Budget 2025: How the new tax rules will impact ULIP investments—Key changes you need to know | Mint

Union Budget 2025: The budget has introduced immense clarity on the tax treatment of the Unit Linked Insurance Policies. Specifically those ULIP’s that don’t fall or qualify for the exemptions provided under Section Section 10(10D) of the Income Tax Act.

What are ULIPs?

A Unit Linked Insurance Plan (ULIP) joins investment and life insurance as a product. Part of the paid premium provides life cover, whereas the rest is invested in equity, debt, or both.

This is entirely based on the investment goals and risk appetite of investors. ULIPs hence help in securing the long-term future of investors and are considered as less riskier assets.

How do ULIPs work?

ULIPs combine both life insurance and mutual fund investments in one asset class. Professionals invest money in different asset classes like equity, debt, hybrid funds etc. Whereas, part of the premium goes into life cover.

What is the lock-in period of ULIPs?

Generally speaking ULIPs have a lock in period of 5 years. Still, experts suggest investors should hold on to their investments for longer. Still, any decision with regards to the same must be made only after proper consultation of registered investment advisors.

What is the new development for ULIP investors?

As per the revised rules ULIPs which fail in meeting exemption conditions are now treated as capital assets. Any gains from such ULIPs are now going to be taxed as capital gains. This aligns them with other investment products like equity oriented funds.

This change completely resolves past doubts and ambiguities, especially for ULIPs issued before February 1, 2021. As these ULIPs had incongruent tax treatments and interpretations.

What are the conditions under the Section 10(10D) of the income tax act?

Therefore, to qualify for an exemption under this Section it is crucial that:

• Premiums must not be more than 10% of the sum assured for policies issued after April 1, 2012.
• Also, the annual premium must remain below ₹2.5 lakhs.

Further, if these conditions are not met the policy gains then will be taxed as capital gains for ULIPs or income from other sources for non-ULIP policies. This step hence brings some clarity in the tax treatment for this investment class. It will also facilitate proper computation of income tax of individuals.

Important takeaways

This amendment brings all ULIPs under a uniform tax framework. This is now irrespective of when they were issued first. It is anticipated that this shift offers investors a clearer understanding of their tax liabilities. Hence, aligning ULIPs with modern investment norms.

Further, this move also promotes fairness, simplifies tax compliance and brings ULIPs in direct comparison with other investment options like mutual funds. Hence, this step is expected to help aspirational investors make more informed decisions in their financial journey.