The Finance Bill 2025 proposes amendments to clarify the taxation of Unit Linked Insurance Policies (ULIPs). Under Section 10(10D) of the Income-tax Act, exemption on life insurance proceeds is conditional on the premium not exceeding 10% of the capital sum assured. From February 1, 2021, policies with premiums exceeding ₹2,50,000 annually do not qualify for this exemption. Such ULIPs are treated as capital assets, and profits from their redemption are taxed as capital gains under Section 45(1B). Furthermore, these ULIPs are included in the definition of “equity-oriented funds” under Section 112A, making them subject to specific tax rules. The proposed amendments will take effect from April 1, 2026, applicable for the assessment year 2026-27 and beyond. These changes aim to rationalize exemptions and ensure that tax benefits are limited to smaller, genuine insurance policies.
Budget 2025: Bringing clarity in income on redemption of Unit Linked Insurance Policy
Clause (10D) of section 10 provides for income-tax exemption on the sum received under a life insurance policy, including bonus on such policy. There is a condition that the premium payable for any of the years during the terms of the policy should not exceed ten per cent of the actual capital sum assured.
2. It may be pertinent to note that to restrict the benefit of exemption under clause (10D) of section 10, to small and genuine cases of life insurance, the Finance Act, 2021, inter alia, made amendments to clause (10D) of section 10 to provide that the exemption under this clause shall not apply with respect to any unit linked insurance policy or policies issued on or after the 01.02.2021, if the amount of premium or aggregate amount of premium payable during the term of such policy or policies exceeds Rs. 2,50,000;
3. It is noted that ULIP is a capital asset only when the exemption under clause (10D) of section 10 does not apply on such policies on account of the applicability of the 4th and 5th proviso and accordingly, taxation as capital gains in case of only such ULIPs. However, in case of life insurance policy (other than a ULIP), the sum received is chargeable to income-tax under “Income from other sources” for any such policy to which exemption under clause (10D) of section 10 does not apply.
4. Further, any sum received under an insurance policy as provided in sub-clauses (a) to (d) read with the provisos to clause (10D) to section 10 are not eligible for exemption under clause (10D) of section 10. Such sub-clauses are applicable to unit-linked insurance policy as well.
5. It is, therefore, proposed to rationalise the provisions for unit-linked insurance policies, so as to provide that,–
(I) ULIPs to which exemption under clause (10D) of section 10 does not apply, is a capital asset [clause (14) of section 2];
(II) the profit and gains from the redemption of ULIPs to which exemption under clause (10D) of section 10 does not apply, shall be charged to tax as capital gains [sub-section (1B) of section 45]; and
(III) ULIPs to which exemption under clause (10D) of section 10 does not apply, shall be included in the definition of equity oriented fund [clause (a) of Explanation to section 112A]
7. These amendments will take effect from the 1st day of April, 2026 and shall accordingly, apply in relation to the assessment year 2026-27 and subsequent assessment years.
[Clauses 3, 12 & 22]
Extract of Relevant Clauses of Finance Bill, 2025
Clause 3 of the Bill seeks to amend section 2 of the Income-tax Act relating to definitions.
Clause (14) of the said section provides in sub-clause (b) that “capital asset”, means any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992. Further, sub-clause (c) of the said clause, provides that capital asset means any unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereof.
It is proposed to amend sub-clause (b) of the said clause so as to insert the expression “or held by an investment fund specified in clause (a) of Explanation 1 to section 115UB” after the words “Foreign Institutional Investor”.
It is further proposed to amend sub-clause (c) of clause (14) of the said section so as to make it applicable for unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply.
These amendments will take effect from 1st April, 2026 and will, accordingly, apply in relation to the assessment year 2026-2027 and subsequent assessment years.
Clause 12 of the Bill seeks to amend section 45 of the Income-tax Act relating to capital gains.
Sub-section (1B) of the said section, inter alia, provides that where any person receives at any time during any previous year any amount under a unit linked insurance policy, to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereof, including the amount allocated by way of bonus on such policy, then, any profits or gains arising from receipt of such amount by such person shall be chargeable to income-tax under the head “Capital gains” and shall be deemed to be the income of such person of the previous year in which such amount was received and the income taxable shall be calculated in such manner as may be prescribed.
It is proposed to amend the said sub-section so as to make it applicable for an unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply.
This amendment will take effect from 1st April, 2026 and will, accordingly, apply in relation to the assessment year 2026-2027 and subsequent assessment years.
Clause 22 of the Bill seeks to amend section 112A of the Income-tax Act relating to tax on long-term capital gains in certain cases.
Clause (a) of the Explanation to the said section, inter alia, provides that “equity oriented fund” means a fund set up under a scheme of a mutual fund specified under clause (23D) of section 10 or under a scheme of an insurance company comprising unit linked insurance policies to which exemption under clause (10D) of the said section does not apply on account of the applicability of the fourth and fifth provisos thereof.
Second proviso to the clause (a) of Explanation to the said section provides that in case of a scheme of an insurance company comprising unit linked insurance policies to which exemption under clause (10D) of section 10 does not apply, in given cases, the minimum requirement of ninety per cent. or sixty-five per cent., as the case may be, is required to be satisfied throughout the term of such insurance policy.
It is proposed to amend clause (a) and the second proviso of the Explanation to the said section so as to make it applicable for unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply.
This amendment will take effect from 1st April, 2026 and will, accordingly, apply in relation to the assessment year 2026-2027 and subsequent assessment years.
Extract of Relevant Amendment Proposed by Finance Bill, 2025
3. Amendment of section 2.
In section 2 of the Income-tax Act,–– Amendment of section 2.
(a) in clause (14), with effect from the 1st April, 2026,–
(i) in sub-clause (b), after the words “Foreign Institutional Investor”, the words, brackets, letters and figures “or held by an investment fund specified in clause
(a) of Explanation 1 to section 115UB” shall be inserted;
(ii) in sub-clause (c), the words “on account of the applicability of the fourth and fifth provisos thereof” shall be omitted;
(b) in clause (22),––
(i) in the long line, after sub-clause (ii), the following sub-clause shall be inserted, namely:––
‘(iia) any advance or loan between two group entities, where,––
(A) one of the group entity is a “Finance company” or a “Finance unit”; and
(B) the parent entity or principal entity of such group is listed on stock exchange in a country or territory outside India other than the country or territory outside India as may be specified by the Board in this behalf;’;
(ii) in Explanation 3, after clause (b), the following clauses shall be inserted, namely:––
‘(c) “Finance Company” and “Finance Unit” shall have the same meaning as assigned respectively to them in clauses (e) and (f) of sub-regulation (1) of regulation 2 of the International Financial Services Centres Authority (Finance Company) Regulations, 2021 made under the International Financial Services Centres Authority Act, 2019:
Provided that such Finance Company or Finance Unit, is set up as a global or regional corporate treasury centre for undertaking treasury activities or treasury services as per the relevant regulations made by the International Financial Services Centres Authority established under section 4 of the said Act;
(d) “group entity”, “parent entity” and “principal entity” shall be such entities which satisfy such conditions as prescribed in this behalf.’;
(c) in clause (47A), after sub-clause (c) and before the proviso, the following sub-clause shall be inserted with effect from the 1st April, 2026, namely:––
“(d) any crypto-asset being a digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions, whether or not such asset is included in sub-clause (a) or sub-clause (b) or sub-clause (c):”.
12. Amendment of section 45.
In section 45 of the Income-tax Act, in sub-section (1B), the words “on account of the applicability of the fourth and fifth provisos thereof” shall be omitted with effect from the 1st April, 2026.
22. Amendment of section 112A.
In section 112A of the Income-tax Act, in the Explanation, in clause (a), with effect from the 1st April, 2026,––
(a) in the opening portion, the words “on account of the applicability of the fourth and fifth provisos thereof” shall be omitted;
(b) in the second proviso, the words “on account of the applicability of the fourth and fifth provisos thereof” shall be omitted.
