Guidelines under Section 10(10D) of the Income Tax Act

CBDT issued Guidelines on Income Tax Exemption for Unit Linked Insurance Policies (ULIP) Receipts under Section 10(10D) vide a Circular 2/2022 dated 19/01/2022. This circular explains the methodology to find out the tax exemption status of ULIPs. Section 10(10D) of the Income Tax Act, 1961 provides for income-tax exemption on the sum received under a life insurance policy, including any sum allocated by way of bonus on such policy subject to certain exclusions. The current article briefs the Guidelines under Section 10(10D) of the Income Tax Act.

Synopsis of CBDT Guidelines

CBDT clarified that receipts from ULIPs, on maturity/ withdrawal including towards bonus, shall be subject to capital gains tax in the case of policies with an annual premium above Rs. 250,000.

The old ULIPs which were bought before February 1, 2021, were considered to be exempted,
The latest CBDT circular states that for exemption the aggregate premium of both new as well as old ULIP will be considered and if the amount exceeds Rs 2.5 lakh then this exemption will not be available for the new ULIP exceeding Rs 2.5 lakh of premium.

Section 10(10D) of Income Tax

Under Section 10(10D) of the Income Tax Act, the amount invested and the amount received as proceeds from Life Insurance is exempt from Income Tax. Thus, any sum received on maturity of a life insurance policy or death benefits is tax-free. Also, Life Insurance is not subjected to TDS (Tax Deducted at Source) making it an ideal tool for saving taxes.

Key changes in Section 10(10D) through Finance Act 2021

The Finance Act, 2021 amended clause (10D) of section 10 of the Income Tax Act by inserting fourth to seventh provisos. Following are the key changes that were made in Section 10(10D) of the Income Tax Act, 1961 through Finance Act 2021.

The Finance Act, 2021 amended Fourth proviso section 10(10D) of the IT Act to provide that no exemption shall be available to any unit-linked insurance policy (ULIP) issued on or after 1 February 2021 if the amount of premium payable for any of the previous years during the term of the policy exceeds Rs 2,50,000.
As per the Amended fifth proviso to section 10(10D) of the Act, in case of multiple ULIPs issued on or after 1 February 2021, exemption under section 10(10D) shall be available only concerning such policies aggregate premium whereof does not exceed Rs 2,50,000 for any of the previous years during the term of any of the policy.
The sixth proviso provides that the fourth and fifth provisos shall not apply in case of the sum received on the death of the person. Any sum received on the death of the person will be exempted and no capital gain or tax would be levied under Income Tax Act.
Any profits and gains arising to a person from the receipt of any sum at the time of maturity, surrender, or partial withdrawal under such high-value ULIP where premium exceed Rs 2,50,000 and it shall be taxable as capital gains in the year of receipt.

Securities transaction tax (STT) applicable on maturity or surrender or partial withdrawal of ULIP issued on or after 1 February 2021 (only on Section 10(10D) non-Compliant Policies)

New TAX provisions for ULIP plans

Budget 2021 had proposed to remove the tax-exempt status on the proceeds of ULIPs if the annual premium exceeded Rs 2.5 lakh. However, there were a lot of ambiguities regarding how the framework will work especially in the case of multiple ULIPs which involves both types taken before the budget proposals and bought after it. Now, CBDT clarifies that any sum received including by way of bonus during the current previous year under any one or more eligible Unit Linked Insurance Policy (ULIPs) issued on or after 01/02/2021 shall be exempt under Section 10 (10D) of the Income Tax Act, 1961 if the annual premium during the policy term didn’t exceed Rs. 250,000, vide Circular 2/2022 dated. 19/01/2022.

The Procedure to determine the exemption under Section 10(10D)

Sum received including any sum allocated by way of bonus during the previous year under any one or more ULIPs issued on or after 01.02.2021 shall be exempt under clause (10D) of section 10 of the Act. The same is explained by way of examples of different situations: Situation 1: No consideration is received by the assessee on any eligible ULIPs during any previous year preceding the current previous year or consideration has been received on such eligible ULIPs but has not been claimed exempt. The exemption under section 10(10D) of the Act shall be determined as under:

If the assessee has received consideration, during the current previous year, under one eligible ULIP only and the amount of premium payable on such eligible ULIP does not exceed Rs 2,50,000 for any of the previous years during the term of such eligible ULIP, such consideration shall be eligible for exemption under the Section 10(10D)
If the assessee has received consideration, during the current previous year, under one eligible ULIP only and the amount of premium payable on such eligible ULIP exceeds Rs 2,50,000 for any of the previous years during the term of such eligible ULIP, such consideration shall not be eligible for exemption under the Section 10(10D)
If the assessee has received consideration, during the current previous year, under more than one eligible ULIPs and the aggregate of the amount of premium payable on such eligible ULIPs does not exceed Rs 2,50,000 for any of the previous years during the term of such eligible ULIPs, such consideration shall be eligible for exemption under Section 10(10D)
If the assessee has received consideration, during the current previous year, under more than one eligible ULIPs and the aggregate of the amount of premium payable on such eligible ULIPs exceeds Rs 2,50,000 for any of the previous years during the term of such eligible ULIPs, the consideration under only such eligible ULIPs shall be eligible for exemption under Section 10(10D) where the aggregate of the amount of the premium payable does not exceed Rs 2,50,000 for any of the previous years during their term

Situation 2: Consideration has been received by the assessee under any one or more eligible ULIPs during any previous year proceeding the current previous year and it has been claimed to be exempt under section 10(1D) of the Act. Such eligible ULIPs are referred to as “Old ULIPs” in this paragraph and corresponding examples and references to eligible ULIPs shall not include old ULIPs. The exemption under clause (10D) of section 10 of the Act shall be determined as under

If the assessee has received consideration, during the current previous year, under one eligible ULIP only and the aggregate amount of premium payable on such eligible ULIP and old ULIPs does not exceed Rs 2,50,000 for any of the previous years during the term of such eligible ULIP, the consideration under such eligible ULIP shall be eligible for exemption under the Section 10(10D)
If the assessee has received consideration, during the current previous year, under one eligible ULIP only and the aggregate amount of premium payable on such eligible ULIP and old ULIPs exceeds Rs 2,50,000 for any of the previous years during the term of such eligible ULIP, the consideration under such eligible ULIP shall not be eligible for exemption under the Section 10 (10D);
If the assessee has received consideration, during the current previous year, under more than one eligible ULIPs and aggregate of the amount of premium payable on such eligible ULIPs and old ULIPs does not exceed Rs 2,50,000 for any of the previous years during the term of such eligible ULIPs, such consideration shall be eligible for exemption under the said clause (10D
If the assessee has received consideration, during the current previous year, under more than one eligible ULIPs and aggregate of the amount of premium payable on such eligible ULIPs and old ULIPs exceeds Rs 2,50,000 for any of the previous years during the term of such eligible ULIPs, consideration under only such eligible ULIPs shall be eligible for exemption under the said clause (10D) where the aggregate amount of premium along with the aggregate amount of premium of old ULIPs does not exceed Rs 2,50,000 for any of the previous years during the term of any of such eligible ULIP.

The above guidelines are explained with the help of the following examples: [pdf-embedder url="https://www.indiafilings.com/learn/wp-content/uploads/2022/01/circular-2-2022-4-11-1.pdf" title="circular-2-2022-4-11 (1)"]

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