The recent amendments in the Union Budget 2025 clarify the tax treatment of Unit Linked Insurance Policies (ULIPs), especially in cases where they don’t qualify for exemption under Section 10(10D) of the Income Tax Act.Here’s a breakdown of the changes and their implications.Tax treatment of ULIPs – What’s changed?
The new provisions state that if a ULIP doesn’t meet the exemption conditions under Section 10(10D), it will be treated as a capital asset.Profits from the redemption of such ULIPs will now be taxed as capital gains, consistent with other investment products.This removes previous confusion, particularly for ULIPs issued before February 1, 2021, which had unclear tax treatment.They are now treated like equity-oriented funds, with the gains taxed accordingly under capital gains tax (Section 45).Tax expert CA Suresh Surana explains that Section 10(10D) used to provide an exemption for life insurance policies, including ULIPs, if they met specific conditions, such as premiums not exceeding 10% of the sum assured or a premium cap of ₹2.5 lakh for ULIPs.If these conditions were unmet, the proceeds were taxed either as capital gains or income from other sources, depending on the type of policy.Key provisions of the amendmentUnder Section 10(10D), the exemption applies if:The premium is not more than 10% of the sum assured (for policies issued after April 1, 2012).The ULIP premium does not exceed ₹2.5 lakh.When these conditions aren’t met, the sum received from the policy will be taxed as capital gains for ULIPs or income from other sources for non-ULIP policies.The amendments standardise the tax treatment of all ULIPs, regardless of their issue date. As Surana points out, this ensures consistency in the way both ULIPs and non-ULIPs are taxed. ULIPs are now classified as capital assets and their profits will be taxed as capital gains, just like equity-oriented funds
