Returns from ULIP investment to be taxed as capital asset in these conditions, clarifies Budget 2025
The Finance Minister has clarified that Unit Linked Insurance Plans (ULIPs) on whom clause (10D) of section 10 does not apply is a capital asset. Accordingly any profit and gains from redemption of ULIPs to which exemption under clause (10D) of section 10 does not apply, and will be taxed as capital gains. This clarification was needed after the exemption limit was reduced to annual premium of Rs 2.5 lakh in Budget 2021 and any returns on premium above Rs 2.5 lakh was made taxable in the hand of the ULIP investor.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
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The Finance Act, 2021, made amendments to clause (10D) of section 10 to provide that the exemption under this clause shall not apply with respect to any unit linked insurance policy or policies issued on or after the February 1, 2021, if the amount of premium or aggregate amount of premium payable during the term of such policy or policies exceeds Rs 2.5 lakh.
For instance if the sum assured of a ULIP policy taken after February 1, 2021, is Rs 20 lakh then the annual premium paid by the investor should not exceed Rs 2 lakh in any given financial year to qualify for Section 10(10D) exemption. If the annual premium is higher than this or the investor goes for a top-up in such a way that the annual premium amount goes above Rs 2.5 lakh then returns from such gains are taxable.
Budget 2025 clarification about taxation of ULIPS not covered under section 10(10D)
According to the explanatory memorandum to Budget 2025 here are the clarifications:“It is proposed to rationalise the provisions for unit-linked insurance policies, so as to provide that:
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ULIPs to which exemption under clause (10D) of section 10 does not apply, is a capital asset [clause (14) of section 2]; The profit and gains from the redemption of ULIPs to which exemption under clause (10D) of section 10 does not apply, shall be charged to tax as capital gains [sub-section (1B) of section 45]; andULIPs to which exemption under clause (10D) of section 10 does not apply, shall be included in the definition of equity oriented fund [clause (a) of Explanation to section 112A].
Clause (10D) of section 10 provides for income-tax exemption on the sum received under a life insurance policy, including bonus on such policy. There is a condition that the premium payable for any of the years during the terms of the policy should not exceed ten per cent of the actual capital sum assured.
“Currently unit linked insurance plans (ULIPs) issued on or after Feb 1, 2021, with 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 taxability of non-exempt ULIPs, issued before February 1, 2021, as capital gains, by rationalisation of relevant income tax provisions.” Vibha Padalkar - MD & CEO, HDFC Life
“These amendments will take effect from April 1, 2026 and shall accordingly, apply in relation to the assessment year 2026-27 and subsequent assessment years,” says Budget 2025 Memorandum.
ULIP is a capital asset in this case
The explanatory memorandum to Budget 2025 said: “It is noted that ULIP is a capital asset only when the exemption under clause (10D) of section 10 does not apply on such policies on account of the applicability of the 4th and 5th proviso and accordingly, taxation as capital gains in case of only such ULIPs.”
“However, in case of life insurance policy (other than a ULIP), the sum received is chargeable to income-tax under “Income from other sources” for any such policy to which exemption under clause (10D) of section 10 does not apply.”
“Further, any sum received under an insurance policy as provided in sub-clauses (a) to (d) read with the provisos to clause (10D) to section 10 are not eligible for exemption under clause (10D) of section 10. Such sub-clauses are applicable to unit-linked insurance policy as well.”
What is clause 10D of section 10?
The benefit of Section 10 (10D) is that it offers tax exemption on the life insurance policy proceeds if certain conditions are satisfied.
According to the Income Tax Act, 1961, “any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, other than—
(a) any sum received under sub-section (3) of section 80DD or sub-section (3) of section 80DDA; or
(b) any sum received under a Keyman insurance policy; or
(c) any sum received under an insurance policy issued on or after the 1st day of April, 2003 but on or before the 31st day of March, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured ; or
(d) any sum received under an insurance policy issued on or after the 1st day of April, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds ten per cent of the actual capital sum assured.”
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This story originally appeared on: India Times - Author:Faqs of Insurances
