Taxation of ULIPs and Life Insurance Policies

Taxation of Unit Linked Insurance Policies (ULIPs) & Life Insurance 

The Finance Bill 2025 has introduced changes to the taxation of Taxation of ULIPs and Life Insurance Policies. Basically there is no new taxation, but just removed confusion. This post will explain the amendments in faqs format:

Q1: What is the tax treatment of proceeds from a life insurance policy?

👉 Section 10(10D) of the Income Tax Act provides a tax exemption on the amount received from a life insurance policy, including any bonus, if certain conditions are met.

Q2: What are the conditions to claim exemption under Section 10(10D)?

To be fully tax-free, the policy must meet these conditions:

✅ For policies (life insurance or ULIP) issued on or after April 1, 2012:

• • The annual premium should not exceed 10% of the sum assured.

✅ For policies issued after a specified date:

• • ULIP policies: ULIP issued on or after the 1st February, 2021, total premium paid during the term should not exceed ₹2,50,000.
  • Other life insurance policies: Insurance policies issued on or after 1st April, 2023, total premium paid should not exceed ₹5,00,000.

🚨 On death of the insured person → The policy payout is always tax-free.

Q3: What happens if above conditions are NOT met?

If the policy fails to meet the above conditions:

🔹 For ULIP policies → The proceed will be taxed as capital gains under Section 45(1B).
🔹 For Other Life Insurance policies → The proceed will be taxed as income from other sources.

Q4: What changes does the Finance Bill 2025 introduce?

Earlier, the taxation of ULIP policies under capital gains was unclear, even when they did not qualify for the Section 10(10D) exemption.

📌 New Amendment:

• • Now, all ULIP policies that do not qualify for exemption will be taxed under ‘capital gains’.
  • For other life insurance policies, taxation remains under ‘income from other sources’.

Impact of this change:
✔ Brings consistency in tax treatment of ULIPs.
✔ Removes confusion on how proceeds should be taxed.

Q5: When do these changes take effect?

📅 These amendments will be effective from April 1, 2025.

Final Takeaway from above discussion:

✅ ULIPs & life insurance remain tax-free if they meet Section 10(10D) conditions.
✅ If Section 10(10D) conditions not fulfilled:

• ULIPs → Taxed as Capital Gains
• Other Life Insurance → Taxed as Income from Other Sources

Summary of taxation of ULIPs and Insurance Proceeds: