Taxation Proceeds of High Premium Unit Linked Insurance Policy (ULIP) Amended by Finance Act 2021

Section 10(10D) of the ITA : Taxation Proceeds of High Premium Unit Linked Insurance Policy (ULIP)

Finance Minister Nirmala Sitharaman is presenting Union Budget 2021-22 on 1^st Feb 2021, proposed the amendment the provision on Section 10(10D) of the income-tax Act 1961 : Taxation of proceeds of high premium unit linked.

Existing provision of the act, the Section 10 (10D) of the Act provides for the exemption for the sum received under a life insurance policy, including the sum allocated by way of bonus on such policy in respect of which the premium payable for any of the years during the terms of the policy does not exceed ten percent of the actual capital sum assured.

Under the existing provisions of the Act, there is no cap on the amount of annual premium being paid by any person during the term of the policy and hence high net worth individuals are claiming exemption under this clause by investing in ULIP with huge premium.

The intention is to provide benefit to small and genuine cases of life insurance

IT IS PROPOSED AMENDED TO PROVIDE THE FOLLOWING;

It is proposed to insert the fourth proviso to clause (10D) of section 10 of the Act to provide that the exemption under this clause shall not available with respect to any ULIP issued on or after 01.02.2021, if the amount of premium payable for any of the previous year during the term of the policy exceeds two lakh and fifty thousand rupees.

It is also proposed to insert a fifth proviso to clause (10D) of section 10 of the Act to provide that, if a premium is payable by a person for more than one ULIP issued on or after 01.02.2021, exemption under this clause shall be available only with respect to policies aggregate premium of which does not exceed two lakh and fifty thousand rupees.

The above provisos are not applicable in case of any sum received on the death of person. It is also amended that ULIP which are covered under forth and fifth proviso as mentioned above is considered as capital asset under section 2(14) of act. Such ULIP are included in the definition of equity-oriented fund in section 112A and accordingly the provisions of section 111A and 112A would apply on sale/redemption of such ULIP.

It is proposed to insert a new sub-section (1B) in section 45 to provide for taxation of profits and gains from the redemption of ULIP as capital gain.

Significant to the amendment has also been proposed in Finance (No. 2) Act 2004 to make security transaction tax (STT) applicable on maturity or partial withdrawal with respect to unit-linked insurance policy issued by the insurance company on or after 01.02.2021.

Above amendment applied with effect from 1^st April 2021.