Changes in “Tax on Maturity Proceeds of ULIP” as per Finance Act 2021

What Is a Unit Linked Insurance Plan (ULIP)?

ULIP is a product issued by Insurance Companies. It’s a product combination of insurance coverage and investment exposure. Like all other insurance policy, Policyholder requires to pay the regular premium. There are many different ULIP plans available (Equity / Debts) in the market like life insurance, retirement income, and education expenses.

Exemptions, Tax Deduction & Taxability:

Exemption under Section 10 (10D) can be claimed only fulfillment of the following conditions:

In the case of ‘Death Claim’, any amount of claim received by the nominee is entirely tax free.
In the case of ‘Maturity Claim’, any amount of claim received by policyholder is subject to tax and the tax is deducted under Section 194DA (TDS on the maturity of Life Insurance Policy) at the rate of …..by the insurance company if the annual premium payment is more then 10% of sum assured and the policy issued on or before 1st April ‘2012.(as per sub section (d) of Section 10 (10D))
Deduction under Section 80C is available for the premium paid for ULIP subject to the condition of 10% of the sum assured and has a lock-in period of 5 years.
If annual premium payment is more then 10% of the sum assured and the policy issued on or before 1st April ‘2012 than the amount of claim is added to total income (Income from other sources) and the tax calculated as per the Income tax slab.

In Finance Bill 2021, Proviso 4 and 5 of Section 10 (10D) added and the explanation as follows.

Fourth proviso to Section 10(10D)

Fourth proviso to clause (10D) of section 10 is inserted to provide that the exemption under this clause shall not apply with respect to any ULIP issued on or after the 1st February, 2021, if the amount of premium paid for any of the previous year during the term of the policy exceeds amount Rs. 2,50,000.

It means all the policies issued before 1st Feb,2021 are not considered in this Proviso and Exemptions, Tax Deduction, and taxability same as we discussed before.

Fifth proviso to Section 10(10D)

Fifth proviso to clause 10(10D) is proposed to be inserted to provide that, if premium is paid by a person for more than one ULIPs, issued on or after the 1st February, 2021, exemption under this clause shall be available only with respect to such policies aggregate premium whereof does not exceed the amount of Rs. 2,50,000, for any of the previous years during the term of any of the policy.

It means if the policyholder has more than one ULIP policy then aggregate premium consider for calculation of 2,50,000 limit as referred in the forth proviso.

If proviso 4th and 5th applicable then Taxability:

As per new amendments ULIP is treated as “Equity Oriented Funds”. So now Capital gain tax arises on the maturity of ULIP’s if Proviso 4 and 5 applicable under section 45(1B) of Income Tax Act.

Under Section 112A, Long-Term Capital Gains (LTCG) arising out of the sale of units of equity-oriented mutual fund schemes are taxed @ 10% without any indexation benefit, if the LTCG exceeds Rs. 1,00,000 in a financial year.

As per Section 111A -In case the equity oriented mutual fund units redeemed are held for 12 months then it qualifies for short term capital gain and taxable at a flat rate of 15%.

Accordingly, Section 2(14) is amended and ULIP is defined as a ‘Capital Asset’ and Section 45(1B) included “Proceeds from the redemption of ULIPs are taxable under the head ‘Capital Gains’