Unit Linked Insurance plans had become one of the favorites of high-net-worth Individuals in the past few years. With their EEE feature (i..e eligible for 80C deductions, exemption of bonus received, no tax on amount received at maturity) and returns linked with investment in Equity & debt along with life cover was all that was needed to attract investors. But this somehow also did impact the Mutual Funds AMC as they felt that there was not a fair play at the ground level. Whereas LTCG on Mutual Funds was made to tax, the maturity proceeds from ULIP’s remained totally exempt. To cover this loop and bring ULIP’s at par with Mutual funds Budget 2021 has proposed taxability of consideration received from ULIP subject to certain conditions. Let us understand in depth how these amendments are brought into and ow will the affect us!

Section 2(14)(b) that defines Capital asset, proposed to be amended as to include the words any unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth proviso thereof;”; Meaning thereby- that ULIP’s whose aggregate premium exceeds the specified limit shall be treated as a capital asset and hence proceeds on maturity shall be treated as capital gains.

Section 10(10d) that exempts the proceeds received on maturity of life Insurance policy to be amended to include 4th & 5th proviso – Provided also that nothing contained in this clause shall apply with respect to any unit linked insurance policy, issued on or after the 1st day of February, 2021, if the amount of premium payable for any of the previous year during the term of such policy exceeds two lakh and fifty thousand rupees: Provided also that if the premium is payable, by a person, for more than one unit linked insurance policies, issued on or after the 1st day of February, 2021, the provisions of this clause shall apply only with respect to those unit linked insurance policies, where the aggregate amount of premium exceed the amount referred to in fourth proviso in any of the previous year during the term of any of those policies: Provided also that the provisions of the fourth and fifth provisos shall not apply to any sum received on the death of a person: Meaning thereby- That ULIP’s that are issued on or after 1, Feb 2021 and have premium exceeding 2.50 lakhs in any previous year during tenure of the policy shall now be taxed at the time of maturity. Exception: Amount received by nominee at the time of death. Also section proposes to calculate limit on aggregate basis i..e total of premium of all such ULIP’s taken by assessee, issued on or after the specified date.

Section 45 has been proposed to be amended to insert sub clause 1b Notwithstanding anything contained in sub-section (1), where any person receives at any time during any previous year any amount under a unit linked insurance policy, to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth proviso thereof, including the amount allocated by way of bonus on such policy, then, any profits or gains arising from receipt of such amount by such person shall be chargeable to income-tax under the head “Capital gains” and shall be deemed to be the income of such person of the previous year in which such amount was received and the income taxable shall be calculated in such manner as may be prescribed.’; Meaning thereby- The capital Gains on ULIP’s shall be calculated in the year of receipt of maturity/bonus and not on due basis.

Section 112A that states provision for calculation of TCG in case of specified securities I proposed to be amended , in clause (a), in the opening portion, after the word and figures “section 10”, the words, brackets, figures and letter “or under a scheme of an insurance company comprising unit linked insurance policies to which exemption under clause (10D) of the said section does not apply on account of the applicability of the fourth and fifth proviso thereof” shall be inserted. ; Meaning thereby– That capital gains calculated on the proceeds, that exceed Rs. 1Lakh shall be taxable at the rate of 10%, in the same way as of Equity oriented Funds.

Crux

  1. ULIP issued on or after 1 st Feb, 2021 with premium (aggregate of all ULIP’s issued on or after 1 st Feb,2021) exceeding 2.50 lakhs during any previous year in the tenure of the policy to be taxed at time of receipt of Maturity proceeds and bonus.
  2. These shall be taxable in the year of receipt.
  3. Bonus received on policy also to be taxed.
  4. Taxability under the capital gains as they are defined as capital asset.
  5. Period of Holding to be 12 months or more to be treated as LTCG and accordingly taxed at 10% without indexation benefit on the amount of gains exceeding 1 lakhs as provided in sec 112A.
  6. Bill states that method may be prescribed for calculation, as per our understanding the Cost of Acquisition shall be amount of premiums paid.

Written & Complied by: CA Disha Sehgal (B.com, ACA).

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Company: DISHA SEHGAL & ASSOCIATES
Location: PARWANOO, Himachal Pradesh, IN
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I am a qualified Chartered Accountant and currently doing my own Practice. I have an unexplainable love for Direct TAX and each case law excites me to know how a word/ line written in law can be interpreted in many different ways. View Full Profile

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4 Comments

  1. Prakash says:

    Since ULIP maturity is going to be taxed I understand tax is on gain only. Since this is considered as Capital gain can we calculate gain after applying indexation.
    Please clarify.

    1. CA DISHA SEHAGL says:

      No, you cannot take benefit of Indexation on it. Sec 112 a has been proposed to be specifically amended to include proceeds of ULIP under it. Sec 112 a provides for charge-ability of Capital Gain on Long term capital asset @10%(exceeding 1 Lakhs) without benefit of indexation. However upto 1 lakhs gains shall be exempted.

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