Unit Linked Insurance Policy is a life insurance policy that has components of both investment and insurance and is linked to a unit as defined in regulation 3(ee) of the Insurance Regulatory and Development Authority of India (Unit Linked Insurance Products) Regulations, 2019, governed by section 10(10D) of the Income Tax Act 1961.
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Taxation
All receipts from a life insurance policy, on the death of the insured person, is tax exempt. In other cases, income from ULIPs is generally exempt u/s 10(10D) of the act. Except the following cases:
- Policies issued between 01-04-2003 and 31-03-2012, if the yearly premium is more than 20% of the sum assured.
- Policies issued on or after 01-04-2012, if the yearly premium is more than 10% of the sum assured.
- Policies issued after 01-02-2021 if the aggregate yearly premium of all such policies is more than Rs.2,50,000.
Under section 2(14), ULIPs those are taxable due to the third condition above, are capital assets. U/s 112A, the definition of “equity oriented fund” includes such ULIPs where the conditions of investments in equity similar to equity mutual funds are met, uniformly throughout the entire term of the policy. So, taxable ULIPs that fall under 112A, are taxed like equity mutual funds, and else, like debt funds. The period of holding to classify as long term u/s 2(42A) is also similar to equity mutual funds & debt mutual funds as the case may be. Section 50AA can also be interpreted so as to be applicable to those ULIPs. So, in short, ULIPs which are taxable due to the third condition above, are treated like mutual funds for computation of capital gains.
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Income from ULIPs taxable due to the 1st and 2nd conditions above, are not defined as capital assets. Hence income from them are taxable under the head “Income from other sources”.
Deductions claimed to be reversed
The taxability of income from ULIPs are as per the conditions above. But there’s something more. U/s 80C(2)(i), the premium paid on ULIPs can be claimed as deduction from the total income subject to limits. U/s 80C(5), if the premium of such ULIPs have been claimed as deductions, and later such ULIPs are discontinued before 5 years, all such deductions claimed need to be reversed and taxed in the year it is discontinued.
Amendment in Budget 2025
Section 2(14)(c), 45(1B), and 112A, was amended to remove the restrictions, due to which it is a capital asset only when the third condition above is met, and thus all ULIPs that are not exempt u/s 10(10D) are now capital assets, irrespective of when it was issued. Income from old ULIPs issued before 01-02-2021, which was taxable as “Income from other sources” will now be taxed under capital gains. This will be applicable from FY 2025-26.
To summarise:
- For FY 2024-25, ULIPs taxable due to the third condition above, are taxable like mutual funds. Others are taxed as “Income from other sources”.
- For FY 2025-26, all taxable ULIPs, are taxable like mutual funds.
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