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I bought a single premium ULIP Policy on 19/05/2011. I paid premium of Rs. 90,000/-. The Sum assured was Rs. 1,15,000. The policy matured on 19/05/2021.  Since the premium paid exceeded 20% of the sum assured I understand the maturity amount will be taxed.  My gain is Rs. 1,80,000/-.  TDS @ 5% has been deducted u/s 194DA.  How the profits will be taxed? Can the difference be treated as capital gains? If yes, will it be LTCG  and can I apply indexation? What will be rate of tax on the indexed gains? 

Answer: Section 10(10)(d) of Income Tax Act provides for exemption of money received from insurance company under a life insurance policy if certain conditions are fulfilled. Money received under a policy of life insurance is fully exempt if it is received on death of the policy holder irrespective of the amount of premium paid as percentage of the sum assured. In case the money is received during the life time of the policy holder, the same becomes exempt only if the premium paid for any year did no exceed 10% of the sum assured during premium paying term for the life insurance policies issued after 1st April 2012. For the policies issued between 1-4-2003 and 31st March 2012, the money is exempt if the premium did not exceed 20% of the sum assured. Since your policy was issued during the period when the restriction of 20% was applicable, the money will become taxable in your hands.

Whether the full amount received is to be taxed or only the differential amount only is to be taxed is not clearly provided under the provisions of the tax laws. However, taking a clue from Section 194DA, where tax is to be deducted at 5% on the income portion of the amount being paid. 

Moreover, the recently introduced provisions for taxing the ULIPs, where the premium paid for the year exceeded 2.50 lakhs during the year, also give a clear indication that it is the difference between the premium paid and the money received which is to be taxed.

Since clear cut rules as to computation of profits on ULIPs is not provided for, in my opinion, the single premium can be treated as investments and the benefit of indexation should be available while computing the capital gains. The difference between the maturity proceeds and indexed value of the premium paid would get taxed at flat rate of 20%.

Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on twitter.

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