The 2025 Indian budget unveiled some major tax reforms that impacted the insurance sector and individual taxpayers. Some key changes include increased tax rebates, revised tax slabs under the new regime, and significant updates to ULIP taxation. Taxpayers must understand these major shifts for effective financial planning, especially concerning investment strategies and life insurance.
Understanding ULIP
A unit-linked insurance plan, or ULIP meaning, is a financial product combining investment and insurance. When an investor invests in a ULIP, part of their premium goes towards life insurance, while the other is invested in debt, equity, or hybrid funds, depending on their choice. That is why it is a unique product offering potential market-linked returns and protection, which are significant benefits of ULIPs investment.
In general, the lock-in period of any ULIP is five years. However, keeping your investment for as long as possible is often recommended. You can always consult your financial advisor to know more about when to withdraw and when not to.
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Advantages of ULIP Investment
Listed below are some benefits of ULIPs that you can get:
- ULIP offers dual benefits: insurance and investment.
- You can choose between debt, equity, or a combination for investment.
- ULIP is a market-linked plan offering higher returns than traditional insurance policies.
- It also provides tax benefits according to Section 80c of the Indian Income Tax Act.
- You also have an option for a partial withdrawal once the lock-in period is over to meet any financial emergencies.
- ULIP also allows you to switch between debt and equity funds based on risk tolerance and market conditions.
Budget 2025 Update
Now that you have understood theULIP meaning, which is an insurance plan that acts like an investment, where a part of your investment goes into the stock market. Let’s look at the before and after the budget updates for ULIP investments.
- Earlier – ULIPS with an annual premium of over INR 2.5 lakh were taken as capital assets.
- New rule after budget: Besides the earlier rule, any ULIP with a premium exceeding 10% of the policy value will also be considered capital assets.
- If your ULIP premium is below INR 2.5 lakh per annum, the amount you receive will be tax-free.
To simplify, as per the new update, if your ULIP does not meet the exemption criteria as per Section 10(10d), it will be considered a capital asset. Profits from these ULIPs will be subject to capital gains taxation like those from your other investment products. Hence, it also removes all confusion before Feb 2021, particularly for ULIPs, which had an unclear tax treatment.
ULIPs will now be treated as equity-oriented funds, and the gains under Section 45 will be subject to capital gains tax. Under Section 112A of the Act, long-term capital gains are subject to a 12.5% tax upon redemption after one year. This change will impact people who previously used ULIPs only as a tax-efficient investment model.
Let’s understand this with an easy example. If the total amount assured on your ULIP taken after Feb 2021 is INR 20 lakh, then your annual premium to be paid should not exceed INR 2 lakh in any financial year for you to qualify for exemptions under Section 10(10D). However, if the annual premium exceeds or you opt for a top-up and the premium exceeds the INR 2.5 lakh threshold, your returns will be taxable.
Here is a table for your easy reference on the new taxation rules vs the previous:
| Criteria | Previous tax treatment | New tax treatment |
| The annual premium is less than or equal to INR 2.5 lakh | Exempt under Section 10(10D) | Exempt under Section 10(10D) |
| Annual premium more than INR 2.5 lakh | Unclear taxability | These will now be treated as capital assets and taxed as equity funds. |
Many experts posted their views on the new taxation rule for ULIP investors, and one of them said:
As per Dr. Mukesh Jindal, Alpha Capital’s Senior Partner, “With this change, it has become important to separate insurance and investment. If your aim is the financial safety and security of your family, you must go for a term insurance policy, which is also an affordable option. However, if you are considering wealth growth, you can opt for equity mutual funds, which offer greater flexibility, low costs, and better returns than ULIPs.”
Conclusion
The Budget 2025 has brought much-needed clarification regarding ULIP taxation, aligning them with equity mutual funds when appropriate. Investors in high-value ULIPs should assess their holdings and comprehend the tax ramifications. Despite various modifications brought about by the new tax regime, the 12.5% concessional LTCG rate is still a benefit compared to possible slab rate taxes.
Remember to keep your investment and insurance separate if your goal is to safeguard your family’s financial stability.
