Income-Tax Clarity on Unit Linked Insurance Policies (ULIPs): Proposed Amendments for AY 2026-27
The Finance Act, 2021 has brought amendments to clause (10D) of section 10 of the Income Tax Act to improve clarity in the taxation of income arising from Unit Linked Insurance Policies (ULIPs). These provisions are particularly made to ensure that tax exemptions are available only for genuine life insurance cases while rationalizing the rules of taxation for ULIPs. The proposed amendments, which are to come into effect from April 1, 2026, will be applicable for the assessment year 2026-27 and subsequent years.
Major Provisions of Clause (10D) of Section 10
Clause (10D) of section 10 explains that under a life insurance, income tax shall not be payable on the amount received, which includes the additional bonuses. If the annual premium paid does not exceed 10% of the total capital sum assured, then the exemption is applicable.
Limitation of Exemptions for ULIPs
In order to restrict the misuse of this exemption on policies with high premiums, the clause (10D) has been amended by excluding ULIPs issued on or after February 1, 2021, from the tax exemptions if the premium or aggregate premium exceeds Rs. 2,50,000 during the term of the policy.
Taxation of ULIPs as Capital Assets
The proposed amendments clarify that:
1. ULIPs as Capital Assets: ULIPs to which the clause (10D) exemption does not apply are treated as capital assets under section 2(14) of the Income Tax Act. Profits and gains from such ULIPs will be taxed as capital gains under sub-section (1B) of section 45.
2. Income from Other Sources: The sum received from all other life insurance policies, which do not attract the Section (10D) exemption, will be taxed under “Income from other sources.”
3. Inclusion of Dividend: ULIPs to which the exemption is not applicable will be included in the equity-oriented funds for the purposes of explanation of section 112A with dividends.
Motivation of the Amendments
These amendments aim to rationalize the tax provisions applicable to ULIPs, making sure that those policies with higher premiums are taxed accordingly. The government has decided that ULIPs which do not fulfill certain conditions shall be considered capital assets. Hence, these would be taxed in a different way so that one cannot misuse tax benefits which were meant for a genuine life insurance policy.
This rule would come into effect from April 1, 2026. It will start from the financial year 2025-26 and onward.
The purpose of this change is to make the tax system more transparent and equitable for ULIPs while making sure that only eligible policies benefit from tax benefits.
