Is Redeeming Value on ULIP Tax Free?

I invested in ULIP single premium of Bajaj Allienz (1.04.2005) on 1 Lac and got the sum assured Rs 5 Lac. Subsequently invested in Top up Rs 5 lac on that. All sum was invested in Equity oriented fund . After three years now the fund value is Rs Rs 8 lac ( on 15.12.2009). What will be capital gain if i redeem full amount .Sachin Purwar , Kanpur

What i understand from your query is that you bought 5 lac assured sum under ULIP  and later invested Rs 5 lakh more , by whatever name called.

Under ULIP , units are bought from the money invested  in the policy. The units are capital asset under I T Act and its sale before one year gives rise to short term capital gains which is taxable.

However, in your case , since the units are 3 years old , the sale will raise long term capital gains . Mutual Fund will certainly deduct STT on the redemption of the units, and that makes the gains tax free u/s 10(38) of the I T Act.

Only thing to remember is that you must check the holding period of units . It may be that some of the units allotted to you in the year before the sale may not complete one year , therefore gain on sale of those units shall be taxable as short term capital gains.