New IT Rule 8AD on Computation of Capital Gains u/s 45(1B)

Central Board of Direct Taxes has notified the Income-tax (2nd Amendment) Rules, 2022 to insert new IT Rule 8AD on ‘Computation of Capital Gains under Section 45(1B)‘, vide Notification 8/2022 dated 18/01/2022. Rule 8AD contains provisions for computation of capital gains under section 45(1B) of the income tax act. The current article briefs the new Rule 8AD on Computation of Capital Gains.

Section 45(1B) of the Income Tax Act

Section 45(1B) provides that when a person receives an amount under Unit Linked Insurance Policies (ULIP), to which exemption under Section 10(10D) does not apply, any profits arising from such receipt shall be chargeable to tax under the head capital gains. The CBDT has notified Rule 8AD for computation of income deemed as capital gains in such cases.

Section 10(10D) of the Income Tax Act

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. For more details on Life Insurance Income Tax Exemption, click here

Rule 8AD - Computation of Capital Gains under Section 45(1B)

Amount Received for the first time under the specified unit-linked insurance policy

If the amount is received for the first time under the specified unit-linked insurance policy during the previous year, the capital gains arising from receipt of such amount will be calculated following the following formula A-B where, A -The amount received for the first time under a specified unit-linked insurance policy during the previous year, including the amount allocated by way of bonus on such policy; B - The aggregate of the premium paid during the term of the specified unit-linked insurance policy till the date of receipt of the amount as referred to in A;

Amount Received at Any time under the specified unit-linked insurance policy

If the amount is received under the specified unit-linked insurance policy during the previous year, at any time after the receipt of the amount as referred to in clause (i), the capital gains arising from receipt of such amount will be calculated in accordance with the formula: C-D where, - C- The amount received under a specified unit-linked insurance policy during the previous year, at any time after the receipt of the amount as referred to in clause (i) including the amount allocated by way of bonus on such policy excluding the amount that has already been considered for calculation of taxable amount under this sub-rule during the earlier previous year or years; D - The aggregate of the premium paid during the term of the specified unit-linked insurance policy till the date of receipt of the amount as referred to in „C‟ as reduced by the premium that has already been considered for calculation of taxable amount under this sub-rule during the earlier previous year or years.

CBDT Clarfication

The capital gains as computed under the above formulas shall be deemed to be the capital gains arising from the transfer of a unit of an equity-oriented fund set up under a scheme of an insurance company comprising unit-linked insurance policies. Explanation: For this rule, the expression “specified unit-linked insurance policy” shall mean any unit-linked insurance policy referred to in sub-clause (c) of clause (14) of section 2 of the Act. Click here to get the Official Notification of CBDT