In Finance Act 2021, government has made amendments to ULIP taxation. We can claim deductions on the premiums paid towards a ULIP under Section 80C. The payout that you receive at the end of the policy term is also tax-exempt subject to conditions under Section 10(10D) of the Income Tax Act, 1961.
Before the amendment-
Payment of premium in excess of 10%(15% in case of mentally disabled persons) of capital sum assured shall be taxable u/s 10(10D).
Here we will discuss the amendments to Taxability of ULIP transactions in Finance Act, 2021.
From February 1st, 2021 whatever returns you received on the maturity of a ULIP plan will be taxable under Section 10(10D) of the ITA, if the mount of premium payable for any of the previous year during the term of such policy exceeds two lakhs and fifty thousand rupees.
Finance Act 2021, has introduced fourth and fifth provision of section 10(10D) of the act, which consists of following information:-
ULIP issued on or after 1-02-2021, for which exemption u/s 10(10D) shall not apply in the following situations
- When the premium paid/payable during the previous year exceeds 2.5 lakhs for a single ULIP.
- When the aggregate amount of premium paid/payable during the previous year exceeds 2.5 lakhs for multiple ULIPs in case a person purchased multiple ULIPs.
then, any profits or gains arising from receipt of such amount by such person shall be chargeable to income-tax under the head “Capital gains” and shall be deemed to be the income of such person of the previous year in which such amount was received and the income taxable shall be calculated in such manner as may be prescribed u/s 45(1B).
However, no taxation is imposed in the case of a death of an individual.
(i) where the amount is received for the first time under the specified unit linked insurance policy during the previous year, the capital gains arising from receipt of such amount by such person during the previous year in which such amount is received shall be calculated in accordance with
the formula:−
A-B
where, –
A= the amount received for the first time under a specified unit linked insurance policy during the previous year, including the amount allocated by way of bonus on such policy; and
B = the aggregate of the premium paid during the term of the specified unit linked insurance policy till the date of receipt of the amount as referred to in „A‟;
(ii) where the amount is received under the specified unit linked insurance policy during the previous year, at any time after the receipt of the amount as referred to in clause (i), the capital gains arising from receipt of such amount by such person during the previous year in which such amount is received shall be calculated in accordance to the formula
C-D
where, –
C= the amount received under a specified unit linked insurance policy during the previous year, at any time after the receipt of the amount as referred to in clause (i), including the amount allocated by way of bonus on such policy excluding the amount that has already been considered for calculation of taxable amount under this sub- rule during the earlier previous year or years; and
D = the aggregate of the premium paid during the term of the specified unit linked insurance policy till the date of receipt of the amount as referred to in „C‟ as reduced by the premium that has already been considered for calculation of taxable amount under this sub-rule during the earlier previous year or years.
Let us understand with the help of an example:-
Example 1:-
| ULIP | A | B | C |
| Date of Issue | 1st Feb 2020 | 1st April 2021 | 1st Aprl 2021 |
| Amount of premium paid | 3,00,000 | 2,00,000 | 3,50,000 |
| SUM assured | 35,00,000 | 10,00,000 | 30,00,000 |
| Consideration received on maturity | 30,00,000 | 15,00,000 | 35,00,000 |
| Taxable/ Exempt | Exempt | Exempt | Taxable |
Example 2:-
Now we will understand taxation in case , If a single person takes multiple ULIPs.
| ULIP | Date of Issue | Premium paid | SUM Assured | Consideration received on maturity | Taxability |
| 1st ULIP | 20th April, 2020 | 3,00,000 | 20,00,000 | 25,00,000 | Will be exempt as ULIP was issued before 1st Feb 2021 |
| 2nd ULIP | 1st April 2022 | 1,00,000 | 10,00,000 | 13,00,000 | Will be exempt as aggregate of premium payable for ULIPs does not exceed 2.5 lakhs |
| 3rd ULIP | 1st April 2022 | 1,50,000 | 15,00,000 | 20,00,000 | |
| 4th ULIP | 1st April 2022 | 3,50,000 | 25,00,000 | 30,00,000 | Will be taxable under relevant provisions |
The short-term capital gain shall be chargeable to tax at the rate of 15 percent under section 111A, and long-term capital gain shall be chargeable to tax at the rate of 10% under section 112A.