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, "Currently, Section 45(IB) of the Income Tax Act states that the proceeds received upon the redemption of a ULIP, where the premium paid exceeds Rs 2,50,000, are taxable as capital gains. However, there was ambiguity regarding the taxability of ULIPs where the premium exceeded 10% of the sum assured but remained below the threshold of Rs 2,50,000. Although these ULIPs did not qualify for exemption under Section 10(10D), they were not subject to capital gains tax under Section 45(IB). To address this inconsistency and ensure fair treatment across all ULIP policies, a recent amendment clarifies that if the proceeds from ULIP redemption do not qualify for exemption under Section 10(10D), they will be taxed as capital gains under Section 45(IB)."

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.