Synopsis
Budget 2021 had proposed to remove the tax-exempt status on the proceeds of ULIPs if the annual premium exceeded Rs 2.5 lakh. However, there were a lot of ambiguities regarding how the framework will work especially in the case of multiple ULIPs which involves both types taken before the budget proposals and bought after it.
If you were planning to buy ULIPs in order to enjoy the tax-free proceeds, then you will now have to be careful and check if it will qualify for tax exemption under new tax rules that have been issued.
The Central Board of Direct Taxes (CBDT) has issued a notification on January 19, 2022, explaining the methodology to find out the tax exemption status of ULIPs. Budget 2021 had proposed to remove the tax exempt status on the proceeds of ULIPs if the annual premium exceeded Rs2.5 lakh. However, there were a lot of ambiguities regarding how the framework will work especially in the case of multiple ULIPs which involves both types taken before the budget proposals and bought after it.
The old ULIPs which were bought before February 1, 2021 were considered to be totally exempted, however, it does not mean that you can buy new ULIPs with premium up to Rs 2.5 lakh and keep enjoying the tax exempt status. The latest CBDT notification states that for exemption the aggregate premium of both new as well as old ULIP will be considered and if the amount exceeds Rs 2.5 lakh then this exemption will not be available for the new ULIP exceeding Rs 2.5 lakh of premium.
Here is what the CBDT notification issued today states regarding the taxation of ULIPs as per Clause (10D) of section 10 of the Income-tax Act, 1961.
The Finance Act, 2021 amended clause (10D) of section 10 of the Act by inserting fourth to seventh provisos. Fourth proviso provides that, with effect from 01.02.2021, the sum received under a Unit Linked Insurance Policy (ULIP), issued on or after 01.02.2021, shall not be exempt under the said clause if the amount of premium payable for any of the previous years during the term of such policy exceeds Rs 2,50,000. Further, fifth proviso provides that if premium is payable for more than one ULIP, issued on or after 01.02.2021, the exemption under the said clause shall be available only with respect to such policies where the aggregate premium does not exceed Rs 2,50,000 for any of the previous years during the term of any of those policies. Sixth proviso provides that the fourth and fifth provisos shall not apply in case of sum received on death of the person.
Seventh proviso to the said clause (10D) also empowers the Central Board of Direct Taxes (Board) to issue guidelines, with the previous approval of the Central Government, in order to remove any difficulty which arises while giving effect to the provisions of the said clause. In exercise of the powers under this proviso, Board, with the previous approval of the Central Government, hereby issues the following guidelines.
Sum received including any sum allocated by way of bonus (hereinafter referred as “consideration”) during the previous year (hereinafter referred as “current previous year”) under any one or more ULIPs issued on or after 01.02.2021 (hereinafter referred as “eligible ULIP”) shall be exempt under clause (10D) of section 10 of the Act, subject to the satisfaction of other provisions of said clause. The same are explained by way of examples of different situations:-
Situation1: No consideration is received by the assessee on any eligible ULIPs during any previous year preceding the current previous year or consideration has been received on such eligible ULIPs but has not been claimed exempt.
The exemption under clause (10D) of section 10 of the Act shall be determined as under :
i. If the assessee has received consideration, during the current previous year, under one eligible ULIP only and the amount of premium payable on such eligible ULIP does not exceed Rs 2,50,000 for any of the previous years during
the term of such eligible ULIP, such consideration shall be eligible for exemption under the said clause (10D);
ii. If the assessee has received consideration, during the current previous year, under one eligible ULIP only and the amount of premium payable on such eligible ULIP exceeds Rs 2,50,000 for any of the previous years during the
term of such eligible ULIP, such consideration shall not be eligible for exemption under the said clause (10D)
iii. If the assessee has received consideration, during the current previous year, under more than one eligible ULIPs and the aggregate of the amount of premium payable on such eligible ULIPs does not exceed Rs 2,50,000 for any of the previous years during the term of such eligible ULIPs, such consideration shall be eligible for exemption under the said clause (10D);
iv. If the assessee has received consideration, during the current previous year, under more than one eligible ULIPs and the aggregate of the amount of premium payable on such eligible ULIPs exceeds Rs 2,50,000 for any of the
previous years during the term of such eligible ULIPs, the consideration under only such eligible ULIPs shall be eligible for exemption under the said clause (10D) where aggregate of the amount of the premium payable does not exceed
Rs 2,50,000 for any of the previous years during their term (Refer Examples).
2 Situation 2: Consideration has been received by the assessee under any one or more eligible ULIPs during any previous year preceding the current previous year and it has been claimed to be exempt under clause (10D) of
section 10 of the Act. Such eligible ULIPs are referred as “Old ULIPs” in this paragraph and corresponding examples and reference to eligible ULIPs shall not include old ULIPs. The exemption under clause (10D) of section 10 of the
Act shall be determined as under:
i. If the assessee has received consideration, during the current previous year, under one eligible ULIP only and aggregate amount of premium payable on such eligible ULIP and old ULIPs does not exceed Rs 2,50,000 for any of the
previous year during the term of such eligible ULIP, the consideration under such eligible ULIP shall be eligible for exemption under the said clause (10D);
ii. If the assessee has received consideration, during the current previous year, under one eligible ULIP only and aggregate amount of premium payable on such eligible ULIP and old ULIPs exceeds Rs 2,50,000 for any of the previous year during the term of such eligible ULIP, the consideration under such eligible ULIP shall not be eligible for exemption under the said clause (10D);
iii. If the assessee has received consideration, during the current previous year, under more than one eligible ULIPs and aggregate of the amount of premium payable on such eligible ULIPs and old ULIPs does not exceeds Rs 2,50,000 for
any of the previous year during the term of such eligible ULIPs, such consideration shall be eligible for exemption under the said clause (10D);
iv. If the assessee has received consideration, during the current previous year, under more than one eligible ULIPs and aggregate of the amount of premium payable on such eligible ULIPs and old ULIPs exceeds Rs 2,50,000 for any of the previous year during the term of such eligible ULIPs, consideration under only such eligible ULIPs shall be eligible for exemption under the said clause (10D) where aggregate amount of premium along with the aggregate amount of premium of old ULIPs does not exceed Rs 2,50,000 for any of the previous year during the term of any of such eligible ULIPs (refer examples).
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