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Alerts:

Direct Tax Alert - CBDT issues guidelines on the availability of exemption in case of high premium ULIPs

25 January 2022

Background

The Finance Act, 2021 amended section 10(10D) of the Income-tax Act, 1961 (IT Act) and inserted new sub-section (1B) to the section 45 of the Act to bring proceeds from high premium Unit Linked Insurance Policy (ULIP)1 under the purview of taxation. Recently, the Central Board of Direct Taxes (CBDT) issued a Circular2 enumerating guidelines on exemption of receipts received from high premium ULIP.

We, at BDO in India, have analysed and summarised the said Circular and provided our comments hereunder:

Guidelines for claiming exemption under section 10(10D) of IT Act

As per the amended section 10(10D) of the IT Act, any sum including bonus received from ULIP issued on or after 01 February 2021 (eligible ULIP) shall not be exempt in the below cases:

  • In case of an eligible ULIP, if the premium payable in any financial year during the term of policy exceeds INR 2,50,000
  • In case of more than one eligible ULIP, if the aggregate premium payable in any financial year during the term of any of such policies exceeds INR 2,50,000

Hence, any sum received in such cases would be treated as taxable income. However, such sums continue to be exempt if received on the death of a person.

The Circular has laid guidelines thereby explaining the available exemption subject to the satisfaction of the provisions of section 10(10D) of Act via illustrations. We have tabulated the same below for ease of understanding.

 

Consideration received during the current financial year from:

Premium payable on ULIP(s)*

Exemption under section 10(10D) of the IT Act

One eligible ULIP

INR 2,50,000 or less for any of any financial year during policy term

Available

More than INR 2,50,000 for any of any financial year during policy term

Not available

More than one eligible ULIP

Aggregate is INR 2,50,000 or less for any of any financial year during the term of policies

Available **

Aggregate is more than INR 2,50,000 for any of any financial year during the term of policies

 Available where aggregate amount of premium payable does not exceed INR 2,50,000**

*Premium payable on eligible ULIP includes cases where exemption under section 10(10D) of the IT Act was claimed in previous years (old ULIP) as well as cases where no exemption was claimed in previous years.

**The aggregate amount of premium payable is to be determined considering the whole premium payable on each policy. One cannot claim exemption by partially considering the premium payable on ULIP.

The Circular has also enumerated various examples for better understanding of the amended provisions listed above.

In case the exemption under section 10(10D) of the IT Act is not available, the amount would be taxable as capital gains. The mechanism for computation of such capital gains has also been notified recently by the CBDT (under Rule 8AD of the Income-tax Rules, 1962) which is covered in our BDO India Direct Tax Alert3.

BDO comments

The CBDT has provided much needed clarity on situations wherein exemption is available and would serve as a guide to deal with practical situations at the time of computation of taxes and filing return of income.

Further, it aids to the mechanism for computing capital gains in case exemption under section 10(10D) of the IT Act is not available.

Also, it is important to note that the sum received from the ULIP’s  issued prior to 01 February 2021 will continue to be eligible for the exemption under section 10(10D) of the IT Act.


1ULIP means a life insurance policy which has components of both investment and insurance and is linked to a unit as defined in clause (ee) of regulation 3 of the Insurance Regulatory and Development Authority of India (Unit Linked Insurance Products) Regulations, 2019 issued by the Insurance Regulatory and Development Authority under the Insurance Act, 1938 (4 of 1938) and the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999)

2Circular No 2 of 2022 dated 19 January 2022

3Mechanism for computing capital gain and Securities Transaction Tax Rules for ULIPs notified click here