How Capital Gains Are Calculated in ULIP Plan?

Union Budget 2023 has recently brought ULIP Capital Gains Tax under the purview of the Income Tax Regime from FY 2022-23 (AY 2023-24). Unit Linked Insurance Plan (ULIP) is a life insurance scheme that has become one of the best investment options with high returns in India in 2023.

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Let us learn in this article how capital gains are calculated in ULIP Plans.

What is a ULIP Plan?

The best ULIP Plans provide you with life coverage benefits along with good investment returns and various tax benefits.

Key Features of a ULIP Plan are as follows:

  • Insurance coverage during your lifetime

  • A part of the premium is invested in market-linked equity, debt, or hybrid mutual funds

  • Earns high returns on your investment

  • Sum Assured is given to the nominee in your absence

  • 5-year lock-in period on investment fund

  • Tax benefits on premiums paid u/ Section 80C of the IT Act, 1961

  • Income tax deduction on the maturity returns u/ Section 10(10D) of the IT Act, 1961

What is Capital Gains Tax?

Central Government levies tax on the profits earned from the sale of movable and immovable (e.g. building, land, gold, and mutual funds) capital assets after holding them for a specific time. This tax levied on your capital assets gains is known as Capital Gains Tax. 

The types of Capital Gains Tax are as follows:

  • Long-term Capital Gains Tax: This capital gains tax is levied when you sell your capital assets after holding them for a long term (more than 36 months).

  • Short-term Capital Gains Tax: This tax is levied on capital gains after holding your assets for a short term (36 months or less).

What is ULIP Capital Gains Tax?

Let us understand the meaning of ULIP Capital Gains Tax from the points mentioned below:

  • You may earn profits when you sell your equity-linked mutual fund assets of the ULIP Plan after a period

  • The government levies a ULIP Capital Gains Tax on the gains earned from the sale of such capital assets

  • Concerning ULIPs, you need to pay a Long Term Capital Gain (LTCG) Tax if you sell your assets after holding them for 1 year or more

  • No tax is charged in case of the demise of the policyholder

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Important features of ULIP Capital Gains Tax:

Features Details
LTCG Tax on ULIPs before 1st Feb 2021 Exempted
LTCG Tax on ULIPs after 1st Feb 2021 Levied u/ Sec 112 of the IT Act, 1961
Premium Limit for ULIP Capital Gains Tax Yearly ULIP premium is Rs. 2.5 lakhs or more
Capital Gains Limit LTCG Tax is levied if gains of Rs. 1 lakhs & Above
LTCG Tax Rate 10% of LTCG

ULIP Capital Gains Tax Calculation

Let us learn how you can calculate ULIP Capital Gains Tax with the help of examples. This will help you get an early idea of your income tax payment.

  1. Example 1: 

    If you buy a ULIP Plan with the terms given in the table below, let us calculate your ULIP capital gains tax:

    Parameters Details
    Premium Rs. 1.5 lakhs
    Policy Term (PT) 20 years
    Profits from selling ULIP funds at the end of PT Rs. 90,000
    LTCG Tax charged
    • NIL
    • Premium is less than Rs. 2.5 lakhs limit, and
    • LTCG gains are less than Rs. 1 lakh
  2. Example 2:

    Parameters Details
    Premium Rs. 1.5 lakhs
    Policy Term (PT) 20 years
    Profits from selling ULIP funds at the end of PT Rs. 3 lakhs
    LTCG Tax charged
    • NIL
    • Annual premium is less than Rs. 2.5 lakhs

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  3. Example 3: 

    Parameters Details
    Premium Rs. 3 lakhs
    Policy Term (PT) 20 years
    Profits from selling ULIP funds at the end of PT Rs. 90,000
    LTCG Tax charged
    • NIL
    • LTCG gains are less than Rs. 1 lakh
  4. Example 4: 

    If your capital profits are higher than the income tax provisions limit, then the ULIP capital tax calculation:

    Parameters Details
    Premium Rs. 3 lakhs
    Policy Term (PT) 20 years
    Profits from selling ULIP funds at the end of PT Rs. 5 lakhs
    Capital Gains Above the Provisional Limit Rs. 5 lakhs- Rs. 1 lakhs
    = Rs. 4 lakhs
    LTCG Tax charged 10% of 4 lakhs
    = Rs. 40,000

In Closing

This article details how capital gains on ULIPs are calculated in advance of paying the income tax amount. It will also help you in ULIP Returns calculation, which is an important factor to decide the best ULIP Plan.

FAQ's

  • Are ULIP gains tax-free?

    The profits earned from selling mutual funds under your ULIP Plan are charged with Long-Term Capital Gains (LTCG) Tax at the rate of 10%.
  • How to calculate returns from ULIP Plan?

    The gains earned over the limit of Rs. 1 lakh is charged at a 10% rate for the calculation of ULIP Capital Gains Tax. This tax is payable if your annual premiums for insurance policies are more than Rs. 2.5 lakhs. 
  • How is tax treated on the maturity of ULIP?

    The maturity returns of the ULIP Plan are charged with Long Term Capital Gains Tax if the total gains are less than Rs. 1 lakhs and the total annual premiums paid are up to Rs. 2.5 lakhs.
  • Is ULIP tax-free after 5 years?

    The maturity returns or surrender of the ULIP Plan at the end of the lock-in period is tax-free if the annual premium payment is less than Rs. 2.5 lakhs.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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