Tax exemptions on ULIP: These investors are set to gain on taxes; check what Budget 2025 proposed

Budget 2025: Finance Minister Nirmala Sitharaman's Budget 2025 included significant tax relief for Non-Residents looking to purchase insurance policies, including ULIPs, from companies registered in the IFSC region.

Starting April 1, 2025, all insurance policies acquired from an IFSC registered office will receive tax exemption under section 10(10D), regardless of premium amounts exceeding Rs 2.5 lakh for ULIPs and Rs 5 lakh for other policies.

As of April 1, 2025, all insurance policies bought from an IFSC-registered office of the insurer will be eligible for tax exemption under section 10(10D), regardless of whether the premium payable exceeds Rs 2.5 lakh for ULIPs and Rs 5 lakh for other policies.

In contrast, FM Sitharaman announced that beginning April 1, 2026, ULIPs with annual premiums surpassing Rs 2.5 lakh will no longer be eligible for tax exemption under Section 10(10D) of the Income Tax Act, 1961. Instead, these policies will be subject to capital gains tax, with long-term capital gains (LTCG) from policies held for over a year taxed at a rate of 12.5%. 

What has changed for NRIs vs domestic investors

Key points for NRIs

The Income Tax Department in its FAQs about Budget 2025 said: “Clause (10D) of section 10 is proposed to be amended so as to provide that proceed received on life insurance policy, issued by insurance intermediary office located in IFSC, shall be exempted without any condition on premium amount (i.e. Rs 2.5 lakh for ULIPs and Rs 5 lakh for other policies). However, the premium payable for any of the year during the term of policy should not be more than 10 percent of the actual capital sum assured.”

According to the Finance Minister's proposal outlined in Budget, the limitation clause for tax exemption on IFSC purchased insurance policies, including ULIPs, is determined by the percentage of the insurance premium in relation to the actual capital sum assured. 

If the annual premium exceeds 10% of the capital sum assured, the tax exemption will not be granted for the policy.

CA Prakash Hegde told the Economic Times: "NRIs are allowed to purchase life insurance policies and ULIPs from an Insurance Intermediary Office located in IFSC and they can get benefit from the above tax exemption."

He added: "The Indian Government has set up IFSC to undertake financial services transactions that are carried on outside India by overseas financial institutions and overseas branches/ subsidiaries of Indian financial institutions. IFSC as envisaged under the Indian context “is a jurisdiction that provides financial services to non-residents and residents (Institutions), in foreign currency other than Indian Rupee (INR). To encourage IFSC, the Indian Government has implemented many regulations and also provided many tax exemptions to units in the IFSC and the investors."

Sonal Alagh, Partner, Alagh & Kapoor Law Offices, said: “The significant aspect of this amendment is the removal of the cap on premium amounts which were previously set at Rs 2.50 lakh for ULIPs and Rs 5 lakh for other life insurance policies to qualify for tax exemption. Now, the only condition is that the premium for any year during the term of the policy should not exceed 10 percent of the sum assured."

Explanation in Budget 2025

The explanatory memorandum to Budget 2025 said: “In order to provide parity to non-residents availing life insurance from insurance office in IFSC vis a vis other foreign jurisdiction, it is proposed to amend the clause (10D) of section 10 so as to provide that proceeds received on life insurance policy issued by IFSC insurance intermediary office shall be exempted without the condition related to the maximum premium payable on such policy as mentioned above.”

Pranjita Barman, Partner, Cyril Amarchand Mangaldas, said: “While the proposed amendments to the Income Tax Act do not clarify whether it will be applicable to residents, non-residents or both, the memorandum to the speech of the finance minister indicates that such an amendment was introduced to ensure parity for non-residents vis-à-vis other offshore jurisdictions. Accordingly, the intent seems to limit the exemptions to non-residents.”

Indian residents

In Budget 2025, it has been clarified for Indian residents that if a ULIP or any other insurance policy fails to adhere to the provisions of Section 10(10D) regarding maximum premium payment limits of Rs 2.5 lakh (ULIP) and Rs 5 lakh (others), as well as the restriction on premium amount being limited to 10% of the sum assured, then it will be subjected to taxation as capital gains.

Section 10(10D) of the Income Tax Act provides an exemption for any sum received under a life insurance policy, including bonuses, with the following conditions:

a) The premium payable for any year during the term of the policy (life insurance or ULIP) issued on or after 01.04.2012 should not exceed 10% of the actual capital sum assured.

b) The total amount of premium payable during the term of the policy or policies should not exceed Rs 2,50,000 for Unit Linked Insurance Policies (ULIPs) or Rs 5,00,000 for other policies issued after certain dates.

Failure to meet these conditions may result in the sum received under an insurance policy being subject to tax as capital gains (for ULIPs) or income from other sources (for policies other than ULIPs).

"In the present provisions, in the case of Unit Linked Insurance Policy, even where payable premium exceeded 10% of the sum assured, the sum received on redemption was not being charged to tax as ‘capital gain’ under sub-section (1B) of section 45(1B). Even though it was not exempt, there was ambiguity regarding the head of chargeability. “The current amendment has now made the tax treatment given to all ULIP policies consistent,” said CA (Dr.) Suresh Surana.

If the exemption specified in Section 10(10D) is not applicable, the amount received from both ULIP and other insurance policies will be subject to taxation under the categories 'capital gains' or 'income from other sources', as appropriate.

Surana added the anticipated change is set to simplify the tax implications of ULIPs and other insurance products, aiding taxpayers in navigating their financial and tax responsibilities related to life insurance investments. By providing greater transparency on the tax treatment of life insurance payouts, such as the implementation of capital gains tax for ULIPs under certain circumstances, the government is striving to empower taxpayers in making well-informed decisions for their financial strategies.

“This move is expected to streamline the tax treatment of ULIPs and other insurance policies and help taxpayers better understand how to plan their finances and tax obligations around life insurance investments. By offering more clarity regarding the tax treatment of life insurance policy proceeds, including the introduction of capital gains taxation for ULIPs in specific cases, the government aims to assist taxpayers in making informed decisions about their financial planning,” added Surana.