Capital gains tax on ULIP: CBDT says non-exempt ULIPs will be treated as equity-oriented funds

A Unit-Linked Insurance Plan (ULIP) will be taxed as an equity-oriented fund if it is not eligible for tax exemption under section 10(10D), according to highlights of Finance Bill 2025 shared by the Central Board of Direct Taxes (CBDT).

Under Section 10(10D), tax exemption is available on insurance policies where the annual premium is not more than 10% of the sum assured. The exemption doesn't apply when the annual premium is over 10% of the sum assured.

While ULIPs are offered by life insurance companies, the premium invested is higher than 10% of the sum assured in many cases. The tax exemption will not apply in such cases; instead, they will be taxed as capital gains, similar to capital gains from equity-oriented mutual funds.

What's the capital gains tax on equity-oriented funds

Currently, short-term capital gains from equity funds are taxed at a flat 20% rate while long-term gains are taxed at 12.5%.

Long-term gains worth up to ₹1.25 lakh are, however, exempted from tax.

What’s new on ULIPs in Finance Bill 2025

The Finance Bill 2025 has made two changes to the taxation of ULIPs.

As per CBDT, ULIPs where the tax exemption under section 10(10D) is not applicable will be considered as capital assets. The income generated from these ULIPs will be taxed under the head of capital gains.

"It is proposed to remove the reference to the phrase “on account of the applicability of the fourth and fifth provisos thereof” from sub-clause (c) of Section 2(14) to broaden its applicability to ULIPs in all instances where the exemption under Section 10(10D) is not available. Consequently, all ULIPs not qualifying for exemption under Section 10(10D) will be classified as capital assets,” CBDT said.

“A corresponding amendment has been made to Section 45(1B) to tax the income arising from receipt of amount under ULIPs, where the exemption under Section 10(10D) is not available, under the head of capital gains," it added.

Under Clause (a) of the Explanation to Section 112A, an equity-oriented fund has been defined as a fund set up under a mutual fund scheme specified under section 10 (23D) or under a scheme of an insurance company comprising ULIPs that do not qualify for exemption under Section 10(10D).

Earlier, the second proviso to clause (a) of the Explanation specified that in the case of an insurance company scheme comprising ULIPs where an exemption under Section 10(10D) is not available, the minimum investment requirement of 90% or 65%, as applicable, must be maintained throughout the policy's term.

The Finance Bill 2025 has proposed to amend clause (a) and the second proviso of the Explanation to make them applicable to all ULIPs where an exemption under Section 10(10D) is not available.

“Therefore, ULIPs that do not qualify for exemption under Section 10(10D) shall be included in the definition of an equity-oriented fund,” CBDT said.