Context:
The government has recently revised the tax treatment of Unit Linked Insurance Plans (ULIPs), removing earlier ambiguities and bringing them in line with other market-linked investment products like mutual funds.
What are ULIPs?
- ULIPs combine life insurance cover + investment in equity, debt, or hybrid funds.
- A portion of the premium provides life insurance, while the remaining is invested.
- They have a lock-in period of 5 years, but long-term holding is advised for wealth creation.
Recent Update
- ULIPs not meeting exemption conditions are now treated as capital assets.
- A capital asset is a long-term property, held for personal or investment purposes, including tangible assets like land, buildings, and machinery.
- Gains from such ULIPs will be taxed as capital gains, instead of enjoying blanket exemptions.
- This applies uniformly to ULIPs, including those issued before February 1, 2021, ending earlier confusion over tax treatment.
Section 10(10D) Exemption Conditions
To qualify for tax exemption under this section:
- Premium ≤ 10% of the sum assured (for policies issued after April 1, 2012).
- Annual premium ≤ ₹2.5 lakh.
- If conditions are not met:
- ULIP policy gains → Capital gains tax
- Non-ULIP policies → Taxed as income from other sources
Significance of the Amendment
- Brings uniformity in taxation of ULIPs regardless of issuance date.
- Simplifies tax compliance and enables accurate computation of liabilities.
- Aligns ULIPs with modern investment norms, making them comparable with mutual funds.
- Encourages investors to make informed financial planning decisions.
