Finance Act 2021 has amended provisions of the Income Tax Act 1961 (Act) in relation to taxation of Unit linked insurance premium (ULIP) paid and amount received on or after 1st February 2021. We are discussing herewith changes in section 10(10D) and 45(1B) of the Income Tax Act along with latest notification issued in relation thereof.

Section 10(10D): Any sum received under a life insurance policy including the sum allocated by way of bonus on such policy is exempt subject to certain conditions.

Finance Act 2021 has inserted fourth and fifth proviso under section 10(10D) of the Act which are reproduced as under:-

Fourth Proviso (Section 10(10D)): Provided also that nothing contained in this clause shall apply in 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 lakhs and fifty thousand rupees.

Fifth Proviso (Section 10(10D)): 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 does not exceed the amount referred to in fourth proviso in any of the previous year during the term of any of those policies

Taxation of ULIP (on or after 1st February 2021)

Analysis with Illustration of the fourth and fifth proviso of Section 10(10D) of the Act:

ULIP Purchase Date Yearly Premium Exempt or Taxable Section 10(10D)/ Fourth Proviso/ Fifth Proviso
15th April 2021 INR 3,00,000 Taxable Fourth Proviso to Section 10(10D)
15th April 2021 INR 2,00,000 Exempt Exempt under Section 10(10D)
15th April 2020 INR 3,00,000 Exempt Exempt under Section 10(10D)
1st ULIP: 15th April 2021

 

2nd ULIP: 1st January 2021

INR 1,00,000

 

 

INR 2,00,000

Taxable Fifth Proviso to Section 10(10D)
1st ULIP: 15th April 2021

 

2nd ULIP: 1st January 2022

INR 1,00,000

 

 

INR 2,00,000

Taxable Fifth Proviso to Section 10(10D)

Important Note: Any amount received on the death of a person under fourth and fifth proviso of section 10(10D) will be exempt and not chargeable to tax.

Section 10(10D) explains that the amount received in pursuance of the fourth and fifth proviso as mentioned above is chargeable to tax. Sub-section (1B) of section 45(1) has been inserted under the Act to explain the taxability for the sum received including bonus allocated under the policy.

Sub-section (1B) of section 45(1)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 provisos 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.

In other words, we can say that :-

Capital Gain due to any profit or gain (Fourth and Fifth Proviso to section 10(10D))= Amount received including the amount allocated by way of bonus minus total premium paid

Further to this, Notification No. 08/2022-Income Tax dated 18th January 2022 has been issued by the CBDT and the following rule shall be inserted in the Income Tax Rules 1962, namely:-

Computation of Capital Gain for the purpose of sub-section (1B) of section 45(1)

i. Amount received for the first time under a specified ULIP

Capital Gain = A-B

A. amount received for the first time under a specified unit linked insurance policy during the previous year, including the amount allocated by way of bonus on such policy

B. the aggregate of the premium paid during the term of the specified unit linked insurance policy till the date of receipt of the amount as referred to in “A‟

ii. Amount received after the receipt as referred to in (i) above

Capital Gain= C-D

C. the amount received under a specified unit linked insurance policy during the previous year, at any time after the receipt of the amount as referred to in clause (i), including the amount allocated by way of bonus on such policy excluding the amount that has already been considered for calculation of taxable amount under this sub- rule during the earlier previous year or years; and

D. the aggregate of the premium paid during the term of the specified unit linked insurance policy till the date of receipt of the amount as referred to in ‘C’ as reduced by the premium that has already been considered for calculation of taxable amount under this sub-rule during the earlier previous year or years.

Authors’ Comment

1. Income shall be chargeable to tax only if premium payable for one ULIP or sum of ULIP exceeds INR 2,50,000 yearly.

2. ULIP policy should be issued on or after 1st February 2021.

3. Income shall be chargeable under the head capital gain in the year of receipt.

4. Amount of Income i.e. total amount received less premium paid shall only be chargeable to tax.

5. There are other conditions which must be satisfied in order to claim exemption under section 10(10D) like key man insurance policy, premium payable should not exceed 10% / 20% of the actual capital sum assured.

Author Bio

Qualification: CA in Practice
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Location: New Delhi, Delhi, India
Member Since: 15 Jan 2018 | Total Posts: 3
Ambitious and self-motivated individual with more than 10 years of professional experience, excellent knowledge of Indian taxation as well as USA taxation. Holds a degree of CA and DISA from ICAI and CPA (USA). View Full Profile

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