TAX ON ULIP & LIP: Taxation of Unit Linked Insurance Plan & Life Insurance Premium
TAX ON ULIP & LIP: Taxation of Unit Linked Insurance Plan & Life Insurance Premium
TAX ON ULIP MATURITY & LIP
- What do you mean by ULIP?
ULIP (unit linked insurance plan) is a financial product that combines the characteristics of Investment and insurance. It was introduced in an effort to make insurance policies a bit more lucrative in terms of rate of return. In ULIP, the amount of premium paid is diverted partly towards life insurance, while a major portion is directly or indirectly invested in stock market.
Before 1st February 2021, whatever returns you received on the maturity of ULIP plan were tax-free under Section 10(10D) of the Income Tax Act. Also, you can claim a tax deduction u/s 80C.
- Taxation in case of ULIP & LIP?
Section 2(14): “Capital Asset” means any ULIP to which exemption u/s 10(10D) does not apply on account of the applicability of the 4th & 5th provisos thereof.
Section 10(10D): Exemption on maturity of Life Insurance Policy
Any sum received under a Life Insurance Policy, including the bonus is Exempt from tax.
Following sums are taxable:
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S.NO |
EXPLANATION |
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Sum received under a Keyman insurance policy. |
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Sum received where premium paid is more than prescribed limit (20%, 10%, 15% as the case may be) given u/s 80C. (If it is received on the death of person then it is fully exempt). |
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Sum received where any ULIP, issued on or after 1st Feb 2021, if the amount of premium payable for any of the P.Y during the term of such policy exceeds Rs. 2,50,000. Provided, if premium is payable, for more than one ULIP’s, issued on or after 1st Feb 2021, the exemption u/s 10(10D) shall apply only with respect to those ULIP’s, where the aggregate amount of premium does not exceed Rs. 2,50,000, in any of the P.Y during the term of any of those policies. (4th & 5th provisos of Section 10(10D). |
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Sum received where any Life Insurance Policy, other than ULIP, issued on or after the 1st April 2023, if the amount of premium payable for any of the P.Y during the term of policy exceeds Rs. 5,00,000. Provided, if premium is payable, for more than one life insurance policy other than ULIP’s, issued on or after 1st April 2023, the exemption u/s 10(10D) shall apply only with respect to those LIP’s, where the aggregate amount of premium does not exceed Rs. 5,00,000, in any of the P.Y during the term of any of those policies. (6th & 7th provisos of Section 10(10D). |
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NOTE: Exemption is available if sum received in point 4 & 5 on the death of the person. |
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Example:
Mr. Kunal is a resident Indian who has the following life insurance policies, some of which are ULIP’s. The details of such policies are given hereunder:
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A |
B |
C (ULIP) |
D (ULIP) |
E (ULIP) |
F (ULIP) |
G (ULIP) |
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Date of issue |
1.4.17 |
1.4.18 |
1.1.21 |
1.4.21 |
1.2.21 |
1.3.21 |
1.4.21 |
|
Premium (p.a) |
50,000 |
40,000 |
3 lakhs |
3 lakhs |
1 lakh |
1.4 lakhs |
2.5 lakhs |
|
Date on which premium falls |
01/04 |
01/04 |
01/01 |
01/04 |
01/02 |
01/03 |
01/04 |
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Maturity Date |
31.3.25 |
31.3.25 |
31.12.29 |
31.3.30 |
31.1.30 |
28.2.30 |
31.3.30 |
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Consideration on maturity |
7 lakhs |
4 lakhs |
32 lakhs |
32 lakhs |
11 lakhs |
17 lakhs |
28 lakhs |
|
Sum assured |
6 lakhs |
3.5 lakhs |
30 lakhs |
30 lakhs |
10 lakhs |
15 lakhs |
25 lakhs |
A: Taxability of Normal Insurance Policy
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S.NO |
EXPLANATION |
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Income on maturity of policy “A” shall be exempt u/s 10(10D) because premium paid during the policy term is not more than 10% of policy value. |
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Income on maturity of policy “B” shall not be exempt u/s 10(10D) because premium paid is more than 10% of policy value. In this case income component Rs. 1,20,000 (4,00,000 – 2,80,000) taxable under IFOS in the P.Y 24-25. |
B: Taxability of Unit Linked Insurance Policy (ULIP)
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S.NO |
EXPLANATION |
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Income on maturity of ULIP “C” shall be exempt u/s 10(10D) because premium paid during the policy term is not more than 10% of policy value and ULIP is taken before 01.02.21. |
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Income on maturity of ULIP “D” shall be taxable as ULIP taken on or after 01.02.21 and premium paid per year is more than Rs. 2,50,000 in a year. In this case income component Rs. 5,00,000 (Rs. 32,00,000 – Rs. 27,00,000) taxable under Capital Gain in P.Y 2029-30 and taxable as LTCG u/s 112A @ 12.5%. |
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In case of ULIP’s “E, F & G” premium in respect of single policy is not more than Rs. 2,50,000 but aggregate exceed Rs. 2,50,000 so in this case assessee can claim exemption for ULIP’s for which premium is not more than Rs. 2,50,000. Assessee can claim exemption either for ULIP “E & F” or “ULIP “G”. Aggregate capital gain in case of ULIP “E & F” is Rs. 6,40,000 ((11,00,000-9,00,000) +(17,00,000-12,60,000)), and in case of ULIP G is Rs. 5,50,000 (28,00,000-22,50,000). Since, it is beneficial to claim exemption u/s 10(10D) for ULIP’s “E & F” so assessee should opt this option and pay capital gain on LTCG of Rs. 5,50,000 on ULIP “G” in P.Y 2029-30. |
- Calculation of Capital Gain in case of ULIP?
As per rule 8AD computation of capital gain in case of ULIP will be as follows:
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S.NO |
EXPLANATION |
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Amount received for first time: Taxable Amount- A-B, where, A= the amount received for the first time in the P.Y, including bonus; and B= aggregate amount of premium till date of receipt of the amount as referred to in “A”. |
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Amount received subsequent time: Taxable Amount- C-D, where, C= the amount received excluding amount already considered in point “A”; and D= aggregate of the premium till the date of receipt of the amount as referred to in “C” excluding the amount already considered in point “B” |
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NOTE: The Capital Gain shall be deemed to be the capital gain arising from the transfer of an unit of an equity-oriented fund and taxable u/s 112A. |
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Example: Mr. Kumar invested Rs. 3,00,000 per year in ULIP of ICICI from 01/04/2021 for 10 years. Policy value is Rs. 40,00,000. Mr. Kumar received Rs 37,00,000 on 17/07/2026 from such policy. On 31/03/2031 he again received Rs. 28,00,000 from such policy. Compute Capital Gain?
Computation of Capital Gain P.Y 26-27 (FIRST TIME).
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PARTICULAR |
AMOUNT (In Rs.) |
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Full Value of Consideration |
37,00,000 |
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Less: Cost of Acquisition (3,00,000 * 6) |
18,00,000 |
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LTCG taxable u/s 112A |
19,00,000 |
Computation of Capital Gain P.Y 30-31 (SUBSEQUENT TIME).
|
PARTICULAR |
AMOUNT (In Rs.) |
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Full Value of Consideration |
28,00,000 |
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Less: Cost of Acquisition (3,00,000 * 4) |
12,00,000 |
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LTCG taxable u/s 112A |
16,00,000 |
- Calculation of Capital Gain in case of LIP?
Clarification on GST component: It is clarified by CBDT that the premium payable/ aggregate premium payable for LIP’s other than ULIP’s, issued on or after 01.04.2023, for any P.Y, would be exclusive of the amount of GST payable on such premium.
Example: Hari, Ram & Kavi take life insurance policy on 10/07/2023. They do not have any other policy & do not take any other insurance policy in future. Discuss Tax Treatment
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PARTICULAR |
HARI |
RAM |
KAVI |
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SUM ASSURED |
45,00,000 |
60,00,000 |
60,00,000 |
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ANNUAL PREMIUM |
4,00,000 |
5,20,000 |
6,50,000 |
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TERM OF POLICY |
10 YEARS |
10 YEARS |
10 YEARS |
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DEDUCTION U/S 80C |
60,000 P.A. |
1,50,000 P.A. |
1,20,000 P.A. |
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MATURITY AMOUNT |
52,00,000 |
77,00,000 |
80,00,000 |
Mr. Hari – As annual premium within the limit of 10% of sum assured & annual premium isn’t more than Rs. 5,00,000 so exemption u/s 10(10D) is available. Nothing will be taxable u/s 56(2)(xii).
Mr. Ram – Annual premium is within the limit of 10% of sum assured but premium on policy taken on or after 01/04/23 is more than Rs. 5,00,000 so exemption u/s 10(10D) not available & it is taxable u/s 56(2)(xii) under IFOS.
Mr. Kavi – Annual premium exceeds the limit of 10% of sum assured & premium on policy taken on or after 01/04/23 is more than Rs. 5,00,000 so exemption u/s 10(10D) not available & it is taxable u/s 56(2)(xii) under IFOS.
Computation of Taxable Amount from LIP under IFOS (P.Y 33-34).
|
PARTICULAR |
MR. RAM |
MR. KAVI |
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Maturity Amount (A) |
77,00,000 |
80,00,000 |
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Annual Premium Paid |
52,00,000 |
65,00,000 |
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Less Deduction claimed u/s 80C |
15,00,000 |
12,00,000 |
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Total Premium paid net off deduction u/s 80C |
(37,00,000) |
(53,00,000) |
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TAXABLE INCOME |
40,00,000 |
27,00,000 |
