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Ahead of budget 2022 which will be presented by the finance minister in a few days, let me take you back to Budget 2021, when the Ulip (unit linked insurance policies) industry got a shock as the new provisos for claiming exemption of the sum received from Ulip were added. There were still some grey areas with respect to the newly added provisos which are now clarified in more detail by CBDT (Central Board of Direct Taxes) in the ‘Guidelines under clause (10D) section 10 of the Income-Tax Act, 1961’ vide circular no. 2 of 2022, dated 19 January 2022.

Ulip is one of the most common investment people make as it has dual benefits. Firstly, when the premium is paid it is claimed as deduction under Section 80C of the Income Tax Act. Secondly, the sum received from the Ulip is exempted under Section 10(10D) of the Income Tax Act, subject to certain conditions.

The Finance Act, 2021, amended section 10 (10D) of the Income Tax Act to withdraw the exemption of sum received (including bonus) from Ulip if the amount of premium payable for any of the previous years during the term of the policy exceeds 2.5 lakh.

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This amendment is applicable prospectively, i.e. for policies issued after 1 February 2021. When the exemption stands withdrawn, tax will be payable on the capital gains i.e. difference between sum received (including withdrawals and bonus) and total premium paid. Also, if premium is payable for more than one Ulip, issued on or after 1 February 2021, the exemption of sum received under Section 10 (10D) shall be available only with respect to such policies where the aggregate premium does not exceed 2.5 lakh for any of the previous years during the term of any of those policies.

The position on sum received from multiple Ulips held by an investor where the aggregate premium of such multiple policies exceeds 2.5 lakh per annum was unclear. Lets understand by example the clarifications brought in circular no. 2 of 2022 dated 19 January 2022.

For instance, Rajesh holds the given Ulips (see table).

Suppose, the sum received from Ulip X is 35 lakh, Ulips A, B, C is 17 lakh, 19 lakh and 12 lakh respectively.

The sum received from Ulip X will be exempt under Section 10 (10D) as the policy has been issued before 1 February 2021 and it is not covered by recently introduced provisos. Rajesh claims exemption for FY 2030-31 for Ulip X.

Now, in FY 2031-32, the sum received from all Ulips A,B,C will not be exempt as the aggregate premium payable for Ulips A, B and C exceeds 2.5 lakh. Now, Rajesh can either claim exemption for Ulip B only or he can claim exemption for Ulips A and C combined as the aggregate premium of Ulips A and C does not exceed 2.5 lakh. Claiming exemption for Ulips A and C will be more beneficial to Rajesh.

For instance, Suresh invests in the given Ulips (see table).

Suppose the sum received for Ulip Y on 1 April 2031 is 14 lakh and Suresh claims exemption for this amount in FY 2031-32. Now, on 01 April 2032 the sum received for Ulip Z is 18 lakh.

This amount will be taxable as the aggregate premium for Ulip Y and Z exceeds 2.5 lakh per annum and the sum received from Ulip Y has already been claimed as exempt in the previous year.

However, as a smart move Suresh should not have claimed the amount received from Ulip Y as exempt in FY 2031-32 which would mean that the aggregate premium from policies which are claimed as exempt will not exceed 2.5 lakh and hence the sum received from Ulip Z will be eligible for exemption.

In other words, you can choose to claim exemption on the Ulip which pays out higher maturity proceeds to reduce your tax bill.

Now, suppose Amar invests in Ulips E, F, G with respective premium of 1 lakh, 1.5 lakh and 2 lakh on 1 April 2021.

Suppose, on his demise in 2035 his family receives 10 lakh, 15 lakh and 20 lakh respectively from Ulips E,F,G. In this case, the sum received from Ulip on the demise of an individual is fully exempt from tax under Section 10 (10D).

Nitesh Buddhadev is a chartered accountant and the founder of Nimit Consultancy.

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