ULIP plans remain a popular investment vehicle despite the 2021 Union Budget removing the tax exemption on the maturity amount of high-value premium policies. In the first 9 months of F.Y. 2021-22, the sale of ULIP plans grew by 49% YoY. There are many reasons behind this growth, including a strong stock market performance, growth of savings, and higher risk appetite among young investors.
Further, the Central Board of Direct Taxes (CBDT) issued a notification in 2022, on how capital gains on ULIPs have to be calculated. This framework considers all income received by the policyholder in the investment plan, like a bonus or withdrawal.
The CBDT further suggests that the total amount of premium paid to date needs to be subtracted from the income received during the period to calculate the gain. The premium amount considered in the calculations currently, will not be considered for the next calculation process. This means, next time only fresh income and premium will be considered for the computation. This reduces investors’ tax burden.
The new tax proposal would makes the treatment of taxable ULIPs similar to that of equity mutual funds. Investors can still claim tax-free returns under Section 10(10D), if annual premiums remain below ₹2.5 lakhs. So, even if an individual invests slightly more than ₹20K per month for 15 years and receives a net return of 12%, they will earn approximately ₹98 lakhs. This could be enough for many investors looking to grow their wealth in the long-term for goals like children’s education, and marriage.
Let’s look at how the capital gains for ULIPs have to be calculated.
Computation of Capital Gains in ULIPs under Rule 8AD of Income Tax
Case I
When an investor receives an amount (including bonus and withdrawals) for the first time under a specific ULIP during the previous financial year, the capital gain in the previous year shall be calculated as: A-B
A = Amount received from the policy during the previous year in any form, including bonus.
B = Aggregate premium paid during the said period of the investment plan till the receipt date of the amount mentioned in ‘A’.
Case II
When the amount is received by investors under a specific ULIP in the previous financial year, at any time after they receive the amount mentioned in Case I. The formula for computing Capital Gains arising from the receipt of this amount is calculated as: X-Y
X = Amount received during the previous financial year from a ULIP, after receipt of the amount referred to in Case I. This includes any bonus received during this time and excluding the amount that has already been considered for computation of gains under this tax rule before.
Y = The aggregate premium paid during the term of the income received in Case II, right till the date of the income receipt, and excluding any amount considered in the calculation under this rule for previous years.
The capital gains as calculated under these cases under rule 8AD will be considered as gains from the transfer of a unit of an equity fund under a ULIP plan.
You can use the following tactics to control your asset allocation between equities and debt in your ULIP to obtain higher returns. As per the experts, your stock investment should be based on your age. You must adjust your asset allocation more towards debt and less towards stocks as you become older to achieve more secure returns. The finest ULIPs like Edelweiss Tokio Life – Wealth Secure+ allow you to switch between various equity and debt funds with no costs. You can change your asset allocation in reaction to market conditions to profit from excellent opportunities while minimising volatility.
