Check tax norms for capital gains on Unit Linked Insurance Plans


A United Linked Insurance Plan is a policy that lets you enjoy the twin benefits of life insurance and investments under the same financial product. What makes ULIP even more lucrative is that they come with a host of tax benefits. So, what are these tax exemptions levied on ULIPs? Let’s find out!

Tax exemption and other benefits of investing in ULIPs

ULIP plans are market-linked with a slice of life cover. It comes with a lock-in period of five years as opposed to three years found on equity-linked saving schemes of mutual funds. The invested amount in ULIPs is eligible for tax deductions under Section 80C. You can get the maximum deduction of INR 1.5 lakh every year under the condition that the premium is within 10% of the assured sum.

Investors are able to choose the fund mix – small, medium, or large-cap in equity or debt funds for investments based on the risk appetite. Also, policyholders are able to switch between various fund options upon paying the switching charges to the insurer.

An insurance company can levy four types of charges in ULIPs:

  • Fund management charges
  • Mortality charges
  • Policy administration charges
  • Allocation charges

The insurance companies deduct the charges for premium allocation directly from insurance premiums in order to recover the cost of policy processing, such as medical examinations, underwriting, and distributor charges. Thus, the high charges in ULIPs lower the comprehensive returns in the long term.

Lack of tax arbitrage in ULIP Plans

The Central Board of Direct Taxes has notified newer norms for computing capital gains under the Unit Linked Insurance Plans. The government had eliminated the tax exemption on the maturity proceeds with the annual aggregate premium of more than INR 2.5 lakh.

Now, the tax exemption is only available for less than INR 2.5 lakh investments under Section 10 (10D) of the Income Tax Act. The LTCG (long-term capital gains) tax is going to apply on ULIPs like every equity-based investment. But there will be no tax levied on the proceeds if the policyholder passes away. Also, in keeping with the real intention of the plan, which was to provide benefits to genuine and small cases, the proceeds that a nominee receives after the death of an individual will have tax exemptions.

The long-term capital gains (i.e., a holding period of more than twelve months) of more than INR 1 lakh in one financial year get taxed at ten percent. The short-term capital gains tax at 15% is levied on total gains. For the equity investments based on tax planning, the experts recommend investors to have a well-balanced portfolio that should also include ULIPs for the long-term.

If you’re looking for a plan that not only save taxes but also gives you both life coverage and insurance profits, then there is nothing like a ULIP plan. Make an application for the same now!

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