Unit Linked Insurance Plans (ULIPs) are distinctive financial instruments that merge investment opportunities with life insurance coverage, offering policyholders the combined benefits of wealth accumulation and financial protection. Historically, ULIP proceeds received favorable tax treatment, enhancing their appeal for long-term financial planning.
However, the Union Budget 2025 introduces pivotal changes. ULIPs will now be classified as capital assets, with proceeds taxed under capital gains rather than as income from other sources. This reclassification affects individuals leveraging ULIPs for goals such as retirement planning, higher education funding, or home purchases.
In this article, we’ll provide a detailed overview of how ULIPs were previously taxed, outline the changes introduced in Budget 2025, and explain the new tax implications to help investors make informed decisions
What is a ULIP?
A Unit Linked Insurance Plan (ULIP) is a hybrid financial product that combines the benefits of life insurance with market-linked investments. Part of the premium provides life cover, while the remaining portion is invested in equity, debt, or balanced funds based on the policyholder’s preference. This dual structure enables both wealth creation and financial protection, making ULIPs suitable for long-term financial planning
Key Benefits of ULIPs
Dual Advantage: Combines life insurance and investment in a single plan.
Flexible Investment Options: Choose between equity, debt, or hybrid funds depending on your risk appetite.
Market-Linked Returns: Offers the potential for higher returns compared to traditional insurance.
Tax Benefits: Premiums qualify for deductions under Section 80C, and maturity proceeds may be exempt under Section 10(10D), subject to conditions.
Partial Withdrawals: Access to funds after the 5-year lock-in period for emergencies.
Fund Switching: Switch between investment funds without tax implications to optimize returns
Tax Benefits on ULIP Premiums – Section 80C
Deduction Limit: Up to ₹1.5 lakh per year under Section 80C (combined with other eligible instruments).
Premium Conditions:
For ULIPs bought after April 1, 2012: Annual premium must not exceed 10% of the sum assured.
For ULIPs bought before April 1, 2012: The limit is 20% of the sum assured.
If these limits are breached, deductions are restricted accordingly
Tax on ULIP Maturity – Section 10(10D)
ULIPs Issued on or Before February 1, 2021
Maturity proceeds are fully tax-free, regardless of premium amount.
ULIPs Issued After February 1, 2021
If annual premium ≤ ₹2.5 lakh: Tax-exempt under Section 10(10D).
If annual premium > ₹2.5 lakh in any year: Maturity proceeds are taxable.
Multiple ULIPs
Combined premium ≤ ₹2.5 lakh: All maturity proceeds remain tax-free.
Combined premium > ₹2.5 lakh: Only ULIPs below the threshold are tax-exempt; others are taxable.
In Case of Death
Payouts to nominees are always tax-free, regardless of premium amount
Budget 2025: Key Update on ULIP Taxation
The Union Budget 2025 introduces a crucial clarification:
From April 1, 2026, ULIPs not eligible for exemption under Section 10(10D) will be taxed as capital gains.
What This Means:
ULIPs with annual premiums over ₹2.5 lakh will no longer be fully exempt.
Redemption proceeds will be taxed under Section 112A (as capital assets), aligning with equity mutual fund taxation
How Will Capital Gains Tax Apply?
ULIPs held >12 months: Gains will be classified as long-term capital gains (LTCG).
Tax Rate: LTCG taxed at 12.5%, as per Budget 2025.
Effective Date: Applicable from FY 2026–27 (AY 2026–27 onward).
This change ensures tax parity between ULIPs and other capital market instruments, removing ambiguity while impacting the tax efficiency of high-premium ULIP investments
About the Author
Priya
Priya is a seasoned content writer with expertise in business registration, tax laws, trademark regulations, and corporate compliance. His well-researched articles provide practical insights and clear guidance, empowering businesses to navigate complex legal and regulatory landscapes with confidence
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