No tax on GIFT City Ulip maturity proceeds even if premiums exceed Rs 2.5 lakh per year

In a boost to life insurance companies’ branches located in the International Financial Services Centre (IFSC)-GIFT city, Budget 2025 has announced a tax exemption for life insurance policies sold through such offices.

Exemption for policies purchased through GIFT city offices

That is, maturity proceeds of such unit-linked and endowment policies will not be taxed even if the annual premiums exceed Rs 2.5 lakh and Rs 5 lakh respectively.

At present, maturity proceeds of Ulip and endowment policies sold in India, which are otherwise tax-free under section 10(10D), attract tax if their premiums exceed these limits. However, rules have been relaxed for policies sold through IFSC insurance offices.

“In order to provide parity to non-residents availing life insurance from insurance office in IFSC vis a vis other foreign jurisdiction, it is proposed to amend the clause (10D) of section 10 so as to provide that proceeds received on life insurance policy issued by IFSC insurance intermediary office shall be exempted without the condition related to the maximum premium payable on such policy," the Budget 2025 provision states.

Also read: ULIP taxation: Limited clarity on key aspects after Budget announcement

It remains to be seen if the differential tax treatment for domestic insurers' policies and their IFSC arms' plans will result in a tax arbitrage prompting non-resident high-networth individuals keen on tax-efficient instruments to tap GIFT-city insurance policies.

"However, the premium payable for any of the years during the terms of the policy should not be more than 10 percent of the actual capital sum assured," says Nitesh Buddhadev, Founder, Nimit Consultancy.

Clarity on domestic Ulips' taxation 

This apart, Budget 2025 has clarified that regular Ulips will be treated as equity-oriented schemes, which means profits made on redemption will be treated as capital gains. Long-term capital gains of over Rs 1.25 lakh booked on sale of equities and equity mutual fund units invite a tax of 12.5 percent, while short-term capital gains (holding period of less than 12 months) attract a tax rate of 20 percent. Capital gains tax structures across asset classes were rationalised in Budget 2024.

In February 2021, finance minister Nirmala Sitharaman had announced her decision to tax maturity proceeds of Ulips with aggregate annual premiums of over Rs 2.5 lakh. Subsequently, in Budget 2023, she had also decided to tax maturity proceeds of endowment policies with aggregate annual premiums of more than Rs 5 lakh.