How Mutual Funds and ULIPs Will Be Taxed After Union Budget 2025

With the enactment of the Finance Bill, 2025, investors must reassess how their capital gains from mutual funds and Unit Linked Insurance Plans (ULIPs) will be taxed. The distinction between long-term and short-term capital gains remains crucial, directly affecting the tax rates applicable upon redemption or sale of investments. Here’s an in-depth look at the revised taxation structure for the financial year 2025-26.

Long-Term Capital Gains Tax

Equity-Oriented Mutual Funds

Mutual funds that allocate at least 65% of their assets to listed domestic equity shares fall under the category of equity-oriented schemes. Gains from investments held for more than 12 months qualify as long-term capital gains and are subject to a 12.5% tax rate, with some exceptions for specific mutual fund categories.

Non-Equity-Oriented Mutual Funds

For debt funds and other non-equity-oriented mutual funds, the required holding period to qualify as long-term capital gains is 24 months. Gains from these investments held beyond 24 months will also be taxed at 12.5%.

Short-Term Capital Gains Tax

Equity-Oriented Mutual Funds

If investors redeem or sell their equity-oriented mutual fund investments before completing 12 months, they will incur a 20% short-term capital gains tax.

Non-Equity-Oriented Mutual Funds

For non-equity-oriented schemes, short-term capital gains (redemption before 12 months) will be taxed at the investor’s applicable income tax slab rate.

Taxation of ULIPs Post Budget 2025

From April 1, 2026, ULIPs with annual premiums exceeding ₹2.5 lakh will be taxed at a 12.5% long-term capital gains (LTCG) rate. This change aims to bring more clarity and fairness to ULIP taxation.

Why This Change Was Introduced?

Previously, there was ambiguity regarding whether ULIP gains should be classified under long-term capital gains or income from other sources. This was especially relevant for high-premium ULIPs, where a large portion of the premium was invested in equity markets.

Unlike traditional life insurance policies that predominantly invest in debt instruments, ULIPs allocate a significant portion of their premiums to equity assets. Consequently, treating them as regular insurance policies for tax purposes was deemed inappropriate. The Budget 2025 framework has now clearly defined their taxation structure, aligning them with equity-linked investments.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.