Union Budget 2025: All Changes Regarding Life Insurance

A new financial year means a new batch of changes for our country’s financial trajectory. Union Budget 2025, held on February 1st of this year, revealed a host of updates meant to guide out nation’s financial development. Along with new tax brackets and exemptions, the Budget also revealed new government policies regarding India’s various financial sectors. Even the life insurance sector was subject to changes as per the new Budget. The biggest news pertaining to life insurance includes changes to ULIP taxation and an increase in FDI rates for the insurance sector.  

Here’s a quick look at every change applicable to the life insurance sector as of Union Budget 2025.  

Clarifying Taxation Rules for Unit-Lined Insurance Plans 

One major change regarding life insurance is the new tax rules applicable to Unit-Linked Insurance Plans (ULIPs). ULIPs are unique life insurance products that provide life cover alongside wealth growth via market linked funds. While ULIPs are primarily an insurance product, many people prefer to use them as an investment vehicle. This is why returns earned through ULIPs will now be taxed as capital gains. 

This change will come into effect from April 1, 2026. 

Deductions Applicable to ULIPs 

ULIPs are subject to tax benefits under both Section 80C and Section 10(10D). Moreover, under Section 10(10D), ULIPs are complete tax exempt if your annual premium amount does not exceed ₹2.5 lakhs. Going over the ₹2.5 lakh limit will make your policy ineligible for tax exemptions and your returns will be subject to taxation.  

What is the Main Change?  

The ₹2.5 lakh limit under Section 10(10D) remains unchanged. However, before Budget 2025, there was no clear rule on how to tax ULIPs that exceed this limit. Due to this reason, ULIPs were generally taxed as ‘income from other sources’, the same as other types of life insurance plans that offered returns. However, due to the market-linked nature of ULIPs, the government felt that it would be more appropriate to tax ULIPs as capital gains.  

This means that ULIPs with a premium cost of over ₹2.5 lakhs will now be taxed under Section 112A of the Income Tax Act. Plus, if the ULIP is held for over a year (12 months), it shall be considered as a long-term capital asset and will accordingly be subject to capital gain tax of 12.5%.  

What This Means for Investors 

Income categorized as ‘from other sources’ would usually be taxed as per a person’s individual tax bracket. This means that the tax rate could potentially increase if the investor was from a higher income bracket under the general tax slabs. This new change can be a positive for those who are in the upper tax slabs. However, for those who are in the lower tax brackets, this change could potentially increase their tax liability. 

Removal of FDI Cap 

The Foreign Direct Investment (FDI) cap for life insurance companies will be increased to 100% from 74%. It should be noted that this increased cap will only apply to companies that invest their entire premium amount within India itself. This is considered to be an overall positive change for the insurance sector. The greater capital inflow should ideally help insurers improve their customer service, their product offerings, and improve their claim settlement timelines. This increased cap could also lead to lower premiums for customers as insurers will be able to depend on foreign investments for greater stability.  

However, it should be noted that these improvements will not be seen overnight. So, as of now, this change is a boon for investors but offers no immediate benefits to life insurance customers.  

Potentially Unlimited Tax Exemptions for NRIs 

The Government of India has announced that any insurance policy issued by the intermediary office located in IFSC (International Financial Services Centre) will not have to adhere to the limitations stipulated by Section 10(10D) of the Income Tax Act. Any policy issued by IFSC will enjoy tax exemptions even if the annual premium for that plan exceeds ₹2.5 lakhs (in case of ULIPs) or ₹5 lakhs (in case other savings plans). However, the total premium of the plan should not exceed 10% of the plan’s sum assured.  

Thanks to this new change, any NRI that purchases an insurance policy in India through the International Financial Services Centre will enjoy complete tax exemptions for their ULIPs/savings insurance plans. This amendment will come into effect on April 1, 2025. 

Conclusion 

The changes announced for the life insurance sector are more large scale this time around. The biggest focus is on the FDI cap removal, which is expected to increase foreign investment in India’s insurance market. The changes to ULIP taxation may or may not be a positive, depending on your tax slab. If you have any queries regarding life insurance, or just want to learn more about its benefits, just leave your details here and we’ll get back to you as soon as possible!