Introduction: We have noticed that there are much confusion’s regarding the taxability of ULIP and LIC maturities among investors and taxpayers. Therefore, we have come up with a detailed analysis of the taxation of the same. In the first article, we discussed which ULIP and LIC maturities are taxable and which are exempted. In this article, we will discuss under which head maturities of ULIP and LIC are taxable, how to compute the income component at the time of maturities and at what rate it will be taxed. Before reading this article, you can also refer to our first article at [ https://taxguru.in/income-tax/taxation-ulip-lic.html ] for better understanding.
1. Is ULIP taxed under the head Capital Gains?
Section 2(14) Capital Assets:
Definition of the capital asset includes ‘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 provisos thereof”
So now ULIP not eligible for exemption under section 10(10D) of the income tax act shall be treated as capital asset. (I.e. where premium amount exceeds Rs.250000)
Furthermore, Section 45(1B) states that “[(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 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.]”. Therefore if ULIP is issued on or after 01 Feb. 2021 and premium exceeds 250000 for single policy or in aggregate as the case may be and not eligible for exemption under section 10(10D) then its taxable as capital gains.
2. How to calculate income component/ Gain on ULIP?
Rule 8AD of the income tax act states about the manner of computation of capital arising on ULIP which is as below:
[Computation of capital gains for the purposes of sub-section (1B) of section 45.
8AD. :-
(1) Where any person receives at any time during any previous year any amount under a specified unit linked insurance policy, including the amount allocated by way of bonus on such policy, then, —
| (i) | where the amount is received for the first time under the specified unit linked insurance policy during the previous year, the capital gains arising from receipt of such amount by such person during the previous year in which such amount is received shall be calculated in accordance with the formula:− | |
| A-B | ||
| where, – | ||
| A= the 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; and | ||
| 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) | where the amount is received under the specified unit linked insurance policy during the previous year, at any time after the receipt of the amount as referred to in clause (i), the capital gains arising from receipt of such amount by such person during the previous year in which such | |
| amount is received shall be calculated in accordance to the formula,— | ||
| C-D | ||
| where, – | ||
| 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 be 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. |
(2) The capital gains as computed under clause (i) or clause (ii) of sub-rule (1) shall be deemed to be the capital gains arising from the transfer of a unit of an equity oriented fund set up under a scheme of an insurance company comprising unit linked insurance policies.
3. How to determine whether it is a LTCG or STCG and what will be the tax rate in each case?
As stated above in rule 8AD of the act, gain from ULIP shall be deemed to be the capital gains arising from the transfer of a unit of an equity-oriented fund. However, the Proviso to section 112A of the act overrides the rule 8AD and states the meaning of an equity-oriented fund taxable under STCG and LTCG as follows:
“equity oriented fund” means a fund set up under a scheme of a mutual fund specified under clause (23D) of section 10[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 provisos thereof] and,—
(i) in a case where the fund invests in the units of another fund which is traded on a recognised stock exchange,—
(A) a minimum of ninety per cent of the total proceeds of such fund is invested in the units of such other fund; and
(B) such other fund also invests a minimum of ninety per cent of its total proceeds in the equity shares of domestic companies listed on a recognised stock exchange; and
(ii) in any other case, a minimum of sixty-five per cent of the total proceeds of such fund is invested in the equity shares of domestic companies listed on a recognised stock exchange:
Provided that the percentage of equity shareholding or unit held in respect of the fund, as the case may be, shall be computed with reference to the annual average of the monthly averages of the opening and closing figures:
[Provided further that in case of a scheme of an insurance company comprising unit linked insurance policies to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereof, the minimum requirement of ninety per cent or sixty-five per cent, as the case may be, is required to be satisfied throughout the term of such insurance policy;]
Therefore to determine whether it is STCG or LTCG we need to ascertain whether it is equity oriented or debt oriented fund.
1. Equity Oriented Fund (ULIP): (Invest 65% of its assets in equity shares of domestic company or in a fund which invest 90% of its assets in equity shares of domestic companies): Period of Holding for determining long term or short term is twelve months. And LTCG taxed under section 112A at 10% above Rs. 1, 00,000 if STT paid. And STCG is taxed under section 111A at 15% if STT paid.
{Deductions under Chapter VI-A not allowed against capital gain taxable under section 112A and 111A.}
2. Debt Oriented Fund (ULIP): (Other than equity oriented fund): Period of holding for determining long term or short term is 36 months. And taxable at 20% if it is LTCG and at normal slab rates if it is a STCG.
Conclusion: Understanding the taxation of ULIP and LIC maturities is crucial for making informed financial decisions. Through a detailed analysis of the taxability aspects discussed in this article, we have shed light on the intricate provisions governing the treatment of ULIPs under the Income Tax Act. By clarifying concepts such as the classification of ULIPs as capital assets, the computation of gains, and the differentiation between long-term and short-term capital gains, we aim to empower readers with the knowledge needed to navigate the taxation landscape effectively. It is imperative for taxpayers to stay abreast of such regulations to optimize their financial planning and ensure compliance with tax laws. We encourage readers to leverage this information in conjunction with professional advice to make sound investment choices and mitigate tax liabilities effectively.
Hope this article is helpful for you thank you…!
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Please explain with examples on LIC maturities, whether is long term or short term. Rate of tax in LTCG, rate of tax for STCG on LIC maturities