As financial landscapes evolve, it’s crucial to stay informed about tax changes that affect your investments. Budget 2025 brings significant updates to the taxation of ULIP schemes, and this post will help you understand the implications for your investments.
What Is a ULIP Scheme?
A ULIP scheme (Unit Linked Insurance Plan) is a hybrid product that combines life insurance with market-linked investments. A part of your premium goes towards securing your loved ones, while the remaining portion is invested in equity, debt, or balanced funds. This provides a combination of wealth creation and financial protection.
One key attraction of a ULIP scheme is its tax-saving benefit under Section 80C (This is available under the old tax regime) of the Income Tax Act, 1961, allowing deductions of up to ₹1.5 Lakh on premiums paid during a financial year.
Budget 2025: The Taxation Turning Point
Finance Minister Nirmala Sitharaman announced a pivotal change, effective 1st April 2026: ULIP schemes with annual premiums exceeding ₹2.5 Lakh will no longer enjoy full exemption under Section 10(10D). Instead, gains on withdrawal will be taxed as capital gains.
What’s the Change?
Here’s a breakdown of the key changes:
| Previously | New Rule (Effective 1st Apr 2026) |
| ULIPs exempt under Sec 10(10D) regardless of premium | Gains on ULIPs with premiums > ₹2.5 Lakh taxed under Sec 112A |
| No clarity on tax classification | Clear treatment as capital gains for high-premium ULIPs |
Implications for Investors
- ULIP premiums ≤ ₹2.5 Lakh p.a.: No change—continue to enjoy full exemption, including maturity and death proceeds.
- ULIP premiums > ₹2.5 Lakh p.a.: Gains above the premium threshold are now taxed as Long-Term Capital Gains (LTCG) at 12.5%, with indexation benefits.
Impact of Budget 2025 on ULIP Taxation: A Case Study for Individual Investors
Consider an individual investor with two ULIP policies:
- ULIP A: Annual premium ₹2 Lakh (equity-linked), policy term 15 years
- ULIP B: Annual premium ₹4 Lakh (balanced fund), policy term 15 years
Scenario A: Before Budget 2025
Total premiums: ₹6 Lakh a year.
Both policies enjoy tax exemption on maturity proceeds under Section 10(10D).
Scenario B: After Budget 2025
From 1st April 2026, ULIP B exceeds the ₹2.5 Lakh cap.
Maturity proceeds: ₹10 Lakh.
Total premium paid: ₹60 Lakh.
Gain: ₹30 Lakh, taxed as LTCG at 12.5% = ₹3.625 Lakh tax payable.
Net proceeds: ₹86.375 Lakh.
Comparative Takeaway
If the investor had maintained each policy below ₹2.5 Lakh per annum:
- Both would have remained fully exempt.
- No LTCG liabilities.
- Higher net maturity proceeds.
Why Has the Government Done This?
The change aims to:
- Seal tax arbitrage: High-net-worth individuals used ULIPs above ₹2.5 Lakh as tax shields, avoiding taxes on stock market investments.
- Level playing field: Now treated like equity mutual funds, ULIP gains above the threshold are subject to capital gains tax.
- Simplify taxation: This move reduces ambiguity between “income from other sources” and “capital gains.”
What Should You Do?
To make the most of the changes introduced in Budget 2025 and ensure your investments in a tax-saving ULIP are tax-efficient, here are a few actionable steps you can take:
A. Review Your Premiums
If your annual premium exceeds ₹2.5 Lakh and you want to continue enjoying tax-free maturity, consider:
- Capping your ULIP premium per annum at ₹2.5 Lakh.
- Spreading investments across two or more tax-saving ULIPs to stay within the threshold.
B. Rebalance Your Portfolio
Consider alternatives:
- Equity mutual funds (LTCG at 10% above ₹1 Lakh/year)
- Debt funds (10% on gains after indexation)
- Traditional insurance integrated with separate investments
C. Stay Informed
Track your policy start dates, premiums, and any future tax law changes.
Aviva Signature Investment Plan – Platinum: Ensure a Bright Future for Your Family
The Aviva Signature Investment Plan – Platinum offers a perfect blend of Security (Sum Assured) and Growth (Fund Value), providing your family with financial protection in the event of an unfortunate occurrence. You can select from flexible investment options that align with your risk tolerance and financial goals, ensuring your investments grow steadily.
This plan combines life coverage with market-linked returns, delivering long-term financial stability.
Additional benefits include flexibility in premium payments, tax savings, and the comfort of knowing your loved ones are financially secure. Invest in their future today and live without worries.
Why It Still Makes Sense as a Tax-Saving ULIP
You can continue to benefit from tax-saving advantages under Section 80C.
ULIPs offer a seamless combination of life insurance and investment, with maturity and death benefits remaining tax-exempt for premiums of ≤ ₹2.5 Lakh.
While Budget 2025 imposes changes, your ULIP scheme can still offer significant advantages if managed wisely, ensuring your financial future is secure and tax-efficient.
Note: Tax benefits are based on the prevailing tax laws, which may change occasionally.
