What is Section 10(10D) of Income Tax Act? Complete Guidelines

Some guidelines were issued by the CBDT under Section 10 (10 D) on Exemption of Income Tax for (ULIP) Unit Linked Insurance Policies Receipts vide circular 2/2022 which was dated January 19, 2022. Under this circular, the methodology to find the status of tax exemption of ULIPs has been explained.

According to Section 10 (10 D) of the Income Tax Act,1961 income tax exemptions are provided on the sum that is acquired under a life insurance policy along with any sum that is allocated as a bonus on any such policies subject to some exclusions. In this blog, we will discuss in brief the Guidelines set by Section 10 (10 D) of the Income Tax Act.

Summary of the CBDT Guidelines

CBDT has made it clear that all the receipts from the ULIPs will be subject to capital gains tax on maturity or withdrawal  along with the bonus when the policies have an annual premium that exceeds Rs. 250,000.

• The old ULIPs were considered to be exempted if they were bought before February 1, 2021.
• The largest CBDT circular clarifies that the total premium of both old and new will be taken into account for exemptions and in case the amount is more than Rs. 250,000, then the exemption will not be availed to the ULIP having a premium which is more than Rs. 2.5 lakh.

Section 10 (10 D) of the Income Tax Act

As per the guidelines of Section 10 (10 D) of the Income Tax Act, the amount that is either invested or is received from the life insurance as proceeds is fully exempt from Income Tax. Therefore, any amount that is received as a death benefit or on the maturity of the policy is fully tax-free. Also, a life insurance policy is an ideal tool to save taxes as there as no TDS (Tax Deducted at Source) is applied to this amount.

Main Changes in Section 10 (10D) of the Income Tax Act

Some significant changes were made to Section 10 (10D) of the Income Tax Act by the Finance Act that was introduced in the year 2021. The Finance Act amended clause 10D of Section 10 by introducing 4th to 7th provisions. The points listed below are the major changes that were made to Section 10 (10D) of the Income Tax Act by the Finance Act:

1. The finance act amended the fourth provision of Section 10 (10D) of the income tax act in order to avail that no exemption will be allowed to any of the ULPs that were issued either on or after February 1, 2021, when the amount of premium to be paid is more than Rs. 250,000 for any of the previous years for the time period of the policy
2. According to the fifth provision of Section 10 (10D) that was amended, if numerous ULIPs were issued on or before February 1, 2021, then exemptions will be provided under Section 10 (10D) only for those policies whose total premium is not more than Rs. 250,000 during the term of the policy for any of the earlier years.
3. The fifth provision states that the fourth and fifth provisions can not be applied in a case where the amount is acquired after the death of an individual. Any amount that is received on the death of an individual is going to be fully exempted and no taxes will be levied on that amount under Section 10 (10D) of the Income Tax Act.
4. Any profits or gains that an individual acquires under a high-value ULIP from the receipt of any amount at maturity or partial withdrawal or surrender where the premium is more than Rs. 250,000 will be liable for taxation as capital gain in the year of the receipt.

New Tax Provisions for ULIPs

According to Budget 2021, tax exemption status will be removed on the proceeds of the ULIPs in case the annual premium is more than Rs. 2.5 lakhs. But some uncertainties were found regarding the working of the framework mainly in the case of numerous ULIPs which have both types taken before the proposals of budget and bought after it.

Now, CBDT has clarified that any amount that is received along with the way of bonus during the earlier years under one or more eligible ULIPs which is issued either on or before February 1, 2021, will be liable for exemption under Section 10 (10D) of the Income Tax Act in case the annual premium is not more than Rs. 250,000 during the term of the policy.

The process for determination of exemption under Section 10 (10D) of the Income Tax Act

The amounts received along with any sums that are allocated as bonuses during the earlier year under one or more ULIPs which are issued either on or before February 1, 2021, will be exempted under Section 10 (10D) of the income tax act. This has been explained below using two different situations:

Situation1: When no consideration has been received by the assessee on any qualified ULIPs during the previous year before the current previous year or when consideration has been received on such qualified ULIPs but has not been exempted. Then, the exemptions under Section 10 (10D) of the income tax act can be determined as follows:

• In case the assessee has got consideration under one qualified ULIP only during the current previous year and the sum of premium that needs to be paid is not more than Rs. 250,000 for any of the earlier years during the term of such a qualified ULIP, then the consideration will be qualified for exemptions under Section 10 (10D).
• In case the assessee has got consideration under one qualified ULIP only during the current previous year and the sum of premium that needs to be paid is more than Rs. 250,000 for any of the earlier years during the term of such a qualified ULIP, then the consideration will not be qualified for exemptions under Section 10 (10D).
• In case the assessee has got consideration under more than one qualified ULIP during the current previous year and the aggregate of the sum of premium that needs to be paid is not more than Rs. 250,000 for any of the earlier years during the term of such a qualified ULIP, then the consideration will be qualified for exemptions under Section 10 (10D).
• In case the assessee has got consideration under more than one qualified ULIP during the current previous year and the aggregate of the sum of premium that needs to be paid is more than Rs. 250,000 for any of the earlier years during the term of such a qualified ULIP, then the consideration will be qualified for exemptions under Section 10 (10D) and the total amount of payable premium is not more than Rs. 250,000 for any of the earlier years during that term.

Situation 2: When an assessee has received consideration under one or more qualified ULIPs during any of the previous years preceding the current previous year, and the exemptions under Section 10 (10D) have been claimed.  Such qualified ULIPs are known as “OLD ULIPs”. The determination of exemption under Section 10 (10D) of the income tax act for such ULIPs can be done as listed below:

• In case the assessee has got consideration under one qualified ULIP only during the current previous year and the total sum of premium that needs to be paid on OLD ULIP and such ULIPs is not more than Rs. 250,000 for any of the earlier years during the term of such a qualified ULIP, then the consideration will be qualified for exemptions under Section 10 (10D).
• In case the assessee has got consideration under one qualified ULIP only during the current previous year and the total sum of premium that needs to be paid on OLD ULIP and such ULIPs is more than Rs. 250,000 for any of the earlier years during the term of such a qualified ULIP, then the consideration will not be qualified for exemptions under Section 10 (10D).
• In case the assessee has got consideration under more than one qualified ULIP during the current previous year and the total sum of premium that needs to be paid on OLD ULIP and such ULIPs is not more than Rs. 250,000 for any of the earlier years during the term of such a qualified ULIP, then the consideration will be qualified for exemptions under Section 10 (10D).
• In case the assessee has got consideration under more than one qualified ULIP during the current previous year and the total sum of premium that needs to be paid on OLD ULIP and such ULIPs is more than Rs. 250,000 for any of the earlier years during the term of such a qualified ULIP, then the consideration will be qualified for exemptions under Section 10 (10D) and the total amount of premium in addition to the total amount of old ULIP’s premium is not more than Rs. 250,000 for any of the earlier years during the term of such a qualified ULIP.

Conclusion

In this blog, we discussed the guidelines of Section 10 (10D) of the Income tax act and the synopsis of the guidelines of CBDT. We also discussed the main changes that were made to Section 10 (10D) of the income tax act and the new tax provisions for the ULIPs.  We also came across the process of determining the exemptions that can be availed under Section 10 (10D).