Income Tax Department has notified norms for computation of capital gains related to Unit Linked Insurance Policy (ULIP).

Notification on capital gains aims to implement FY 22 budget proposal on ‘Rationalisation of taxation of ULIP.’ It is proposed to allow tax exemption for maturity proceed of the ULIP having annual premium up to ₹2.5 lakh. However, the amount received on death shall remain exempt without limiting the annual premium. The cap of ₹2.5 lakh on the yearly premium of ULIP shall be applicable only for the policies taken on or after February 1, 2021. Further, to provide parity, the non-exempt ULIP shall be provided with the same concessional capital gains tax regime as available to the mutual fund.

According to Om Rajpurohit, Director (Corporate & International Tax) with AMRG & Associates, the discussion on these rules was made in Section 45(1B) of the Finance Budget 2021, wherein the amount received under a unit-linked insurance policy (ULIP) shall be taxable as capital gain, if the premium paid towards ULIP exceed ₹2.5 lakh during any previous year w.r.t. policy issued on or after February 1, 2021.

“The govt. through this notification has provided the mechanism for computation of capital gain, wherein the gain will be computed on the basis of amount received in excess of aggregate premium paid for the first time and so on,” he said.

According to Aravind Srivatsan, Tax Leader with Nangia Andersen LLP, a new Income Tax Rule 8AD has also been inserted to provide for the computation mechanism for the gains from ULIP redemption which were purchased after February 1, 2021 and not exempted under section 10(10D) of the Income Tax Act. “With the new computation mechanism in place, such details of redemption would also be available in the new AIS (Annual Information Statement) thereby the details are available for the tax payer as well and would get auto populated in the tax returns as well going forward,” he said.

Computation method

The notification has prescribed two situations for computation of capital gain – one when the amount is received for the first time and one when received after that. Explaining this, Sandeep Sehgal, Partner- Tax with AKM Global, the newly introduced Rule 8AD, in line with the expectations, prescribes the calculation of capital gains to tax the bonus received on ULIPs. On a first-time receipt, the difference between the amount of receipt and premiums paid till that date would be taxed. On a later receipt, the bonus taxed earlier and premiums considered earlier would be excluded and the gains shall be calculated accordingly.

“The intention behind bringing ULIPs to the tax net through capital gains for the policies issued on or after 1st February 2021 was to provide a level playing field for mutual funds and insurance companies selling ULIPs as investment product where premiums payable for any of the years during the term of the policy exceeds INR 250,000. The method to determine the taxability of such ULIPs was awaited, which is clarified now,” he said.