ULIP tax treatment ambiguity cleared in Budget 2025 | Details here
The latest clarification classifies ULIPs as capital assets, with proceeds taxed under ‘capital gains’ instead of ‘income from other sources’ like earlier
The Union Budget 2025 has introduced an important amendment when it comes to the taxation of Unit Linked Insurance Policies (ULIPs).
This brings much-needed clarity since so far, the tax treatment of ULIPs was ambiguous. An example would be when premiums exceed certain thresholds.
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The latest clarification classifies ULIPs as capital assets, with proceeds taxed under ‘capital gains’ instead of ‘income from other sources’ like earlier.
Taxation of Unit Life Insurance Policy Proceeds (ULIPs)
Section 10(10D) of the Income Tax Act provided an exemption for any sum received under a life insurance policy. This included bonuses as well. The exemptions are subject to the following conditions, as per a Financial Express report:
a) The premium payable for any of the years during the terms of the policy (life insurance or ULIP) issued on or after 01.04.2012 should not exceed 10% of the actual capital sum assured.
b) The amount of premium or aggregate amount of premium payable during the term of such policy or policies should not exceed ₹2,50,000 (for Unit Linked Insurance Policy) or ₹5,00,000 (for other policies) for policies issued after certain dates.
If these conditions aren't fulfilled, the sum received under an insurance policy may be taxed as capital gains (for ULIP) or income from other sources (for policies other than ULIP).
If the exemption under Section 10(10D) does not apply, the sum received under both ULIP and other insurance policies shall be chargeable to tax under the head ‘capital gains’ or ‘income from other sources’, respectively, according to the report.
Vibha Padalkar, MD and CEO of HDFC Life said, “Currently unit linked insurance plans (ULIPs) issued on or after Feb 1, 2021, with an aggregate annual premium above Rs. 2.5 lakh, which are not exempt under section 10(10D), are taxable as capital gains. We now welcome the clarity on the taxability of non-exempt ULIPs, issued before February 1, 2021, as capital gains, by rationalisation of relevant income tax provisions.”