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ULIP Capital Gain Tax: Check Tax Norms for Capital Gain on ULIPs

ULIP taxation refers to the tax rules on the maturity benefits of your ULIP. Read to know the new tax norms for capital gain on a unit-linked insurance plan (ULIP).

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Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

Unit-Linked Insurance Plans, also known as ULIPs, are investment products that offer insurance coverage along with the opportunity to invest in various market-linked funds. As the name suggests, the investment component of ULIPs is linked to the performance of underlying assets such as equity shares, bonds, or money market instruments.

    Key takeaways

    Tax norms for capital gains on ULIPs

  • ULIP returns
  • ULIP tax benefits
  • ULIP capital gains tax

ULIPs have become a popular investment choice in recent years due to their dual benefits of life insurance coverage and the possibility of earning returns from market-linked investments. However, it is important for ULIP investors to understand the tax implications of their investment.

Tax Norms for Capital Gains on ULIPs

ULIP returns

The returns from ULIPs are subject to ULIP taxation, just like any other investment instrument. The tax treatment of ULIP returns depends on the duration of the investment. If the ULIP policy is held for less than three years, the returns are treated as short-term capital gains and are taxed as per the income tax slab of the investor.

On the other hand, if the policy is held for more than three years, the returns are treated as long-term capital gains and are taxed at 10% without indexation or 20% with indexation.

ULIP tax benefits

ULIP tax benefits are offered to investors under section 80C of the Income Tax Act. The premium paid towards a ULIP policy is eligible for a tax deduction of up to ₹1.5 lakhs in a financial year. This means that the investor can reduce their taxable income by the amount of premium paid, effectively reducing their tax liability.

ULIP capital gains tax

The ULIP capital gains tax arising from the sale of units is subject to ULIP taxation. The tax implications of capital gains depend on the duration of the investment and the applicable tax slab of the investor. If the ULIP units are sold before the completion of three years, the capital gains are treated as short-term capital gains and are taxed as per the applicable tax slab.

If the units are sold after three years, the capital gains are treated as long-term capital gains and are taxed at 10% without indexation or 20% with indexation.

No Tax Arbitrage in ULIPs: A Comprehensive Guide

As an investor, it is always important to understand the tax implications of the investments you make.

  • Tax is an important factor in determining the returns from your investments, and it is crucial to choose tax-efficient investment options.
  • One popular investment option that many people consider is Unit Linked Insurance Plans (ULIPs). ULIPs offer a combination of insurance and investment benefits and are seen as lucrative investment options by many.

However, when it comes to taxes, ULIPs have some specific rules and regulations that investors need to be aware of.

  • One important tax aspect of ULIPs that investors need to know about is the absence of tax arbitrage.
  • Tax arbitrage refers to the practice of taking advantage of tax differences in different investment options to minimize tax liabilities.
  • In the case of ULIPs, there is no tax arbitrage available. This is because the tax rules for ULIPs are very specific, and there is no room for tax optimization.
  • All the investment returns generated by ULIPs are taxed in the same manner, regardless of the amount invested or the tenure of the investment.

Moreover, ULIPs have a lock-in period of five years, during which investors cannot make any changes to their investments. This means that investors cannot switch to a tax-efficient investment option even if they want to, which further eliminates the possibility of tax arbitrage.

Conclusion

ULIPs are an attractive investment option due to the combination of insurance coverage and market-linked returns. However, it is important for investors to understand the ULIP tax benefits and implications of their investment. By being aware of the tax norms for capital gains on ULIPs, investors can make informed decisions and effectively plan their finances.

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

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- A Consumer Education Initiative series by Kotak Life