Capital gains from the sale of Ulip units are taxable

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I took out two single premium Ulip contracts as follows: the first on July 26, 2011 for ??1 lakh ( ??1.25 lakh sum insured) and the second on May 7, 2014 for ??1 lakh ( ??1.25 lakh sum insured). I redeemed the policies on January 9 (i.e. after more than five years) and received ??2.25 lakh and ??1.8 lakh, respectively (minus 3.75% TDS). I had not requested benefits of 80 C the year of the investment. I am in the 30% tax slab. How should the amount of the benefit be taken into account in the income tax question for filing the return for tax year 21-22? Will it be added to my other income and taxed at the slab rate or is it a long term capital gain? What will be the tax rate and the cost inflation index that should be taken into account to obtain a net benefit gain?

—Dilip Shah

In accordance with Section 10 (10D) of the Income Tax Act 1961 (the Computer Act), the amount received under a life insurance policy (including the value of redemption) issued after April 1, 2003, but no later than March 31, 2012 and when the premium payable for one of the years does not exceed 20% of the insured capital, is tax exempt.

In addition, the sum received under a life insurance policy issued as of April 1, 2012 and for which the premium payable for one of the years does not exceed 10% of the insured capital, is exempt from tax. .

The premiums paid by you exceeding 20% ​​(for the contract taken out in 2011) and 10% (for the contract taken out in 2014) of the insured capital, the lump sum you received when you surrendered the contract in 2021 is taxable. in your hands without the exemption of section 10 (10D).

The taxation of income from a unit-linked insurance scheme (Ulip), which does not benefit from an exemption under Article 10 (10D) due to excess premiums paid, is not expressly specified in the law.

However, it could arguably be taxed as a capital gain / loss in your hands, as Ulip can be considered a capital property under general principles. As Ulip units were held more than 36 months before the sale, Ulip units will be qualified as long-term assets. The gain or loss resulting from the sale of these Ulip shares would be taxable as LTCG or LTCL (long term capital loss) in your hands. The LTCG or LTCL of the return of Ulip must be calculated as the difference between the net proceeds from the sale (proceeds from the sale after deduction of ancillary costs) and the indexed acquisition cost. The indexed acquisition cost of the asset in your case would be calculated as the acquisition cost / cost inflation index (CII) of the year of acquisition x CII of the year of sale.

The prescribed ITCs for fiscal years 2011-12, 2014-15 and 2020-21 are 184, 240 and 301, respectively. Tax is payable at 20% (plus applicable surtax and tax) on the resulting LTCG. In addition, any tax withheld at source can be claimed as a deduction from the final tax payable.

In addition, you can apply for a rollover exemption against the above mentioned LTCG under Section 54F of the Act by purchasing or building a residential property in India, subject to the prescribed conditions and time limits.

Parizad Sirwalla is Partner and Head, Global Mobility Services, Tax, KPMG in India.

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