I had taken Single Premium ULIP Policy in Feb 2011 paying a Premium of Rs 5 Lacs, Sum Assured Rs 6.25 Lacs. I have surrendered this policy on 14 Sep 2016 and waiting for the payment of Rs 8.67 Lacs. I discovered that since the Premium is more than 20% of Sum Assured the income is not exempt u/s 10(D). There is an opinion that the entire proceeds are chargeable to tax under Income from other Sources but I differ with this view and looked at Income Tax Act to consider it under the Head Capital Gains.
Following is written on Income Tax India Website:
Income under the Capital Gains
Chargeability:
Capital gains shall be chargeable to tax if following conditions are satisfied:
a) There should be a capital asset. In other words, the asset transferred should be a capital asset on the date of transfer;
b) It should be transferred by the taxpayer during the previous year;
c) There should be profits or gain as a result of transfer.
Meaning of Capital Asset [Sec 2(14)]
Capital Asset is defined to include:
a) Any kind of property held by an assessee, whether or not connected with business or profession of the assessee.
The word "property" is not defined but I find that Legal definition of the word property is very broad and may easily include the ULIP Policy.
If I look at Income from other Sources following is written:
Income from Other Sources
Any income which is not chargeable to tax under any other heads of income and which is not to be excluded from the total income shall be chargeable to tax as residuary income under the head “Income from Other Sources”.
Therefor if ULIP Policy is a property it could not be charged to Income from other sources.
What is the opinion on this Forum?
Kindly don't involve so called Tax Consultants who play it safe and say that the entire proceeds are chargeable under income from other sources. I consider this logic against Natural Justice since Premium is part of the entire proceeds and could not be charged twice (once it is charged in AY 2011-12), although, I have claimed deduction Rs 1 Lac under 80C in that year.
Kamalakar
3 Answers
Hi dear Kamalakar,
Very good point and valid one. Tricky one too.
I agree that the units of ULIP can be treated as 'Capital Asset' under the IT Act. But there has been no clear cut information as whether to treat the 'surrender value' (in the above scenario) as 'income from other sources' or under the head 'capital gains'.
So, in case if you show this under the head CG, how can you justify your viewpoint if there is a compliance notice.
When the law is not clear about this the interpretation can be either way.
Today I could dig out Circular No 7/2003
Finance Act, 2003 - Explanatory Notes on provisions relating to Direct Taxes
According to Para 10.3
10.3 The insurance policies with high premium and minimum risk covers are similar to deposits or bonds. With a view to ensure that such insurance policies are treated at par with other investment schemes, amendments have been made in section 88 and clause (10D) of section 10. The existing clause (10D) of section 10 has been substituted so as to provide that the exemption available under the said clause shall not be allowed on any sum received under an insurance policy issued on or after the 1st day of April, 2003, in respect of which the premium payable in any of the years during the term of the policy, exceeds twenty per cent of the actual capital sum assured. In view of this, the income accruing on such policies (not including the premium paid by the assessee) shall become taxable. However, any sum received under such policy on the death of a person shall continue to remain exempt. The new provision also provides that the amounts received under sub-section (3) of section 80DD, shall not be exempt under this clause.
The premium paid Rs 5 Lac is not taxable. So I can treat the remaining Rs 3.67 Lacs as income from other sources.
Kamalakar
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