I-T dept issues clarity on taxability on redemption of ULIPS

In a bid to bring in clarity as to who will be taxed and how, when it comes to the redemption of ULIPS post-February 1, 2021, the central board of direct taxes has come up with a circular laying out the rules and method of calculation.

According to the recent circular, which was issued keeping in mind the announcement made in the Union Budget 2021,  capital gains made on the sum received under Unit Linked Insurance Plans (ULIPs) issued on or after  February 1,2021 shall not be exempted if the annual premium payable for any year exceeds Rs 2.50 lakhs.

According to sources at CBDT, “this is no new tax that has come in, rather the redemption of ULIPs was brought to taxation by the Finance Act 2021 and the recent notification and circular is with the purpose of prescribing rules of such taxation and providing clarity in taxation when a person has multiple utilities.”

The Finance Act 2021 carried out an amendment in section 10(10D) of the Income-tax Act.

This provision was enacted to create a level playing field between mutual fund investment and ULIP investment.

“In case of the mutual fund, the redemption of mutual fund unit is charged to capital gains tax. However, in the case of ULIP, the redemption was exempt, even though the insurance part of the premium was very less and the investment part of the premium was high. This amendment by the Finance Act 2021 ensured that both mutual fund units and ULIPs operate on the same footing. However, a general exemption was provided to those cases where the annual premium is not more than Rs 2.5 lakh in a year. This 2.5 lakh benefit was provided for ULIPs (even if it was not there for mutual fund) so that premium paid for life insurance part does not get hit,” sources at CBDT added.

The Finance Act 2021 also inserted sub-section (1B) in section 45 of the Income-tax Act to make income from ULIPs taxable as capital gains just like redemption from a mutual fund are taxable as capital gains.

The move had delegated power to the Central Government to prescribe a method of calculation of capital gains. Accordingly, Rule 8AD was also notified on 18th January 2022 providing a method of calculation of capital gains.

The amendment by the Finance Act 2021 also made it clear that if there is more than one policy, the 2.5 lakh premium limit for a year would be applied by aggregating the premium of such policies.

“Given this, there was a need for providing clarity by way of a circular, laying down clearly how taxable income is to be calculated when there is more than one ULIP. Accordingly, Circular no 2 of 2022, dated 19th January 2022 was issued providing clarity of taxation in various situations. These situations were also illustrated by way of examples,” sources added.