LTCG Tax in ULIP

Introduction

Insurance products have evolved a great deal in recent years. Today, it is possible to enjoy a variety of other financial benefits from life insurance in addition to a life cover. This includes savings, retirement benefits and even investments 

In fact, there is a specific category of life insurance plans that combine the benefits of insurance and investments. We’re talking about Unit Linked Insurance Plans (ULIPs), of course. The long term capital gains (LTCG) on ULIP investments have recently been brought within the income tax net in India.

How Does a Unit Linked Insurance Plan Work?

A Unit Linked Insurance Plan (ULIP) gives you a life cover, like all life insurance plans. So, if something untoward happens to you during the tenure of the plan, the insurance provider pays out the sum assured under the plan to your nominees.

However, in addition to the insurance coverage offered, ULIPs also give you the opportunity to invest in a variety of market-linked funds such as equity funds, debt funds or a mix of the two. At the time of maturity or death, the fund value of your investments is paid out to you or your nominee as the case may be.

These gains on your ULIP investments, which are earned over the long term, form the LTCG on your ULIP. And you will need to pay the long term capital gain tax on your ULIP gains as per the provisions of the Income Tax Act, 1961.

Long Term Capital Gain Tax on ULIPs

When you sell a capital asset, the profits you earn from such a transaction are called capital gains. If you have held the said asset for a specified duration or longer, the asset is considered a long term capital asset, and the profits from its sale are considered as long term capital gains (LTCG) 

In the case of ULIPs, the returns you earn from your investments are considered as long term gains if you have held the ULIP for a period of 12 months or longer. The LTCG in ULIPs was initially exempt from tax. So, ULIPs were exempt-exempt-exempt (EEE) investments.

However, that changed with the introduction of taxation on LTCG in ULIPs in Budget 2021. As per the new provisions, new Unit Linked Insurance Plans issued on or after February 1, 2021 will be subject to long term capital gains tax, as per Section 112A of the Income Tax Act, 1961.

 

Check out the relevant provisions of ULIP long term capital gain taxation below.

 

• This provision is applicable only to ULIPs whose annual premium is Rs. 2.5 Lakhs or above.

• The amount of gains exceeding Rs. 1 Lakh are subject to long term capital gain tax on ULIPs as per this provision.

• The rate of tax on the long term capital gains is 10%.

Calculation of LTCG Tax in ULIPs

Based on the above provisions of taxation of the LTCG on ULIPs, here is an example of how the tax is calculated in different scenarios.

Scenario 1:

Say you have purchased a ULIP with an annual premium of Rs. 1.5 Lakhs. At the end of the policy term of 20 years, you earn Rs. 90,000 as your long term capital gains.

In this case, you will not be subject to LTCG tax on your ULIP because -

• Your annual premium does not exceed Rs. 2.5 Lakhs

• Your long term capital gains are below Rs. 1 Lakh

Scenario 2:

Again, say you have purchased a ULIP with an annual premium of Rs. 1.5 Lakhs. At the end of the policy term of 20 years, you earn Rs. 3 Lakhs as your long term capital gains.

In this case, you will not be subject to tax on the LTCG on your ULIP even though your long term capital gains are above Rs. 1 Lakh, because your annual premium does not exceed Rs. 2.5 Lakhs.

Scenario 3:

Now, let’s assume you have purchased a ULIP with an annual premium of Rs. 3 lakhs. At the end of the policy term of 20 years, you earn Rs. 90,000 as your long term capital gains.

In this case, you will not be subject to LTCG tax on your ULIP even though your annual premium exceeds Rs. 2.5 Lakhs, because your long term capital gains are below Rs. 1 Lakh.

Scenario 4:

In this case, say you have purchased a ULIP with an annual premium of Rs. 3 Lakhs. At the end of the policy term of 20 years, you earn Rs. 5 Lakhs as your long term capital gains.

 

In this case, you will have to pay tax on the LTCG tax on your ULIP because

-

• Your annual premium exceeds Rs. 2.5 Lakhs

• Your long term capital gains are above Rs. 1 Lakh

So, you will have to pay LTCG tax at the rate of 10% on Rs. 4 Lakhs (i.e. Rs. 5 Lakhs - Rs. 1 Lakh). This comes up to Rs. 40,000 as long term capital gain tax on your ULIP.

Conclusion

Now that you know all about LTCG tax in ULIPs, you can use this information to create a more informed investment plan for yourself. You can also learn more about the features and benefits of Unit Linked Insurance Plans and purchase a ULIP easily on Bajaj Markets. By including a ULIP in your portfolio, you can enjoy the benefits of insurance combined with market-linked investments.