
MUMBAI: High ticket Ulips (unit-linked insurance plans) held for over one year will now attract capital gains tax at 12.5% from April 2026, Finance Minister Nirmala Sitharaman has clarified, ending the ambiguity about whether such gains should be taxed as long-term capital gains (LTCG) or as income from other sources.
This clarification was made necessary after the exemption limit was lowered to an annual premium of Rs 2.5 lakh in the budget 2021 and any returns on a premium above Rs 2.5 lakh were made taxable in the hand of the Ulip investor.
According to the budget 2025, Ulips with an annual premium exceeding Rs 2.5 lakh will now be taxed as capital gains on withdrawals. The amendment will be effective from April 1, 2026, she said, adding the applicable tax rate will be 12.5%. Earlier, there was ambiguity about whether such gains should be taxed as long-term capital gains or as income from other sources.
With the new proposal, the taxation framework is further refined, ensuring uniform treatment of proceeds from Ulips as capital gains, thus aligning Ulips more closely with equity mutual funds and is expected to impact investors who previously used these policies for tax-efficient wealth accumulation.
"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 of 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," says the Finance Bill 2025.
The Finance Act 2021, made amendments to clause (10D) of section 10 to provide exemption under this clause shall not apply concerning any Ulips issued on or after February 1, 2021, if the premium payable exceeded Rs 2.5 lakh. For instance, if the sum assured of a Ulip taken after February 1, 2021, was 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 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.
Neeraj Agarwala, a partner at Nangia Andersen India, said, Ulip is a financial product that combines the benefits of investment and insurance. Currently, the amount received on the redemption of a Ulip investment is tax-free under Section 10(10D), provided the annual premium does not exceed Rs 2.5 lakh. However, previously there was no clear taxation on Ulips of above premium of Rs 2.5 lakh at redemption.
Ulips differ from traditional insurance policies because a significant portion of the premium is invested in stocks. As a result, taxing Ulips at redemptions in the same manner as regular insurance policies was considered inappropriate. To address this, budget 2025 has clarified that Ulips with annual premia exceeding Rs 2.5 lakh will be taxed as capital assets and that the redemption proceeds will be treated as capital gains and taxed under Section 112A. If the policy is held for over 12 months, it will be classified as a long-term capital asset and subject to a 12.5% tax, Agarwala explained.