The Finance Minister Nirmala Sitharaman unveiled the Union Budget 2025 on February 1st, 2025, at 11:00 AM in Parliament, marking her 8th consecutive budget under the Modi Government 3.0. One of the notable clarifications for investors holding Unit Linked Insurance Plans (ULIPs) was introduced. The Budget outlines that ULIPs, for which the exemption under clause (10D) of section 10 of the Income Tax Act does not apply, will be treated as capital assets. Consequently, any profits or gains derived from the redemption of such ULIPs will now be subject to taxation as capital gains.
This change follows amendments introduced in the 2021 Budget, which imposed a cap of Rs 2.5 lakh on the annual premium for ULIPs to qualify for tax exemptions under Section 10(10D). If the premium exceeds this threshold, the returns from the ULIP will be taxable. Union Budget 2025: In-Depth Analysis for Strategic Insights – Click here
The Finance Act of 2021 modified Clause (10D) of Section 10, specifying that policies issued on or after February 1, 2021, will not be eligible for the exemption if their total premium exceeds Rs 2.5 lakh during the policy term. For instance, a ULIP with a sum assured of Rs 20 lakh, where the annual premium exceeds Rs 2.5 lakh, will result in taxable returns. The explanatory memorandum to Budget 2025 outlines that ULIPs, which do not qualify for the exemption under clause (10D) of section 10, will be treated as capital assets. Consequently, any profits derived from the redemption of such ULIPs will be subject to capital gains tax.
Additionally, these ULIPs will be classified as equity-oriented funds for tax purposes. These provisions are set to take effect from April 1, 2026, and will apply for the assessment year 2026-27 and subsequent years. Union Budget 2025: In-Depth Analysis for Strategic Insights – Click here It is important to note that ULIPs are considered capital assets only when the exemption under Section 10(10D) does not apply. However, other life insurance policies (other than ULIPs) where the exemption is not applicable will continue to be taxed under “Income from Other Sources.” This shift is part of the government’s ongoing efforts to rationalize the tax provisions for life insurance products.