High Value ULIPs on Income Tax Radar  

Current Tax Provision 

Under Section 10(10D) of the Income Tax Act ,1961, any sum received (except on death of the person) under a life insurance policy, issued on or after 1 April 2012, is taxable if premium payable for any of the years during the policy term exceeds 10 percent of the actual capital sum assured/death sum assured. Hence any payout (maturity, surrender, partial withdrawals, etc) under the said compliant life insurance policy should be exempt under section 10(10D) of the Act. This exemption is applicable to ULIP policies as well. 

Proposed Tax Provision 

Now, as per the proposed amendments in Budget 2021, in addition to the existing criteria (mentioned above), it is now proposed that any sum received under any ULIPs, issued on or after 1 February 2021, shall be taxable if the amount of premium payable for any of the years during the policy term exceeds Rs. 250,000.

It is also proposed that in case of investment in multiple ULIPs by a policyholder, whereby the aggregate premium threshold of Rs 2.5 lakh is breached, all the ULIPs shall be disqualified and no exemption can be claimed. 

Death proceeds from all ULIPs shall however be exempt from tax.

The ULIPs not qualifying the above test shall be treated as a ‘capital asset’ & will be taxable in similar manner as investment in equity oriented fund. Any gains shall be  taxed as long term or short term capital gains as the case may be. 

CBDT will be issuing guidelines for the computation mechanism of capital gains in due course.

Some more important points to consider in this regard:

1) Securities Transaction Tax will be applicable on aforesaid ULIPs on surrender or redemption of units.

2) Only Unit linked life insurance policies to be covered under this ambit. Hence other policies like ULIP pension will continue to be covered under the earlier regime.

3) TDS @5% under Section 194DA will be applicable on the payouts  of the aforesaid non-compliant ULIPs.

4) The non-exempt ULIP shall be provided same concessional capital gains taxation regime as available to the mutual fund i.e income upto Rs 1 lac p.a shall be exempt from tax as mentioned under Section 112A of the Act. 

5) Single premium ULIP policies will be worst hit if the premium payable for the first year exceeds Rs 2.5 lacs.

It may be noted that the proposed amendments are subject to Finance Bill enacted in Parliament & receiving assent of the President.

Further, the views expressed above are personal & have been shared for general information purposes only.