Capital Gains Tax & Insurance: New Rules To Impact Tax Liabilities For ULIP Policyholders

Budget 2024 ushered in significant changes to India’s capital gains tax regime, reshaping the investment landscape for individuals and corporations alike. Key alterations include the harmonisation of long-term capital gains tax rates across different asset classes, the elimination of indexation benefits, and an increase in the short-term capital gains tax rate on equity investments.

These modifications have far-reaching implications for taxpayers, necessitating a careful evaluation of investment strategies in light of the new tax landscape.

Short-term capital gains (STCG):

For certain financial assets, STCG will be taxed at a flat rate of 20%. For other financial assets and non-financial assets, the existing tax rates will continue to apply.

Long-term capital gains (LTCG):

LTCG on all financial and non-financial assets will be taxed at a flat rate of 12.5%.

The exemption limit for LTCG has been increased to Rs. 1.25 lakh per year.

Impact on ULIPs

ULIPs (Unit Linked Insurance Plans) are investment-cum-insurance products. The tax implications on ULIPs have changed in recent years, and the Budget 2024’s modifications to capital gains tax further influence their taxation.

Key points to consider:

ULIP as a financial asset: ULIPs are generally categorised as financial assets. Therefore, the new tax rates for short-term and long-term capital gains would apply to ULIP returns.

Lock-in period: The lock-in period for ULIPs is typically five years. After this period, withdrawals are considered long-term capital gains.

Rushabh Gandhi, MD & CEO, IndiaFirst Life, said, “The proposed hike in Capital Gain Tax is expected to impact the tax liabilities for ULIP policyholders. However, the ULIP holders purchasing policies with premiums of less than 2.5 lakh per annum can continue to avail benefits under Section 10 (10D) and are not liable to pay any tax on maturity.”

Budget 2023: Introduced a new limit of Rs. 2.5 lakh for annual premium to qualify for tax exemption under Section 10(10D) for ULIPs issued after February 1, 2023.

Section 10(10D) of the Income Tax Act provides for tax exemptions on the amount received under a life insurance policy. This includes both death benefits and maturity benefits.

While ULIPs are technically insurance products, the tax treatment of their maturity benefits is different. The investment component of ULIPs is subject to capital gains tax, and only the insurance component qualifies for tax exemption under Section 10(10D).

Taxation on withdrawals:

Before February 1, 2021: If your ULIP was purchased before this date, you could potentially avail of certain tax benefits under the old regime.

After February 1, 2021: The new tax regime applies, where gains exceeding Rs. 1 lakh are taxed at 10% for equity-linked funds and 20% for non-equity funds.

Section 80C: Contributions to ULIPs can still qualify for tax deductions under Section 80C, subject to certain conditions.

While the Budget 2024 has brought about changes in capital gains tax, the overall tax implications of ULIPs depend on various factors. It’s essential to understand your ULIP’s specific terms, your investment horizon, and consult with a tax professional to make informed decisions.