Every year as the taxation season beckons, every taxpayer in the country would look for different ways to reduce their annual tax liabilities. To maximise their tax savings, they may invest in different tax-saving instruments. If you are looking for ways to reduce your tax outgo, you can consider investing in ULIP (Unit Linked Insurance Plan).
Apart from helping you save taxes, ULIPs also offer two other benefits. One, you get insurance cover, and two, an opportunity to invest in different assets like debt, equity, and balance funds, stocks, etc., to suit your risk appetite and financial goals.
In the event of unfortunate demise during the policy period, the insurance company will pay the death benefit to the nominee. But, if you survive the policy period, the insurer will pay the maturity benefits to you when the policy matures.
Now, are the maturity benefits, including the gains from your investment, taxable? To understand the tax implications on ULIPs, you must first understand what LTCG (long-term capital gains) tax is.
What is LTCG?
When you sell any asset, you may earn profits from the sale. This profit is called capital gains since you get this profit from selling a capital asset. The capital gains can be short-term or long-term, depending on the tenure for which you hold the asset.
As per the income tax laws, if you hold an asset for 36 months or more before you sell or transfer it, it is considered a capital asset. However, if you hold any of these assets for 12 months or more, they would be regarded as long-term assets:
- Equity or preference shares of listed companies
- Listed securities
- Units of equity-related funds
- Zero-coupon bonds
The tax levied on the gains you get from these capital assets is called long-term capital gains tax or LTCG. Since ULIPs have a lock-in period of five years, any returns you may get from your investment qualify as long-term capital tax and they are taxed accordingly.
LTCG in ULIPs
The Union Budget 2021 added high-value ULIPs to Capital Assets. High-value ULIPs are ULIP policies that are issued on or after February 1, 2021, and the premium you pay is more than ₹2.50 lakhs. Any returns you get from the high-value ULIPs will be taxed as capital gains.
As per this amendment, if you have purchased ULIP after February 1, 2021, and the aggregate annual premium you pay is more than ₹2.5 lakhs, then the returns earned on maturity are not entirely tax-free.
If the returns you get is more than ₹1 lakh, it will be taxed at 10%. However, ULIPs issued before the cut-off date remain tax-free, subject to specific provisions under Section 10 (10D) of the Indian Income Tax Act.
Tax benefits on ULIPs
The premium you pay for ULIP is subject to a tax deduction of up to ₹1.5 lakhs in a financial year under Section 80C of the IT Act.
As per Section 10 (10D) of the IT Act, the returns you get from ULIPs are tax-free. However, it is subject to specific conditions. The annual premium must be less than 10% of the policy’s sum assured if the policy is purchased after April 1 2012, and for policies purchased before that, the annual premium must be less than 20%.
Now that you know about the ULIP taxation, make sure that you do your diligence to understand the tax rules and get the maximum benefit from it.