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Are Gains from ULIP Sale Taxable?

Sale of ULIP units is non-taxable if the return earned on ULIP investments with an annual premium of more than ₹2.5 lakh.

  • Apr 29, 2022

A ULIP investment is one of the most popular financial instruments, offering excellent returns on investment and a slew of other appealing features.

ULIPs include “ULIP taxation benefits,” which are a crucial component in attracting a large number of investors, in addition to huge returns.

In this article, we’ll go over the fundamentals of ULIP plans and all about ULIP taxation.

Basics of a ULIP Plan

A Unit Linked Insurance Plan (ULIP) includes insurance and investing in one package. The purpose of ULIPs is to cater to wealth creation and life insurance, with the insurance company investing a portion of your money in life insurance and the balance in a fund that is based on debt, equity or both and meets your long-term aims. These objectives might include retirement preparation, children’s education fee, or any significant event for which you want to save.

Fundamentals of Unit Linked Insurance Plan (ULIP) Taxation

Returns from unit-linked insurance plans appear to be more appealing now that the LTCG charge on equity investments has been announced. ULIP’s investing component functions similar to a mutual fund but has a distinct fee structure. Several income-tax laws govern it. Because ULIPs have a 5-year lock-in period, revenues from the policy—ULIP maturity taxability or early surrender—are tax-free under Section 10 (10D) of the income-tax act if the sum insured in a life insurance payout is at least ten times the yearly premium. The death benefit, on the other hand, is tax-free. Given the anticipated LTCG tax of 10.4% on equity investments through mutual funds, this is a benefit for ULIPs.

  • Surrender Charge and ULIP taxability

ULIP surrender taxation is rather easy to understand.

If the insurance is surrendered after the 5-year lock-in term, the surrender value is tax-free, and the insured can take advantage of the tax incentive. Once you have completed five years, there will be no surrender fee, and the surrender price will be tax-free. If you surrender your ULIP before five years, the surrender value is added to your income and taxed at the applicable slab rate.

  • ULIP Taxation in Budget 2021

The return earned on ULIP investments with an annual premium of more than ₹2.5 lakh (i.e., high-value premium insurance) would not be tax-deductible, according to ULIP taxable budget 2021. The Central Board of Direct Taxes (CBDT) has released a notification that explains how capital gains on unit-linked insurance plans (ULIPs) would be calculated. The CBDT’s fundamental structure treats all payments the policyholder receives as income, whether they are for withdrawal or as an incentive.

As per ULIP taxation in Budget 2021, the CBDT’s fundamental structure treats all payments the policyholder receives as income, whether they are for withdrawal or an incentive. Therefore, to calculate profits, CBDT recommends deducting the entire premium paid to date from the income received to date to find out the capital gain amount in its circular dated January 19, 2022.

ULIPs offer an appealing variety of benefits, particularly when it comes to ULIP taxation; nevertheless, before investing, thoroughly examine all elements of the plan to make the best choice for yourself and your loved ones.

In this policy, the investment risk in the investment portfolio is borne by the policyholder.

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Ref. No. KLI/22-23/E-BB/521


- A Consumer Education Initiative series by Kotak Life

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