Impact of Union Budget 2025-26 on Life Insurance

Key Takeaways:

• Existing tax benefits under Section 80C and Section 10(10D) remain unchanged.
• ULIPs will now be taxed under capital gains instead of income from other sources.
• Foreign Direct Investment (FDI) cap in the life insurance industry raised to 100%.
• New tax exemptions announced for NRI policyholders via IFSC offices.
• These changes are aimed at boosting foreign investment, product innovation, and affordability

Union Budget 2025 aimed at a balanced approach for the Indian economy. With a focus on economic expansion, it has taken steps to bring down the fiscal deficit and increase the expenditure for development. The life insurance sector received a few key updates regarding taxation. It also focused on foreign investments and policy exemptions for NRIs. If you are an investor looking for insight into the changes and approach for decision making, something is in store for you. Scroll to discover. 

Changes in the Life Insurance Sector 

Some of the key aspects presented and changed in Budget 2025 concerning life insurance include: 

Existing Tax Benefits 

The life insurance premiums will continue to be eligible for claim deductions under section 80C of the Income Tax Act. The upper limit will remain ₹ 1.5 lakhs. The tax exemptions, on meeting the terms and conditions, will remain so under Section 10(10D) of the Income Tax Act. Further, the old tax regime will offer better benefits and maximum deductions compared to the newer one.

Clarification and Changes in Taxation Rules 

Clarity and transparency have been provided regarding ULIPs or Unit-Linked Insurance Plans. These plans are a combination of both life insurance and investment. The budget has stated that the taxable returns and withdrawals obtained via ULIPs will be taxed as capital gains under Section 112A of the Income Tax Act. It will be effective from April 1, 2026. 

These ULIPs were previously taxed as “Income from Other Sources”. The taxable returns here refer to ULIPs with premium costing over ₹ 2.5 lakhs. Further, if the ULIPs are held for more than 12 months or a year, the taxation will be applicable at 12.5 percent under Long-Term Capital Gains (LTCG) tax.

Impact of Budget on Life Insurance Plan Takers

The switch from the taxation category “Income from Other Sources” to Capital Gains will lead to taxes being charged depending on the individual’s tax slab. Hence, the taxes may increase for the low-income groups but decrease for high-income groups. 

Foreign Direct Investment (FDI) Cap Removal 

The FDI cap life insurance will witness an increase from 74 percent to 100 percent. It will be applicable for companies investing the total premiums within India. Concerning its implication on the Life Insurance industry, it is expected to offer the following benefits: 

• Possibility of more foreign investments, thus leading to lower premiums for customers. 

• More capital inflow might enhance investment and hence improve:

  • Quality of customer service

  • Quantity and quality of products 

  • Betterment of claim settlement timelines.

Tax Exemptions for NRIs

The insurance policies issued by the intermediary office located in the International Financial Services Center (IFSC) will be tax-exempt under Section 10(10D) of the Income Tax Act. It holds true for ULIPs with premiums above ₹ 2.5 lakhs and for savings plans exceeding ₹ 5 lakhs. However, the total premium must be less than 10 percent of the sum assured by the plan. 

The change may lead to increased participation of NRIs in Indian Life Insurance Plans, positively impacting the economy. It will be applicable from April 1, 2025.

Conclusion 

Union Budget 2025 has brought clarity and improvements in the life insurance sector. The taxation revisions, FDI cap removal, and expansion in NRI tax exemption will have certain notable impacts. The shift will also be likely to bring in foreign investment, enhance the quality of products and services, and lower the premiums. Discover an interesting variety of Life Insurance Plans now with Canara HSBC Life Insurance.