Taxation ulip: ulip purchased after January 2021 will only be exempt from tax under these conditions: the government publishes rules

If you were planning to buy ULIPs in order to take advantage of the tax-free product, you will now need to be careful and check if it will be eligible for tax exemption under the new tax rules that have been issued.

The Central Board of Direct Taxes (CBDT) published a notification on January 19, 2022, explaining the methodology for knowing the tax exemption status of ULIPs. The 2021 budget had proposed to remove tax exempt status on ULIP proceeds if the annual premium exceeded Rs 2.5 lakh. However, there was a lot of ambiguity regarding how the framework will work, especially in the case of multiple ULIPs that involve both types taken before budget proposals and purchased after.

Old ULIPs purchased before February 1, 2021 were considered fully exempt, however, this does not mean that you can purchase new ULIPs with a premium of up to Rs 2.5 lakh and still enjoy tax exempt status . The latest CBDT notification states that for the exemption, the overall premium of both new and old ULIP will be considered and if the amount exceeds Rs 2.5 lakh, this exemption will not be available for the new ULIP exceeding Rs 2 .5 lakh premium.

This is what the CBDT notice published today states regarding the taxation of ULIPs under clause (10D) of section 10 of the Income Tax Act 1961.

The 2021 finance law amended clause (10D) of article 10 of the law by inserting clauses fourth to seventh. The fourth condition provides that from 01.02.2021, the sum received under a unit linked insurance policy (ULIP), issued on or after 01.02.2021, will not be exempt under the said clause if the premium amount payable for any of the previous years during the term of this policy exceeds Rs 2,50,000. Further, the fifth condition provides that if the premium is payable for more than one ULIP, issued on or after 01.02.2021, the exemption under the said clause will only be available in respect of policies where the premium total does not exceed Rs 2,50,000 for any of the previous years during the term of any of these policies. The sixth provision provides that the fourth and fifth provisions do not apply in the case of an amount received on the death of the person.

The seventh condition of the said clause (10D) also empowers the Central Board of Direct Taxes (the Board) to issue directives, with the prior approval of the central government, in order to remove any difficulty which arises while giving effect to the provisions of the said clause. . In exercising powers under this reservation, the Council, with the prior approval of Central Government, hereby issues the following directives.

Amount received, including any amount allocated as a bonus (hereinafter referred to as “consideration”) during the previous year (hereinafter referred to as “current previous year”) under one or more ULIPs issued to effective from 01.02.2021 (hereinafter referred to as “Eligible ULIP”) shall be exempt under clause (10D) of Article 10 of the Act, subject to satisfaction of the other provisions of the said clause. The same are explained by means of examples of different situations:-

Situation 1: No consideration is received by the assessee on the eligible ULIPs during any previous year preceding the current previous year or consideration has been received on these eligible ULIPs but has not been claimed exempt. The exemption under clause (10D) of section 10 of the Act is determined as follows:

I. If the assessee has received consideration, during the current previous year, under a single eligible ULIP and the amount of the premium payable on this eligible ULIP does not exceed Rs 2,50,000 for the one of the preceding years during the term of such eligible ULIP, such counterparty is eligible for exemption under said clause (10D);

ii. If the assessee has received consideration, during the current previous year, under a single eligible ULIP and the amount of the premium payable on this eligible ULIP exceeds Rs 2,50,000 for one of the previous years during the term of this eligible ULIP, this counterparty must not be eligible for the exemption under the said clause (10D);

iii. If the assessee has received consideration, during the current previous year, under more than one eligible ULIP and the total amount of the premium payable on these eligible ULIPs does not exceed Rs 2,50,000 for any of the preceding years during the term of this eligible ULIP, such counterparty is eligible for an exemption under said clause (10D);

iv. If the assessee has received consideration, during the current previous year, under more than one eligible ULIP and the total amount of the premium payable on these eligible ULIPs exceeds Rs 2,50,000 for the one of the preceding years during the term of such qualifying ULIPs, the counterparty solely under such qualifying ULIPs is eligible for exemption under said clause (10D) where the total amount of premium payable does not exceed 2.50 000 rupees for any of the previous years during their term (see examples).

2 Situation 2: Consideration was received by the assessee under one or more eligible ULIPs in any previous year prior to the current previous year and claimed to be exempt under clause ( 10(D) of section 10 of the Act. These eligible ULIPs are referred to as “old ULIPs” in this paragraph and the corresponding examples and references to eligible ULIPs must not include old ULIPs. The exemption under clause (10D) of section 10 of the Act is determined as follows:

I. If the assessee has received compensation, during the current previous year, under a single eligible ULIP and the total amount of the premium payable on these eligible ULIPs and the old ULIPs does not exceed 2, Rs 50,000 for any of the preceding years during the term of such eligible ULIP, the counterparty under such eligible ULIP shall be eligible for an exemption under the said clause (10D);

ii. If the assessee has received consideration, during the current previous year, under a single eligible ULIP and the total amount of the premium payable on this eligible ULIP and the old ULIPs exceeds Rs 2,50,000 for any of the preceding years during the term of such Eligible ULIP, the Counterparty under such Eligible ULIP will not be eligible for an exemption under such clause (10D);

iii. If the assessee has received consideration, during the current previous year, under more than one eligible ULIP and the total amount of the premium payable on these eligible ULIPs and the old ULIPs does not exceed 2, Rs 50,000 for any of the preceding years during the term of such qualifying ULIPs, such counterparty is eligible for an exemption under the said clause (10D);

iv. If the assessee has received consideration, during the current previous year, under more than one eligible ULIP and the total amount of the premium payable on these eligible ULIPs and the old ULIPs exceeds Rs 2, 50,000 for any of the previous years during the term of this eligible ULIP, only those eligible ULIPs shall be eligible for exemption under said clause (10D) where the full premium amount together with the full premium amount of former ULIP does not exceed Rs 2,50,000 for any of the previous years during the term of any of these qualifying ULIPs (see examples).

The notification also explains the rules with various examples.
Click here to read the CBDT notification.