- Tax

Unit Linked Insurance Plans: Check Tax Norms for Capital Gains on ULIPs


ULIPs are a great investment option that can provide good returns and life cover. However, you need to understand the tax rules for capital gains on ULIPs before making an investment.

In this article, we will discuss the tax norms for capital gains on ULIPs.

Unit-linked insurance plans (ULIPs) are an investment option that many are opting for. These policies provide investors with investment and insurance benefits.

The premiums paid for the policy are allocated for two different purposes. While one part of the premium is allocated towards life cover, the other part is used to invest in investment instruments like equity and debt funds.

Benefits of ULIPs

It Can Help in Accumulating Funds

As one part of the premium is invested in equity and debt funds, the investors can make returns based on the options chosen. Hence, ULIPs can help investors earn good returns over a period of time.

It Can Provide Life Cover

Another advantage that ULIPs can provide is life cover. In case the policyholder dies during the term, his/her nominees can receive the life cover amount. Thus, ULIPs are a great way to provide financial protection to the dependants.

Tax Rules for Capital Gains on ULIPs

The Central Board of Direct Taxes (CBDT) issued new tax rules to compute capital gains on unit-linked insurance plans. The ULIP tax benefits for proceeds received on maturity with a premium of more than Rs. 2.5 Lakhs in a year was removed.

The tax exemption is solely available for investment up to Rs. 2.5 Lakhs under Section 10(10D). As per the new rules, the government plans on levying tax on capital gains from ULIPs that have a yearly premium of more than Rs. 2.5 Lakhs. The difference between the total premium paid and proceeds from the plan will be considered capital gains in the first instance. After that, the difference between the premium paid and incremental proceeds will be used to compute capital gains.

Long term capital gains (LTCG) tax will be levied on funds held for more than one year. While long term gains above Rs. 1 Lakh will be taxable at 10%, a flat rate of 15% will be levied on short term gains on the high premium plans.

Furthermore, new rules were notified on the liability of collection of securities transaction tax on ULIP plans when they are sold and during reporting requirements. A new rule is also introduced to compute gains after redeeming ULIP units for policies purchased after February 1 2021, which aren’t exempt under Section 10(10D).

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