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Introduction

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

 

Moreover, there is a specific category of life insurance plans that combines the benefits of insurance and investments, known as Unit Linked Insurance Plans (ULIPs). The long term capital gains (LTCG) on ULIP investments have recently been brought within the income tax net in India. Find out more about ULIPs in the sections below.

How Does a Unit Linked Insurance Plan Work?

A Unit Linked Insurance Plan (ULIP) provides you with 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.

 

But apart from the insurance coverage they provide, ULIPs also allow you to invest in a wide range of market-linked funds, including debt funds, equity funds or a combination of the two. The fund value of your investments are then distributed either to you or your nominee, as applicable, on maturity or death.

 

The long-term capital gains (LTCG) on your ULIPs comprise of these investments made by you. In addition, you will have to pay LTCG on your gains from ULIPs in accordance with 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 known as 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 LTCG if you have held the ULIP for a period of 12 months or longer. The LTCG in ULIPs was initially exempt from tax, meaning that these were exempt-exempt-exempt (EEE) investments.

 

However, that changed with the introduction of taxation on LTCG in ULIPs during Budget 2021. As per the new provisions, new ULIPs issued on or after February 1, 2021 will be subject to LTCG 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 ₹2.5 Lakhs or above

  • Gains exceeding ₹1 Lakh are subject to LTCG tax on ULIPs as per this provision

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

Calculation of LTCG Tax in ULIPs

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

Scenario 1:

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

In this case, you will not be subject to LTCG tax on your ULIP since:

  • Your annual premium does not exceed Rs. 2.5 Lakhs

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

Scenario 2:

Say you have purchased a ULIP with an annual premium of ₹1.5 Lakhs. At the end of the policy term of 20 years, you will be able to earn ₹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 ₹1 Lakh, because your annual premium does not exceed ₹2.5 Lakhs.

Scenario 3:

Now, let’s assume you have purchased a ULIP with an annual premium of ₹3 lakhs. At the end of the policy term of 20 years, you earn ₹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 ₹2.5 Lakhs, because your long term capital gains are below ₹1 Lakh. 

Scenario 4:

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

In this case, you will be required to pay 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 ₹4 Lakhs. This comes up to ₹40,000 as long term capital gain tax on your ULIP.

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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. Moreover, you can also learn more about the features and benefits of Unit Linked Insurance Plans and purchase one easily on Bajaj Markets. By including a ULIP in your portfolio, you can enjoy the benefits of insurance combined with market-linked investments. 

FAQs

What is the meaning of LTCG in ULIPs?

LTCG in ULIPs refers to the long term capital gains earned from your ULIP investments. These are the gains earned when you have held your ULIPs for a period of 12 months or more.  

Are ULIP gains exempt from tax?

Prior to Budget 2021, ULIP gains were completely exempt from tax. However, ULIPs issued on or after February 1, 2021 are not exempt from tax.

What is the rate of tax on ULIP long term capital gains?

The rate of tax on the long term capital gains from your ULIP is set at 10% as per the Income Tax Act, 1961.  

Is there any tax exemption limit on ULIP LTCG?

Yes. Long term capital gains below Rs. 1 lakh from your Unit Linked Insurance Plan are exempt from tax. 

Are the death benefits from ULIPs taxable?

No. The death benefits received from a Unit Linked Insurance Plan are exempt from tax according to section 10(10D) of the Income Tax Act, 1961.  

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