Budget aims at clarifying the tax rules for income from redemption of ULIPs by amending provisions Clause (10D) of Section 10 of the Income-tax Act.
Anisha Kumari | Feb 4, 2025 |
Rationalizing Income on Redemption of Unit Linked Insurance Policies (ULIPs)
Budget 2025 aims at clarifying the tax rules for income from redemption of Unit Linked Insurance Policies (ULIPs) by amending provisions under Clause (10D) of Section 10 of the Income-tax Act. It highlights the need to draw a distinction between small, genuine insurance cases and policies with higher premiums treated as capital assets.
Provisions Under Clause (10D) of Section 10
Clause (10D) of Section 10 exempts income-tax on amounts received under a life insurance policy, including any bonus. However, this exemption is subject to the condition that the premium payable during any policy year does not exceed 10% of the actual capital sum assured.
Amendments Introduced in 2021
The Finance Act, 2021, amended Clause (10D) of Section 10. It provided that this exemption was not available if the ULIPs were issued on or after February 1, 2021 and the annual premium or total premiums paid in the entire tenure of the policy exceeded Rs.2,50,000.
The intention behind the amendment was that the tax benefit was available only for genuine life insurance policies.
ULIP as a capital asset.
Under the new provisions:
1. ULIPs are a kind of capital assets if the conditions for exemption specified in Clause (10D) are not fulfilled.
2. Any profit arising out of and income generated in consequence of redemptions in such ULIPs is construed to be a capital gain for purposes of levy.
However, for typical life insurance contracts other than those of ULIPs, its amount received goes to “income from other sources” in the event that an exemption does not apply.
Proposed Rationalization of Provisions
In support of clarifying the treatment applicable to ULIPs, propose the following rationalization of its provisions:
1. ULIPs not qualifying for an exemption under Clause (10D) of Section 10 shall be deemed to be capital assets under Clause (14) of Section 2.
2. The income so arising on the redemption of such ULIPs shall be considered as capital gains within the meaning of Sub-section (1B) of Section 45.
3. Such ULIPs shall be treated as an equity-oriented fund for the purposes of taxation in Clause (a) of the Explanation to Section 112A.
Commencement Date
These proposed amendments will take effect from April 1, 2026, and so are applicable to the AY 2026-27 and subsequent years.
Consequences
This rationalization is expected to create a clear distinction between life insurance products meant for genuine financial security and investment-linked products like ULIPs with high premiums. It ensures fair taxation while preserving the integrity of tax exemptions for small and genuine life insurance policies.
Aligning ULIPs with tax rules, the above move is seen in a way to prevent misuse, but at the same time, it will provide clarity on the treatment of income tax to the taxpayers.
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