Budget 2025 Personal Finance Changes: ULIP Taxation, ITR, Increased TDS and TCS Limits, NPS Vatsalya scheme, Tax Exemption for Self-Occupied Properties, KYC ; How do changes align ULIPs with equity-oriented mutual funds?

Budget 2025 has introduced significant changes in personal finance that will affect taxpayers and investors. Key updates include modifications to taxation on Unit Linked Insurance Plans (ULIPs), changes in income tax return (ITR) filing timelines, and enhancements in tax deductions for specific groups. These updates aim to provide more flexibility and benefits to various taxpayers, especially senior citizens and families with dependents with disabilities. These changes reflect a commitment to making the tax system more equitable and supportive of diverse financial situations. Taxpayers should stay informed and consider how these updates may affect their financial planning moving forward.

ULIP Taxation

The finance ministry has clarified that for ULIPs, if the annual premium exceeds Rs 2.5 lakh, any redemption will be subject to capital gains tax. If the ULIP is held for more than a year, the applicable tax rate is 12.5%, which aligns it with equity-oriented mutual funds. Previously, ULIPs purchased after February 1, 2021, could enjoy tax-free redemptions under Section 10(10D), provided the premium limit was adhered to.

Updated ITR Filing

The timeline for filing updated ITRs has been extended from two years to four years. This change offers taxpayers more time to amend their returns. However, the tax payable on additional income reported in updated returns is now structured: 60% for filing within three years and 70% within four years. For quicker filings, the rates are lower, with 25% for one year and 50% for two years.

NPS Vatsalya Scheme

The new NPS Vatsalya scheme, designed for parents with children or dependents with disabilities, now offers the same tax exemptions as the regular NPS. This includes an additional Rs 50,000 tax deduction under the old tax regime, providing much-needed financial relief for these families.

Changes in TDS and TCS Limits

The TDS threshold for interest earned by senior citizens has been increased to Rs 1 lakh from Rs 50,000, while non-senior citizens will see an increase to Rs 50,000 from Rs 40,000. Additionally, the TDS threshold on rent has been raised significantly to Rs 6 lakh per annum from Rs 2.4 lakh. For dividends, the TDS threshold has been increased from Rs 5,000 to Rs 10,000, reducing the number of investors who will face TDS deductions.

On the TCS front, the threshold for remittances under the RBI’s Liberalized Remittance Scheme (LRS) has been proposed to rise from Rs 7 lakh to Rs 10 lakh, and TCS on educational remittances will be removed if funded through loans from specified institutions.

Tax Exemption for Self-Occupied Properties

Tax exemptions have been expanded to allow for two self-occupied properties, meaning taxpayers can now claim zero valuation for a second property, even if it is unoccupied or not rented out. This change alleviates the tax burden on homeowners with multiple properties.

NSS Withdrawals Tax Exemption

Withdrawals from the National Savings Scheme made on or after August 29, 2024, will now be tax-exempt, including both the principal amount deposited and the interest accrued, for which a deduction has been previously allowed.

Revamped KYC

A revamped Central Know Your Customer (KYC) system is set to be introduced in 2025, aimed at simplifying the KYC process. This initiative will streamline periodic updates, making the system more user-friendly and efficient.