Every year, taxpayers look for different ways to reduce their burden of taxation. There are many investment options that give you tax benefits. Unit Linked Insurance Policies are among the many tax-saving investments that investors can choose from. Aside from offering a life cover, a ULIP policy also gives the policyholder the opportunity to earn market-linked returns by choosing from ULIP funds like equity funds, debt funds, etc.
This brings us to the question of how the gains received on maturity are taxed. To understand how ULIP taxation works, let us first understand what long-term capital gains tax is.
What is long-term capital gains tax?
When an asset is sold, the seller earns some gains or profits from the sale. These profits are called capital gains, since they are derived from the sale of a capital asset. Depending on the tenure for which the seller held the said asset, these capital gains can be long-term or short-term.
Typically, if an asset is held for 36 months or longer before it is transferred, it is considered a capital asset. However, in the case of the following assets, they are classified as long-term assets if they are held for a period of 12 months or more –
- Equity or preference shares in a listed company
- Other listed securities
- Units of UTI
- Units of equity oriented funds
- Zero coupon bonds
The tax that is levied on the capital gains earned from the transfer of a long-term capital asset is called long-term capital gains tax. Since the lock-in period of ULIPs is 5 years, any returns earned from the investment in ULIP funds qualifies as long-term capital gains. So, is LTCG tax levied on these gains? Let us find out.