxed according to the policyholder’s income slab.

However, death benefits paid to nominees remain tax-free under Section 10(10D), regardless of the premium amount.

Also read:New vs. Old Tax Regime Making the Right Choice for Your Income

Key Takeaways from Budget 2025 for ULIP Policyholders

1. High-value ULIPs (annual premium > Rs 2.5 lakh) are now treated as capital assets, aligning them with equity mutual funds.
2. Long-term capital gains (LTCG) tax on ULIPs is now set at 12.5%, while short-term gains (STCG) attract a 20% tax rate.
3. Endowment policies exceeding Rs 5 lakh annual premiums remain taxable as ‘Income from Other Sources’.
4. Death benefits continue to remain tax-free, guaranteeing financial security for nominees.

In conclusion, the Union Budget 2025 has brought much-needed clarity on the taxation of ULIPs and high-value life insurance policies. These changes clarify that ULIPs are treated fairly in comparison to equity mutual funds while preventing potential tax arbitrage opportunities. For expert guidance on tax-saving investment strategies, trust TaxSpanner to keep you updated with the latest tax reforms.