Section 10(10D) & 45(1B) - Taxation of ULIP (Unit Linked Insurance Policy)

• Section 10(10D) of the Income Tax Act, 1961 prescribes exemption from tax on sum received on maturity of an insurance policy, including the sum allocated by way of bonus.

• However, amount received under a Key man Insurance Policy and amount received in a case where premium paid is more than the limit prescribed in section 80C is taxable. But, if such sum is received on death of a person, then it will not be taxable.

• Fourth proviso to section 10(10D) provides that exemption under this section shall not be available in respect of any ULIP, issued on or after 1st February 2021, where the amount of premium payable exceeds Rs. 2,50,000/- in any of the PY during the term of the such policy.

• Fifth proviso provides that if a person has taken more than one ULIP, exemption shall apply only in respect of those ULIP, issued on or after 1st February 2021, where the aggregate amount of premium does not exceed Rs. 2,50,000/- in any of the PYs during the term of any of these policies.

• This means that if any ULIP was issued before 1st February 2021, it is exempt from tax irrespective of the amount of premium paid in respect of that policy.

• Section 10(10D) further provides that the 4th and 5th proviso discussed above shall not apply to any sum received on death of a person.  

• Section 2(14) of the Act says that any ULIP to which exemption under section 10(10D) does not apply on account of application of 4th and 5th provisos shall be considered as a capital asset. 

• Moreover, section 45(1B) prescribes the provisions for calculation of capital gains on transfer of such capital asset. 

• In such a case, capital gains shall be calculated in the year in which such amount from ULIP is received. 

• Rule 8AD prescribes the manner of calculation of capital gains in such a case. 

• The capital gains shall be calculated by subtracting the amount of premium paid from the sum received. 

• The gains so arrived shall be deemed to be the capital gains arising from transfer of a unit of an equity oriented fund and taxable under section 112A.