Big-ticket ULIPs held for over 1 yr will attract capital gains tax at 12.5%

Finance Minister Nirmala Sitharaman announced on Saturday that big-ticket Unit Linked Insurance Plans (ULIPs) with annual premiums exceeding Rs 2.5 lakh will now be subject to long-term capital gains (LTCG) tax at a rate of 12.5%, effective from April 1, 2026. The move seeks to bring more clarity and fairness to the taxation of ULIPs, a popular financial product that combines insurance coverage with investment in equity markets.

 

Previously, there was ambiguity regarding the tax treatment of gains from ULIPs, especially those with annual premiums over Rs 2.5 lakh. ULIPs are structured in a way where a large portion of the premium is invested in stocks, differentiating them from traditional insurance policies, where premiums are typically invested in debt instruments. Due to this investment strategy, it was deemed inappropriate to treat ULIPs like regular insurance policies for tax purposes, leading to the introduction of this new tax framework.

 

 

In her Budget 2025 speech, Sitharaman clarified that ULIPs with an annual premium above Rs 2.5 lakh would now be taxed under the capital gains tax regime, aligning them with equity mutual funds. This change comes after a major shift in the taxation of ULIPs in the 2021 budget, where returns on ULIPs with premiums above Rs 2.5 lakh were made taxable. However, the tax treatment for these policies on redemption had remained unclear, creating confusion for investors.

 

With this new proposal, ULIPs will be taxed as capital gains when withdrawn, with a 12.5% tax rate for policies held for over a year. The amendment is expected to impact investors who previously used ULIPs primarily as a tax-efficient investment vehicle.

 

"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.

 

What dos this mean for investors?

 

This change applies to ULIPs purchased after February 1, 2021, with premiums exceeding Rs 2.5 lakh annually. Under the previous system, returns from these policies were exempt from tax under Section 10(10D) of the Income Tax Act. However, the new provision will tax these gains as long-term capital gains, subject to the 12.5% tax rate if the policy is held for more than 12 months.

 

For example, if an investor purchases a ULIP with a sum assured of Rs 20 lakh and an annual premium of Rs 3 lakh, the returns from this policy, if redeemed after one year, will now attract the 12.5% long-term capital gains tax.

 

This move also addresses the issue of investors using ULIPs solely for tax-saving purposes, which was a concern given the large equity exposure in these policies. Now, by subjecting ULIPs to capital gains tax, the government aims to create a fairer tax system for all types of investments.  Short-term capital gains (STCG) from ULIPs will be taxed at 20%, and long-term capital gains (LTCG)—for investments held for over 12 months—will be taxed at 12.5%. As per Deloitte India, the  earlier confusion on how ULIPs were taxed has now been addressed, providing greater certainty for investors. With the new amendment,  ULIPs will have tax treatment similar to equity mutual funds.

 

The new tax treatment will be applicable from the assessment year 2026-27, with the tax rate pegged at 12.5% for long-term capital gains from ULIPs. The decision also aligns with the government’s focus on streamlining the tax system and eliminating ambiguities that have hindered investor confidence.

 

The move to classify ULIPs as capital assets for tax purposes and subject them to long-term capital gains tax was necessary given the complex nature of these products. The shift brings much-needed clarity for both investors and insurers, and the new tax regime will encourage transparency and uniformity in the taxation of investment products.

 

As the changes will only come into effect from April 1, 2026, investors have time to plan accordingly and adjust their investment strategies if they were using ULIPs for tax-saving purposes.