Non tax-exempt Ulip redemption gains to be taxed as capital gains: Budget 2025

The Unit-linked insurance policies (Ulips) that aren't exempt under Section 10 (10D) will now be considered a capital asset and be included under the definition of equity-oriented funds. Hence, any profit and gains from the redemption of Ulips, for which tax exemption under Section 10(10D) does not apply, will be charged to tax as capital gains (sub-Section 1B of Section 45).

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Currently, Ulip redemptions are tax-free under Section 10(10D) if the annual premium does not exceed ₹2.5 lakh. "Previously, there was no clear taxation rule for redemption of Ulips with premium above ₹2.5 lakh. Unlike traditional insurance policies, Ulips invest a significant portion of the premium in the market. So, taxing Ulip redemptions in the same manner as regular policies was considered inappropriate," said Neeraj Agarwala, partner, Nangia Andersen India.


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The budget has now clarified that Ulips with annual premiums over ₹2.5 lakh will be taxable as capital assets and the redemption proceeds will be treated as capital gains and taxed under Section 112A. "If held for more than 12 months, it will be classified as a long-term capital asset and subject to a 12.5% tax," said Agarwala.