The Union Budget 2025 has introduced significant clarifications regarding the tax treatment of Unit Linked Insurance Policies (ULIPs) and other life insurance policies, a move that CA (Dr.) Suresh Surana believes will bring much-needed transparency for taxpayers.
Previously, Section 10(10D) provided exemptions for sums received under life insurance policies, including bonuses, provided certain conditions were met. These conditions included:
- The premium for any year during the policy term (for both life insurance and ULIPs issued on or after April 1, 2012) should not exceed 10% of the actual capital sum assured.
- The aggregate premium payable during the term should not exceed ₹2.5 lakh (for ULIPs) or ₹5 lakh (for other policies), depending on the issue date.
If these thresholds were breached, the proceeds from these policies would be taxable. However, there was ambiguity regarding the head of chargeability—whether such amounts would be taxed as capital gains or income from other sources.
Dr. Surana explained, “The previous provisions created confusion, especially in the case of ULIPs, where premiums exceeding 10% of the sum assured were not exempt but also weren’t clearly taxed under capital gains as per Section 45(1B). The amendment now brings consistency to the tax treatment of ULIPs and other life insurance policies.”
Under the new amendment, if the exemption under Section 10(10D) does not apply:
- Proceeds from ULIPs will be taxed under capital gains.
- Proceeds from other life insurance policies will be taxed under income from other sources.
Dr. Surana emphasized that this move will streamline the tax treatment of life insurance proceeds, providing clarity for taxpayers planning their finances. “By addressing ambiguities and ensuring a consistent approach, the government is empowering taxpayers to make more informed decisions regarding their life insurance investments,” he noted.
This budgetary reform is expected to simplify financial planning and reduce litigation by clearly defining the tax obligations associated with life insurance policies, particularly for ULIP holders.
