Budget 2025 has brought about some important changes in how Unit Linked Insurance Plans (ULIPs) are taxed, especially those with high annual premiums.
The redemption proceeds from these high-premium ULIPs will be treated as capital gains and taxed accordingly. If held for more than 12 months, it will be classified as long-term capital gains and be taxed at 12.5 per cent
Budget 2025 has brought about some important changes in how Unit Linked Insurance Plans (ULIPs) are taxed, especially those with high annual premiums.
ULIPs with annual premiums exceeding Rs 2.5 lakh that are not exempt under Section 10(10D) will now be considered capital assets. Hence, gains from these ULIPs will be taxed as capital gains, just like those from equity-oriented mutual funds.
The redemption proceeds from these high-premium ULIPs will be treated as capital gains and taxed accordingly. If held for more than 12 months, it will be classified as long-term capital gains and be taxed at 12.5 per cent.
Clarity Regarding Taxation Of ULIPs
This brings clarity regarding the taxation of ULIPs. Previously there was some confusion regarding the tax treatment of ULIPs with annual premiums exceeding Rs 2.5 lakh. The returns from traditional insurance policies were taxed as "income from other sources" if they didn't qualify for Section 10(10D) exemption. However, it wasn't clear if the same applied to high-premium ULIPs.
Basically, there were different interpretations of how these ULIPs should be taxed. Some experts were of the option that they should be taxed as capital gains since there was an investment component. However, others thought they should be taxed as income from other sources. This created uncertainty for investors.
One needs to note that, unlike traditional insurance policies, ULIPs invest a substantial amount in the market, in a similar manner to mutual funds. Therefore it was considered inappropriate if they were taxed like insurance products.
Budget 2025 has brought clarity and consistency in the taxation of ULIPs, especially high-income ones. Now they are treated as capital assets and their tax treatment is more aligned to their investment nature.
High premium ULIPs are now thus less tax efficient due to capital gains tax, Investors who were using ULIPs for tax savings may need to reevaluate their strategy. Also, ULIPs with premiums below Rs 2.5 lakh continue to remain tax-free.