I received ₹9 lakh from 2 ULIP policies. What are the income tax implications?

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I have received about 9 lakhs from 2 tax ULIP policy matured after 10 years of investment in 2 policies. Are these receipts taxable? If taxable then how can I save tax from it?

Answer: The taxability of the money received by you would depend on the premium paid as a percentage of the sum assured in respect of these ULIP policies which are basically life insurance policies. Money received on maturity of a life insurance policy is fully tax free if the premium paid in respect of such insurance policies did not exceed 10% of the sum assured during any of the premium paying term for the policies issued after 1-4-2012. In case the policies were issued between 1st April, 2003 and 31st March 2012 a higher threshold of 20% premium of the sum assured is available.

Since you have not provided with the actual amount of premium paid as well as the sum assured in respect of both the policies, it is not possible for me to comment whether the maturity proceeds received by you are taxable or tax free.

The money received by you would be tax free in your hands if the policy was issued after 1st April 2012 and the premium paid did not exceed 10% of the sum assured for any year during the premium paying term. And in case the same were issued before 1st April 2012, the premium should not have exceeded 20% of the sum assured for any single year.

In case the premium paid exceeded the above threshold limits in any of the year, the maturity proceeds are not fully taxable in your hands. In my opinion only the amount received over the premium paid would be taxable in your hands. The same may be offered under the head “Income from other sources.”

Alternatively, and taking a clue from the provisions introduced for taxation of ULIP policies issued after 1st February 2021, you can treat this as investments and offer the profits as capital gains after applying the cost inflation index on the premiums paid during the tenure of the policy. Please note that only the premium paid beyond three years of maturity would be eligible for indexation.

Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on Twitter.

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