Budget 2025 clarifies capital gains tax on ULIPs with high premiums

Finance Minister Nirmala Sitharaman has provided further clarity on the taxation of ULIP (Unit Linked Insurance Plan) policies with high premiums. As per the Budget 2025 ULIPs with annual premiums exceeding Rs 2.5 lakh will now be taxed as capital gains. The amendment will be effective from April 1, 2026. Long-term gains (from policies held for over a year) will be taxed at 12.5%. Earlier, there was ambiguity about whether such gains should be taxed as long-term capital gains (LTCG) or as income from other sources.

Neeraj Agarwala, Partner at Nangia Andersen India, said, “A ULIP is a financial product that combines the benefits of investment and insurance. Currently, the amount received on the redemption of a ULIP is tax-free under Section 10(10D), provided the annual premium does not exceed Rs 2.5 lakh. However, there was previously no clear taxation rule for redemption of ULIP above premium of Rs 2.5 lakhs. Unlike traditional insurance policies, ULIPs differ because a significant portion of the premium is invested in the stock market. As a result, taxing ULIP redemptions in the same manner as regular insurance policies was considered inappropriate.

To address this, the latest budget has clarified that ULIPs with annual premiums exceeding Rs 2.5 lakh will be taxable as capital asset. The redemption proceeds will be treated as capital gains and taxed under Section 112A. If the policy is held for more than 12 months, it will be classified as a long-term capital asset and subject to a 12.5% tax, Agarwala explained.

As per the Finance Bill 2025: “Sub-section (1B) of the said section provides that any amount received under a ULIP, where the exemption under Section 10(10D) does not apply, shall be taxed under the head ‘Capital Gains’ and deemed as income of the recipient for the year in which it is received. The amendment extends this provision to all such ULIPs and will be effective from April 1, 2026, impacting assessment year 2026-27 onwards.”

With the new amendment, the taxation framework is further refined, ensuring uniform treatment of ULIP proceeds as capital gains. This move aligns ULIPs more closely with equity mutual funds and is expected to impact investors who previously used these policies for tax-efficient wealth accumulation.

Insurance stocks have given a mixed reaction with LIC stock up by 0.47% at Rs 849.45, SBI Life is down by 1.63% at Rs 1459 and ICICI Prudential Life down by 1.5% at Rs 606. 
 



Source link

Leave a comment