If you were planning to buy ULIPs to get tax-free returns, you should be cautious and double-check if they will qualify for tax exemption under the new tax legislation.
On January 19, 2022, the Central Board of Direct Taxes (CBDT) released a statement outlining the mechanism for determining whether ULIPs are tax-exempt. If the yearly premium for ULIPs topped Rs 2.5 lakh, the tax-exempt status would be removed, according to Budget 2021.
However, numerous doubts remained regarding how the system would work, notably in the event of several ULIPs obtained before and after the budget plans.Old ULIPs purchased before February 1, 2021, were considered tax-free; however, this does not mean you can keep your tax-free status by purchasing new ULIPs with premiums up to Rs 2.5 lakh.
According to the current CBDT notification, the entire premium of both new and old ULIPs would be considered for exemption, and if the total exceeds Rs 2.5 lakh, new ULIPs with premiums above Rs 2.5 lakh will not be eligible for exemption.The CBDT notification issued today indicates the following about the taxation of ULIPs under Section 10D of the Income-tax Act, 1961.
The Finance Act of 2021 added the fourth to seventh provisos to clause (10D) of section 10 of the Act. With effect from 01.02.2021, the amount received under a Unit Linked Insurance Policy (ULIP) issued on or after that date is not excluded under the abovementioned clause if the amount of premium is payable in any of the preceding years during the term of the policy exceeds Rs 2,50,000.
Furthermore, the fifth proviso states that if the premium is payable for more than one ULIP issued on or after 01.02.2021, the exemption under the said clause is available only for such policies where the aggregate premium for any of the previous years during the term of any policy does not exceed Rs 2,50,000.
The seventh proviso to said clause (10D) further authorizes the Central Board of Direct Taxes (Board) to establish guidelines, with the prior consent of the Central Government, to resolve any difficulty that develops while putting the provisions of the said clause into action. The Board, in exercising its duties under this proviso, hereby issues the following guidelines with the prior permission of the Central Government.
Under clause (10D) of section 10 of the Act, any sum received during the previous year (hereinafter referred to as “current previous year”) under any one or more ULIPs issued on or after 01.02.2021 (hereinafter referred to as “eligible ULIP”) will be exempt, subject to the other provisions of said clause. Examples of various scenarios are used to explain the same.
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