What Is The Taxability of Gains From The Sale of ULIPs

Have you invested in a ULIP plan? If the answer is yes, you will naturally want to gain more knowledge on the taxability of the gains from these investments. It is something that will influence your overall returns, thereby necessitating a clear understanding of the same. We will first examine ULIPs briefly before diving deeper into the taxability of their gains in this article. 

A Brief Look at ULIPs

What is ULIP plan? A ULIP is a unit-linked insurance plan which combines both investments and insurance. You get life coverage throughout the policy’s tenure, with a 5-year lock-in period. Simultaneously, your premium is invested into funds and market-linked instruments for earning returns after deducting applicable charges. You can choose the funds (from equity, debt, liquid, or hybrid funds) to invest in while also periodically switching them based on market trends and other circumstances. Premium payments for ULIPs also qualify for tax deductions up to Rs. 1,50,000 under Section 80C in the older tax regime. Depending on your risk appetite, future goals, and current financial situation, you can invest in debt and equity funds or a mixture of both. Now that you have a basic idea about ULIPs, here’s taking a closer look at the taxability of these investments. 

Taxability of ULIPs and Their Gains

There are several aspects that you should remember with regard to ULIPs and their taxability. Here are some key points to note in this regard. 

  • Death benefits paid by the insurance company to the policyholder’s nominees are completely tax-exempted under Section 10 (10D)
  • Maturity benefits or early surrender values are tax-free under Section 10 (10D) if the payout is a minimum of ten times the annual premium
  • If the policy is surrendered post the lock-in period of five years, then the surrender value will be completely tax-free. However, surrendering a policy before five years will lead to the value being added to the policyholder’s income, and it will be taxed as per the applicable slab rate. 
  • For ULIPs issued on or post 1st February 2021 and with insurance premiums of Rs. 2.5 lakh or higher for any previous year, the amount received, inclusive of bonuses at maturity, will be taxable. In this case, those buying multiple ULIPs with aggregate amounts exceeding Rs. 2.5 lakh will have to pay taxes under the same rule. This was announced in the 2021 Union Budget. 
  • LTCG (long-term capital gains) taxes will apply on ULIPs, similar to taxes for all equity-based investments. This is 10% for gains exceeding Rs. 1 lakh, while short-term capital gains are taxed at 15% of the gains for holding periods of 12 months or lower. There is no taxation, however, for payouts resulting from the demise of the policyholder. 

These are the key components of taxability as far as ULIPs are concerned. While investing in a ULIP plan, you should always consult your financial advisor with regard to the taxation aspect and its impact on your overall returns. You can ensure that your premiums stay below Rs. 2.5 lakh threshold, even if you have multiple policies. This will help you ensure tax-free maturity amounts under Section 10 (10D). At the same time, do remember that you also gain from tax deductions under Section 80C, which will shave off a major chunk of your gross taxable income. Hence, even if you end up paying LTCG and other taxes in the pursuit of growth, you will still have some attractive tax deductions to enjoy for the tenure of the policy.