Can you please clarify what taxes will be in the following cases.

1. I paid a premium of Rs.30,000 per year for two years in a ULIP. I used these premiums for claiming deductions under Section 80C. If I surrender this policy after two years, do I have to pay any taxes on the gains at the time of surrender.


2. I paid a premium of Rs.30,000 per year for 12 years in a ULIP. I used these premiums for claiming deductions under Section 80C. I surrendered the policy at the end of 12 years. The actual term I enrolled for when taking the policy is 20 years. Do I pay any taxes on my gains at the time of surrender.

Thank You,Raj Gopal, Hyderabad

Surrender of ULIP before five years will make you liable to tax on all the deduction availed till that year in which the policy was surrender. Read this posting Be Ready To Pay Tax On Surrender of ULIP or Pension Plan !

As far as second question is concerned, remember Units of ULIP are capital asset . Every year , new units are bought by Mutual Fund company from the premium paid by you and any dividend accrued to you. So , when ULIP is surrendered after 12 years , there will be long term gain or loss . On long term assets , you can even take indexation benefit for every year.It hardly matter, because as STT will be deducted by the Mutual Fund Authority , the gain if any will be totally tax free as per section 10(38) of the I T Act because in all probability all the units are held for more than 12 months .

Can there be short term gains/loss?

Yes, there may be a case the last premium is paid and units are bought. If the last units , i.e in case of purchase in 12th year, 12 years have not elapsed , the capital gains shall be short term capital gains or loss , depending upon the NAV at which the units are bought and sold for by the Mutual Fund Authority.

In simple terms , for 11 years, gain will be tax free as it will be long term and for 12 th year , there may be short term capital gains.