ULIP Taxation: The new framework brings ULIPs at par with equity mutual funds and ensures that they are taxed at par with other capital market instruments.
While presenting the Union Budget 2025, Finance Minister Nirmala Sitharaman announced that from April 1, 2026, Unit Linked Insurance Plans (ULIPs) whose annual premium is more than ₹ 2.5 lakh will no longer be exempt from tax under Section 10 (10D) of the Income Tax Act, 1961. She said that such policies will now come under the tax ambit under capital gains.
At the same time, long-term capital gains on policies of more than one year will be taxed at 12.5%. Actually, earlier there was confusion about whether ULIPs with higher premiums would come under the category of income from other sources or LTCG.
The new framework brings ULIPs to the level of equity mutual funds and ensures that they are taxed like other capital market instruments. Now that the tax on ULIPs has been decided, it will affect investors who earlier considered it an effective way to add wealth.
Earlier, even if the premium was 10% more than the fixed sum, the sum was not considered as capital gain, but now it will be considered. Earlier also there was no tax relief on sum, but there were no clear rules regarding under which category it should be taxed.
Earlier, under the Finance Act 2021, tax exemption on premiums of more than ₹ 2.5 lakh under ULIP was limited. Through this, an attempt was made to prevent misuse of tax saving methods. At the same time, investors will now be able to calculate their tax with accuracy in time.
While deciding about their ULIP, investors will also have to see what will be the short term and long term capital gains. The tax rate for long term capital gains on equity investments is lower than normal income, which can benefit long-term investors.
With the new changes, the tax framework for ULIP has been improved and uniform rules have been implemented on different types of investment products.
ULIPs are a category of insurance plans that combine insurance and investment into one. Such plans offer the benefits of both insurance and market-linked returns. A part of the investment goes into insurance cover while the remaining part goes into equity and debt instruments.
