Are ULIP Taxable now since Budget 2021 Proposals?

BACKGROUND
Taxability of receipt from maturity of ULIPs are exempted under section 10 (10D), so let’s read first the section which was applicable before this budget proposals:

ULIP (Unit Linked Insurance Policy) - This policy is the combination of conventional policy and mutual funds / SIP (Systematic Investment Plans) and it is designed in such a way, where taxpayer pays premium monthly/quarterly/half yearly/annually and the same is invested in mutual funds after deducting insurance and fund management charges. In long run, such plans are experienced to generate higher returns than FDs, other Insurance policies.

*Section 10 (10D) of Income tax Act 1961 - any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, other than—
(a) any sum received under sub-section (3) of section 80DD or sub-section (3) of section 80DDA; or
(b) any sum received under a Keyman insurance policy; or
(c) any sum received under an insurance policy issued on or after the 1st day of April, 2003 but on or before the 31st day of March, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured; or
(d) any sum received under an insurance policy issued on or after the 1st day of April, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds ten per cent of the actual capital sum assured:
Provided that the provisions of sub-clauses (c) and (d) shall not apply to any sum received on the death of a person:
Provided further that for the purpose of calculating the actual capital sum assured under sub-clause (c), effect shall be given to the Explanation to sub-section (3) of section 80C or the Explanation to sub-section (2A) of section 88, as the case may be :
Provided also that where the policy, issued on or after the 1st day of April, 2013, is for insurance on life of any person, who is—
(i) a person with disability or a person with severe disability as referred to in section 80U; or
(ii) suffering from disease or ailment as specified in the rules made under section 80DDB,
the provisions of this sub-clause shall have effect as if for the words "ten per cent", the words "fifteen per cent" had been substituted.
Explanation 1.—For the purposes of this clause, "Keyman insurance policy" means a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person and includes such policy which has been assigned to a person, at any time during the term of the policy, with or without any consideration;
Explanation 2.—For the purposes of sub-clause (d), the expression "actual capital sum assured" shall have the meaning assigned to it in the Explanation to sub-section (3A) of section 80C;

• From reading of this section 10(10D), where receipt from maturity of every insurance policy except some exception given in clause a, b, c and d, is being exempted or not to be included in taxable income of tax payer.

Exceptions are only for below cases, where the receipt of insurance policy maturity is not going to include in exempt income, i.e., it will be taxable:

• Any money received from keyman Insurance policy. Keyman insurance policy is generally taken by corporates for their key employees, where in case of death of such key employees, company receives money from insurance company. It is taxable in hands of company since company already treated premium of such insurance policy as business expenses under its business income.
• Receipt of policies referred for section 80DD/80DDA. There are some insurance policy for person with disability, where tax payer claims such insurance premium u/s 80DD/80DDA as deduction to his/her taxable income, and receipt from such policies for any incident become taxable here.
• Policy having more % of Annual premium from its sum insured, viz:
  o More than 10% of sum insured as annual premium for policies taken after March 2012.
  o More than 20% of sum insured as annual premium for policies taken before March 2012.

After exclusions, there are three proviso given in this section which determines:

• Non-applicability of exclusion of 10%/20% in case of Death of insured
• Calculation adjustment for capital sum insured keeping provisions of 80C / 88A
• Enhancement % of sum insured @15% instead 10% for persons having disability.
  Further we have two explanation to define:
• Keyman insurance policy
• Capital Sum insured.

Hence, we can conclude from above that Receipts from Insurance policy except some specified exclusions were exempt and are not included in taxable income of Tax payers.

BUDGET 2021 PROPOSALS

Government has proposed changes in Budget 2021 with reference to insurance policy exemption under section 5 (c) as detailed below:

*Section 5(c) in clause (10D)
(i) after the third proviso and before Explanation1, the following provisos shall be inserted, namely:––
“Provided also that nothing contained in this clause shall apply with respect to any unit linked insurance policy, issued on or after the 1st day of February, 2021, if the amount of premium payable for any of the previous year during the term of such policy exceeds two lakh and fifty thousand rupees:
Provided also that if the premium is payable, by a person, for more than one unit linked insurance policies, issued on or after the 1st day of February, 2021, the provisions of this clause shall apply only with respect to those unit linked insurance policies, where the aggregate amount of premium does not exceed the amount referred to in fourth proviso in any of the previous year during the term of any of those policies:
Provided also that the provisions of the fourth and fifth provisos shall not apply to any sum received on the death of a person:
Provided also that if any difficulty arises in giving effect to the provisions of this clause, the Board may, with the previous approval of the Central Government, issue guidelines for the purpose of removing the difficulty and every guideline issued by the Board under this proviso shall be laid before each House of Parliament, and shall be binding on the income-tax authorities and the assessee.”;
(ii) after Explanation 2, the following Explanation shall be inserted, namely:––
‘Explanation 3.— For the purposes of this clause, “unit linked insurance policy” means a life insurance policy which has components of both investment and insurance and is linked to a unit as defined in clause (ee) of regulation 3 of the Insurance Regulatory and Development Authority of India (Unit Linked Insurance Products) Regulations, 2019 issued by the Insurance Regulatory and Development Authority under the Insurance Act, 1938 and the Insurance Regulatory and Development Authority Act, 1999.’;

*Further Section 14(a) of the finance bill 2021, introduced new clause (1B) to section 45 for adding Such ULIP policy as excluded from section 10(10D) under taxability as capital Gain.

**Now we will analysis this change for clarity of doubts as follows:

• There is no addition / deletion of exclusion of insurance policies we discussed earlier
• There is insertion of proviso fourth, fifth, sixth and seventh to this section after three earlier proviso
• There is insertion of explanation 3.
  **

In fourth and fifth proviso, it is proposed that there is exclusion of insurance policy from exempted income if any taxpayer is planning to purchase any ULIP policy having annual premium of more than INR 250,000/- or any such ULIP policies having annual premium in aggregate more than INR 250,000/-.

In other words, if any one going to invest INR 250,000/- or more in ULIP plan/(s) from 1st February, 2021 onwards, the maturity benefit of receiving income as tax-free or say as exempted is not be available anymore and such maturity benefit will be taxed as Capital Gain as per prescribed rules.

And proviso sixth says non-applicability of proviso fourth and fifth in case of death of insured, it means,

• in case of Survival benefit, it will be taxed under Capital Gain head if premium is more than INR 2.50 Lacs and
• in case of death benefit, it will remain as exempt in hands of nominee.

Proviso seventh is for issuing guidelines by Central Board of direct taxes with approval of Central Government.

After proviso, Explanation 3 is introduced for defining ULIP (Unit linked insurance policy)

CONCLUSION

From above detailed, it can be concluded that Government has taxing rich people who invest there more money in ULIP plans, where market return is more than conventional policies and receive there maturity money as tax free. A middle class person, if he is planning to invest INR 500-INR 20000 per month, will remain benefited for the exemption and need not to worry.

In nutshell,

• ULIP plans were tax free with some exemptions
• ULIP plans will remain tax free if annual premium does not exceed INR 2.50 Lacs (For new policies taken on or after 1st February 2021)**