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
- 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.
- These shall be taxable in the year of receipt.
- Bonus received on policy also to be taxed.
- Taxability under the capital gains as they are defined as capital asset.
- 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.
- 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).
Author Bio
I PURCHASED ULIP POLICY IN 2004. PREMIUM WAS 50000 HALF YEARLY. I PAID PREMIUM FOR 19 YEARS. I CLOSED POLICY IN YEAR 2023(JUN).
ICICI PRU DEDUCTED TDS. WHETHER IT IS JUSTIFIED OR NOT
i invested in ULIP in the year March 2013 of Rs. 300,000 single premium. Sum assured amount Rs. 375,000. Got maturity amount Rs. 723,717. do i need to show maturity of Rs. 423,717 as long ter capital gain with 1lkah exemption u/s 11A
Dear Sir
i purchased IPRU Wealth Builder II in Apr 2014
yearly premium 50000 and SA 350000,5 yly pay .I surrendered in may 2022. what is my tax liability this FY. will i come under <20% premium rule.
Thanks
Dear
Since ULIP is purchased before 01.02.2021 the amount received is fully exempt u/s10(10)d as your premium never exceeded 20% of sum assured as well.
Regards
CA Disha Sehgal
Excellent and very useful article.
My father bought LIC profit plus plan 188 (Growth) for me in the year 2007 ( I was an adult at the time) with a premium of 10000 per year (10% of sum assured) for 5 years with sum assured 1 lakh. The policy will mature in 2027 (20 years) and its current value has already crossed 1 lakh. My father never needed to file an ITR.
I am wondering what will be the tax treatment of this policy when it matures in 2027 according to the current rules. On one hand, it is an inherited property (?) from family so may be tax free. On the other hand, the taxes on long-term equity-oriented products are 10%. In case I do have to pay taxes, can I deduct the premiums paid even though my father paid them or the entire maturity amount will be taxable?
Dear
Since premiums paid are less then 20% if sum assured therefore this is fully exempt
I bought a ULIP policy “ICICI Pru Pinnacle Super-LP” from “ICICI Prudential” on 10-02-2012 in my name. Policy Term was for 10 years with Premium Paying Option was for Five Pay. I paid Yearly Premium of Rs 50000 per year for 5 years and thus total Rs 250000 paid. Last Yearly Premium was paid on 10-02-2016. Sum Assured was Rs 350000.
Policy was matured on 10-02-2022. I received Rs 234559.01 as policy payout on maturity. Thus I got a loss of Rs 15440.99.
Am I eligible to claim loss in Income while filling Income Tax Return? If so, kindly advise me how to calculate and claim in the Income Tax Return. I am pensioner and file ITR-1 every year.
Kindly clarify, we had purchased a single premium ULIP policy from ICICI PRUDENTIAL, Rs. 80000/- were paid on 6/10/10. The life cover was for Rs. 100000/-. Rs. 130129.61 were received on 14.10.20 , { Rs. 1954/- were deducted as TDS } What will be the tax liability.
Hello Mr. Ajay
For your query – Please be noted sec 10(10)d provides exemption for amount recieved on maturity/bonus from lic. Though there are certain exceptions and your case falls under it. Since the amount of premium paid by you exceeded 20% of capital sum insured the amount received on maturity shall be taxable under the head income from other sources. Tds under 194 DA has to be deducted at 5%. Since for covid period rates were slashed by 25% accordingly 3.75% tds has been deducted on the income part.
Hope this helps.
pl help. one of my client had bought a LIC ULIP policy paying Rs. 10L premium in 2011. The maturity valu of the the policy is Rs. 2596000. Now at the time of paying maturity proceeds Rs. 78000 was deducted with the reason that 5% tds on profit amount of rs. 1596000 (2596000-1000000 premium paid). Please do guide me if the client will have to pay more income tax??? and if yes at what rate / slab??thank you
Very informative and helpful.
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.