Finance Minister Nirmala Sitharaman announced in the budget on Saturday that large Unit Linked Insurance Plans (ULIPS) with annual premium more than Rs 2.5 lakh will now be levied at the rate of 12.5% LTCG tax at the rate of 12.5%. This provision will be applicable from 1 April 2026. This step has been taken with the aim of making the tax system of Ulips clear and transparent, as it is a financial product that combines both insurance and investment.
Earlier there was confusion about tax on ULIPS
Till now there was confusion about taxation on the benefits of ULIPS, especially for the policy whose annual premium was more than Rs 2.5 lakh. The structure of Ulips is done in such a way that a large part of it is invested in the stock market, while in traditional insurance policies, usually invested in debt instruments. For this reason, it was not considered appropriate to keep Ulips tax free like other insurance policies. For this reason, the government has now decided to impose capital gains tax on them.
Finance Minister announced in budget 2025
The Finance Minister clarified during Budget 2025 that the ULIPS whose annual premium is more than Rs 2.5 lakh will now be brought under the purview of capital gains tax, which will make its tax system equal to equity mutual funds.
In fact, in the budget 2021 itself, the income from ULIPS with a premium of more than Rs 2.5 lakh was taxable. However, there was no clarity on how these schemes would pay tax on redemption (withdrawal). Under the new proposal, the withdrawal of ULIPS will now be charged a capital gains tax, if the policy is kept for more than a year, a LTCG tax of 12.5% will be applicable.
What will be affected on investors?
This change will be applicable to the ULIPS purchased after 1 February 2021, whose annual premium is more than Rs 2.5 lakh. Earlier the return from these policies was completely tax free under Section 10 (10D) of the Income Tax Act. But under the new rule, now the 12.5% rate of long-term capital gains tax (LTCG) will be applicable on the benefits of these rules, if the policy is kept for more than 12 months.
Now the government has made it clear that Capital Gains will cost LTCG (Long-Term Capital Gains Tax) at the rate of 12.50% on Capital Gains.
Example: Suppose, an investor (Investor) paid a premium of Rs 10 lakh every year for 5 years, ie a total of 50 lakhs. If he gets Rs 2 crore on maturity after 10 years, then his profit will be Rs 1.5 crore. It will have to pay tax at the rate of 12.50%.
In ULIP, investors have the facility to put funds in different asset classes (eg equity, debt etc.). They can change asset allocation according to their financial goals and market conditions.
If an investor purchases an ULIP with a sum assured of Rs 20 lakh, whose annual premium is Rs 3 lakh, then the returns from this policy will have to pay 12.5% LTCG tax if you redeem after one year.
Ulips to save tax is now difficult to use
The government believes that many investors were using Ulips only to save tax, as equity investment has a large share. Now these schemes are being classified as capital assets and brought under the purview of capital gains tax, so that fair tax systems can be made on investment options.
Short-Term Capital Gains (STCG): If Ulip is sold before 12 months, then 20% tax will be levied.
Long-Term Capital Gains (LTCG): If the ULIP is kept more than 12 months, then 12.5% tax will be levied.
Investors will get clarity through new rule
According to Deloitte India, the confusion about the taxation system of Ulips has now gone away from this change. ULIPS will now apply tax rules equal to equity mutual funds, which will bring transparency and more clear tax structure for investors.
How long will the new tax be implemented?
The new capital gains tax assessment will be applicable from the year 2026-27. The impact of this tax will be seen from 1 April 2026. This change is part of the government to make the tax system simple and transparent. This is a significant improvement for investors and insurance companies, which will help in bringing complex financial plans such as ULIPS to the uniform tax system.
Since this new tax provision will be applicable from 1 April 2026, investors have enough time to adjust. Those who were still using Ulips as tax saving till now have to reconsider their investment plans.
What do experts say
Bhavik Thakkar, CEO of Abus Investment Managers, says, “Under Section 10 (10D) of the Income Tax Act, a life insurance policy (eg bonus or maturity amount) was exempted from tax. But this exemption was dependent on certain conditions: If a life insurance policy or ULIP is taken or after 01.04.2012, the premium filled in any year should not exceed 10% of the actual insurance amount. The total amount of the premium filled during the entire period of the policy should not exceed Rs 2,50,000 (for ULIP) or should not exceed Rs 5,00,000 (for other insurance policies), this limit for some special dates The latter applies to policies. ”
He says, “If these conditions are not fulfilled, the amount received from the insurance policy may have to pay tax as” Capital Gains “in terms of Ulip and” Income from Other Sources “in case of other policies. “