Income Tax Guidelines: How to claim the exemption for the sum received under ULIP

The CBDT has issued guidelines to clarify any difficulty in applying Section 10(10D) of the Income Tax Act. The said provision allows exemption on the sum received under life insurance policy/Unit Linked Insurance Plans (ULIPs), subject to certain conditions. 

The Finance Act 2021 amended the exemption criteria for consideration received under ULIP. It disallowed tax exemption for maturity proceeds of ULIPs issued after 1st February 2021, whose annual premium is above Rs 2.5 lakh. 

According to the guidelines issued, the sum received under a ULIP, issued on or after 1st February 2021, shall not be exempt under the said clause if the annual premium amount for any of the previous years during the term of such policy exceeds Rs 2,50,000. 

Further, suppose the premium is payable for more than one ULIP, issued on or after 1st February 2021. In that case, the exemption under the said clause shall be available only for such policies where the aggregate premium does not exceed Rs 2,50,000 for any of the previous years during the term of any of those policies. 

For the policies issued before 1st February 2021, the taxpayer can take the exemption on the consideration received under the ULIP, even if the annual premium exceeds Rs 2.5 lakh. 

The above clarification is explained with certain examples for different situations:

Examples for one eligible ULIP 

The first criteria for the sum received under ULIP to be tax-exempt under Section 10(10D) is that the annual premium payable for any of the years of the term of the policy is not more than 10 per cent (for policies issued after 1st April 2012)/20 per cent (for policies issued before 1st April 2012) of the sum assured, as the case may be. 

So for the below different scenarios, let us also assume that the taxpayer has received consideration for only one ULIP policy and the above first criteria is satisfied. 

• In scenario I, since the ULIP is taken before 1.04.2021, the maturity amount of Rs 50 lakh will be exempt from tax, although the annual premium is Rs 5 lakh.
• In scenario II, the ULIP is taken on 1.04.2021, and the annual premium amount is above Rs 2.5 lakh. Hence, the maturity proceeds will be taxable on 1.11.2031.
• In scenario III, the ULIP is taken on 1.04.2021, and the annual premium amount is Rs 2.5 lakh. Hence, the maturity proceeds received on maturity will not be taxable.

Multiple eligible ULIPs

Now let us see the case if there are multiple ULIPs.

Scenario II

• In FY 2031-32, the maturity proceeds of ULIP A received will be exempt from tax as the annual premium was less than Rs 2.5 lakh.
• As per the guidelines, in case of multiple policies maturing during the same year, the aggregate premium for all the procedures claimed to be exempt under clause (10D) shall not exceed Rs 2,50,000 for any previous year during the term of any of the policies.
• In the FY 2032-33, ULIPs “B”, “C”, and “D” maturity proceeds are received. You can see the annual premium of ULIPs “B”, “C”, and “D” in aggregate is more than Rs 2.5 lakh during the term of the policy.
• Out of which consideration received under either ULIP “B” or ULIP “C” will be exempt from tax. This is because the consideration received of Rs 12 lakh under ULIP “A” having an annual premium of Rs 1 lakh was exempted in the FY 2031-32. And the annual premium of ULIP “A” and ULIP “B” or the annual premium of ULIP “A” and ULIP “C” does not exceed Rs 2.5 lakh.

{ULIP “A” + ULIP “B” = Rs 2 lakh (Rs 1 lakh + Rs 1 lakh)  

OR

ULIP “A” + ULIP “C” = Rs 2.5 lakh (Rs 1 lakh + Rs 1.5 lakh)}

• Hence, the exemption of Rs 18 lakh of ULIP “C” shall be more beneficial to the taxpayer than exemption of Rs 12 lakh of ULIP “B” in FY 2032-33.
• The consideration received under ULIP “D” will be taxable because the annual premium exceeds Rs 2.5 lakh.

{ULIP “A” + ULIP “D” = Rs 4 lakh (Rs 1 lakh + Rs 3 lakh)}

• Therefore, maturity proceeds of ULIP “B” and ULIP “D” will be taxable in FY 2032-33.

Scenario II

In the above example, if no exemption is claimed for the consideration received under ULIP “A” in FY 2031-32, then in FY 2032-33, the taxpayer can claim the deduction for maturity proceeds of both ULIP “B” and ULIP “C” because the aggregate of their annual premium does not exceed Rs 2.5 lakh. Consideration received under ULIP “D” would be taxable.

For any clarifications/feedback on the topic, please contact the writer at namita.shah@cleartax.in.