How Capital Gains Are Calculated in ULIP Plan?

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

Important features of ULIP Capital Gains Tax:

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

   

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.

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