Unit Linked Insurance Policy: Budget 2025 presented on February 1 has cleared a lot of things regarding the taxation of redemption or maturity income of Unit-Linked Insurance Policy (ULIP). ULIPs with a total premium of more than Rs 2.5 lakh in a year are not eligible for tax exemption under Section 10 (10D).
With this, now such policies will be considered as equity-oriented mutual funds. That is, the tax regime for such policies will be the same as equity-oriented funds. Therefore, the profit received on maturity will be considered as capital gains tax. This new amendment in ULIP will come into effect from April 1, 2025.
Tax will have to be paid if the conditions of section 10(10D) are not fulfilled
The Income Tax Department’s FAQs state, “If the conditions of section 10(10D) are not fulfilled, then returns received under an insurance policy may be taxed as capital gains tax (for unit-linked insurance policies) or income from other sources (for policies other than ULIPs).”
Capital Gains Tax
Let us tell you that long term capital gains of more than Rs 1.25 lakh per annum on the sale of equity and equity mutual fund units are taxed at 12.5 per cent, while short term capital gains (holding period of less than 12 months) are taxed at 20 per cent. In Budget 2024, the capital gains tax structure was rationalized across different asset classes.
What is section 10(10D)
Under Section 10(10D) of the Income Tax Act, any amount received under a life insurance policy, including bonuses on such a policy, is exempt from tax. Hence, the amount received by the policyholder on maturity or the claim amount received by the nominee on the death of the policyholder is tax free. However, this exemption is subject to certain conditions. Tax exemption cannot be availed in cases where the annual premium exceeds 10 per cent of the sum assured.
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