[Section 45(1B)]: Capital Gain in case of Profits or Gains arising from receipt of the amount on Maturity of High Premium Unit Linked Insurance Policy (ULIP)

Computation of Capital Gains [Section 45(1B)

(1)        Unit Linked Insurance Policies (ULIPs) have gained popularity as a dual investment-cum-insurance product. ULIPs offer individuals the opportunity to invest in various asset classes while providing life insurance coverage. However, when it comes to the maturity of a high premium ULIP, there are certain tax implications to consider.

(2)        Under Section 45(1B) of the Indian Income Tax Act, 1961, any profits or gains arising from the receipt of the amount on maturity of a high premium ULIP are considered as capital gains. This means that such gains are subject to taxation as per the prevailing capital gains tax rates.

(3)        It is important to note that the tax treatment of capital gains on the maturity of high premium ULIPs differs based on the holding period. If the ULIP is held for less than 36 months, the gains are considered short-term and taxed at the individual’s applicable income tax slab rate. On the other hand, if the ULIP is held for 36 months or more, the gains are classified as long-term and taxed at a lower rate of 20% with indexation benefit.

To calculate the capital gains on the maturity of a high premium ULIP, the following formula can be used:

Capital Gains = Maturity Amount – Premium Paid

Notwithstanding anything contained in section 45(1),

  • where any person receives at any time during any previous year
  • any amount including the amount allocated by way of bonus, under a unit linked insurance policy, to which exemption under section 10(10D) does not apply (as premium/aggregate premium payable in any previous year for Unit Linked Insurance Policy/Policies exceeds Rs. 2,50,000),
  • then, any profits or gains arising from receipt of such amount by such person shall be chargeable to income-tax under the head “Capital gains” and shall be deemed to be the income of such person of the previous year in which such amount was received
  • and the income taxable shall be calculated in such manner as may be prescribed.

Taxability of ULIP on Sale or Redemption:

The Finance Act, 2021 has included such ULIPs [to which exemption under section 10(10D) does not apply] in the definition of equity oriented fund in section 112A so as to provide these policies the same treatment as unit of equity oriented fund.

See also  Tax on Long-Term Capital Gains under Section 112A in Certain Cases

Thus provisions of sections 111A and 112A would apply on maturity/redemption of such ULIPs. Section 112A does not allow any indexation of cost and long-term capital gain is chargeable to tax at the special rate of 10% of an amount exceeding Rs. 1,00,000 in aggregate.

Understanding of Section 45(1B)

Unit Linked Insurance Policies (ULIPs) have gained immense popularity in recent years due to their dual benefits of insurance coverage and investment opportunities. One of the key features of ULIPs is the option to choose a high premium policy, which offers higher returns on maturity.

When the amount on maturity of a high premium ULIP is received, it may be subject to capital gain tax under section 45(1B) of the Income Tax Act. It is important to understand the implications of this tax and how it affects your overall investment strategy.

1.   Applicability:

Section 45(1B) applies specifically to high premium ULIPs. High premium ULIPs are those insurance policies where the annual premium paid by an individual exceeds 10% of the actual capital sum assured. If the policy qualifies as a high premium ULIP, the provisions of Section 45(1B) come into play when the policy matures.

2.   Taxation on Maturity:

Under Section 45(1B), when a high premium ULIP matures, any amount received by the policyholder or the nominee is treated as a capital gain. This capital gain is taxed as income in the hands of the policyholder in the year of receipt.

3.   Tax Calculation:

The taxable capital gain is calculated as the difference between the amount received on maturity and the total premium paid by the policyholder during the term of the policy. This amount is added to the individual’s total income for that year and taxed at the applicable income tax rates.

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4.   Exemption and Deductions:

The tax treatment under Section 45(1B) does not provide for any specific exemptions or deductions related to high premium ULIPs. The entire capital gain amount is generally included in the individual’s total income.

5.   TDS (Tax Deducted at Source):

In certain cases, the insurance company may be required to deduct TDS on the amount paid to the policyholder upon maturity. The TDS rates and requirements are subject to the provisions of the Income Tax Act.

6.   Indexation Benefit:

Unlike some other capital gains, such as those from the sale of property, Section 45(1B) does not provide for indexation benefits. Indexation is a method used to adjust the cost of acquisition for inflation, which can reduce the taxable capital gain.

7.   Reporting and Compliance:

Policyholders are required to report the maturity proceeds from high premium ULIPs in their income tax return and pay any applicable taxes. Non-compliance can result in penalties and interest.

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