ULIPs have become more appealing due to long-term capital gains on equity investments.The plans feature an investment component with a different pricing structure than a mutual fund, but it performs similarly. It falls under a different set of income-tax regulations because it only has a modest quantity of insurance.
According to Section 10 (10D) of the Income-tax Act, revenues from the policy’s maturity or early surrender are tax-free if the sum insured is at least ten times the annual premium. The 5-year lock-in term for ULIPs should be considered though.
Taxpayers hunt for new strategies every year to lessen their tax burden. There are many investments that offer tax benefits. One of the various tax-saving* options available to investors is unit-linked insurance policies. A ULIP not only offers life insurance but also gives policyholders the option to choose among funds like stock funds, debt funds, and more in order to receive market-linked returns.
The question of how the gains realized at maturity are taxed is brought up by this. Defining long-term capital gains tax is the first step in understanding how ULIP taxes operates.
Advice: It is convenient to use an online ULIP return calculator to understand the premium price, deductibles, etc.
What is the meaning of long-term capital gains tax?
The seller realizes some gains or profits when they sell an asset. Because they come from the sale of a capital asset, these profits are referred to as capital gains. Depending on how long the seller kept the investment, these capital gains may be long-term or short-term in nature.
An asset that has been kept for 36 months or longer before being transferred is normally considered a capital asset. The following assets, however, are categorized as long-term assets if they are kept for a period of 12 months or longer:
- The equity or preference shares of a listed firm
- other securities that are sold openly
- Equity-oriented fund units
- Bonds that do not pay interest
On capital gains obtained through the transfer of a long-term capital asset, long-term capital gains tax is assessed. Any returns from investing in ULIPs qualify as long-term capital gains due to the 5-year lock-in period. So, are these gains subject to an LTCG tax? Let’s look into it.
Is the LTCG tax applicable to ULIPs?
In Budget 2021, high-value ULIPs have been included in the list of capital assets. High-value ULIPs are those that are issued on or after February 1, 2021, and have a premium of more than Rs. 2.50 lakh. A high-value ULIP’s profits (apart from the death payment) will be taxed as capital gains.
With respect to ULIPs purchased on or after February 1, 2021, with an aggregate yearly premium above Rs. 2.5 lakhs, this amendment states that LTCG generated on the maturity of said ULIPs is not totally tax-free. Taxes on amounts over Rs. 1 lakh will be 10%. ULIPs purchased before to this date, however, continue to be tax-free if they satisfy the requirements stated in Section 10. (10D).
Tax advantages of ULIPs
Aside from the ULIP tax benefits mentioned above,Tax benefits are also offered by ULIP policies. Additional information about ULIP taxation can be found here:
1. Credit for premium taxes
Subject to the requirements outlined therein, the premiums paid for ULIPs each fiscal year may be claimed as a deduction from total income under section 80C of the Income Tax Act of 1961 up to Rs. 1.5 lakh. Let’s say the policy does not adhere to the requirements of Section 10(10D). In that case, the maximum Section 80C deductions are 10% of the capital sum insured for policies issued after April 1, 2012, and 20% for policies issued prior to April 1.
2. Tax advantages at maturity (for ULIPs issued before February 1, 2021)
According to section 10(10D) of the Income Tax Act of 1961, ULIP tax advantages are exempt from taxes. For policies acquired after April 1, 2012, this is only valid if the annual premium is less than 10% of the capital sum assured (it is 20% for policies purchased prior to that date).
3. Tax advantages upon maturity (for ULIPs issued on or after February 1, 2021)
Budget 2021 states that for ULIPs issued on or after February 1, 2021, the proceeds will be taxed at the time of maturity, surrender, or withdrawal, as appropriate, if the premium exceeds Rs. 2.50 lakhs in any fiscal year during the policy’s duration.
The only exception to this regulation is any sum received by the nominee at the time the insured passed away. It should be noted that any proceeds from a keyman policy at death will be subject to taxes (Employer–Employee policy).
There are two tax systems available to choose from. Under the previous tax system, one could select from 70 exemptions and deductions or opt for the new system’s lower tax rates. As for the ULIP tax advantages, The appropriate tax regime must be chosen in accordance with this.
As you start your tax planning for the year, keep the aforementioned information in mind. This will enable you to weigh all the tax benefits of a ULIP and make an informed decision.
The topic of the solicitation is insurance. Please carefully read the sales brochure/policy wording before closing a deal for more information on advantages, restrictions, limitations, terms, and conditions.
*According to the IRDAI-approved insurance plan, the insurer provides all savings. Standard T&C are in effect.
Current tax legislation may modify the tax benefit.