Unit Linked Insurance Policy means a life insurance policy which has components of both investment and insurance and is linked to a unit.
In other words, Unit Linked Insurance Plan is a hybrid investment option which consists of a component of insurance as well as investment to serve the needs of the respective investors. The amount paid for said scheme is partly towards the insurance of the holder and partly towards the investment. The investable portion of the premium is invested in equity, debt, money market or a mix of all based on the goals and risk appetite of the investor.
Section 2(14) of the Income Tax Act, 1961 defines the capital assets and now the said clause amended by The Finance Act, 2021 in such a manner that 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 proviso thereof.
For the sake of understanding we are need to understand the provisions of Section 10(10D) pertaining to Unit Linked Insurance Policy.
The Finance Act, 2021 made certain inclusions in the said clause.
Fourth 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 2.5 lakh.
Fifth proviso: 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 2.5 lakh any of the previous year during the term of any of those policies.
It is important to note that the above said provisos (i.e., fourth and fifth) shall not apply to any sum received on the death of a person.
Deduction allowed under chapter VI-A for Investment in ULIPs
Deduction under Section 80C is allowed for the investment made in ULIP. An Individual can claim a deduction for the investment made for himself, spouse or children (dependent or independent) and HUF can claim a deduction for the investment made for any member of HUF.
It is pertinent to note that ULIPs typically have a lock-in period of 5 years.
For the purpose of taxability under the Act, 1961, a new sub-section inserted (1B) to Section 45.
Notwithstanding anything contained in sub section (1) to section 45, where any person receives at any time during any previous year any amount under a ULIP, to which exemption under Section 10(10D) does not apply on account 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 tax under the head “Capital gains” in the previous year in which such amount was received. Further, the income taxable under this head shall be calculated in such manner as may be prescribed.
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Whether provisions are applicable to unit linked plans if the amounts withdrawn after 01/04/2021, against investments made prior to 31.03.2015?
If we carefully read the amended extracts which are as under.
Besides restricting the exemption under Section 10(10D) for payment of excess premium, the Finance Bill, 2021 has proposed to insert Fourth and Fifth Proviso to Section 10(10D) that no exemption shall be available under this provision in respect of ULIPs issued on or after the 01-02-2021, if the amount of premium payable for any of the previous year during the term of the policy exceeds Rs. 2,50,000 (i.e., ‘high premium’ ULIPs).
Thus amended proviso only for new policies.