Unit-linked insurance policies (ULIPs) are hybrid financial products that combine investment and insurance components. The Income Tax Act, 2025 treats proceeds from ULIPs as capital gains under Section 67(5), with Rule 49 of the Income Tax Rules, 2026 providing the detailed computation methodology【49†L0】. Understanding this framework is essential for taxpayers holding ULIPs.
The Statutory Framework
Section 67(5)
Section 67(5) provides that if any profits or gains arise to a person from receipt of any amount, including a bonus, under a unit linked insurance policy to which the exemption specified at Schedule II (Table: Sl. No. 2) does not apply【67†L5】:
- Such profits and gains shall be chargeable to income-tax under the head "Capital gains"
- They shall be deemed to be the income of such person in the tax year in which such amount was received
- The income taxable shall be calculated in such manner, as may be prescribed
Rule 49
Rule 49 provides the detailed computation methodology for capital gains arising from ULIP proceeds【49†L0】.
The Computation Methodology
First Receipt Scenario
Where the amount is received for the first time during the tax year【49†L0】:
Capital Gains = A − B
Where:
- A = The amount received for the first time, including the amount allocated by way of bonus on such policy
- B = The aggregate of the premium paid during the term of the specified unit linked insurance policy till the date of receipt of the amounts referred to as 'A'
Subsequent Receipt Scenario
Where the amount is received during the tax year, at any time after the receipt of the amount as referred to in the first receipt scenario【49†L0】:
Capital Gains = C − D
Where:
- C = The amount received during the tax year, at any time after the receipt of the amount as referred to in the first receipt scenario, including the amount allocated by way of bonus on such policy excluding the amount that has already been considered for calculation of taxable amount during the earlier tax year or years
- D = The aggregate of the premium paid during the term of the specified unit linked insurance policy till the date of receipt of the amount referred to as 'C' as reduced by the premium that has already been considered for calculation of taxable amount during the earlier tax year or years
Nature of Capital Gains
The capital gains as computed under Rule 49 shall be deemed to be the capital gains arising from the transfer of a unit of an equity-oriented fund set up under a scheme of an insurance company that includes unit linked insurance policies【49†L0】.
This means that the gains are treated as arising from the transfer of an equity-oriented fund unit, which has implications for:
- The rate of tax applicable
- The availability of indexation benefits
- The set-off of losses
Applicability
Specified Unit Linked Insurance Policy
Rule 49 applies to "specified unit linked insurance policy" which means any unit linked insurance policy referred to in Section 2(22)(c)【49†L0】.
Exemption Not Applicable
The computation applies where the exemption under Schedule II (Table: Sl. No. 2) does not apply. This occurs when:
- The premium to sum assured ratio exceeds the prescribed limits
- The aggregate premium exceeds ₹2,50,000 in any tax year
Practical Example
Scenario
Mr. A holds a ULIP with the following details:
| Item | Amount (₹) |
|---|---|
| First receipt (including bonus) | 2,00,000 |
| Premium paid till first receipt | 1,50,000 |
| Second receipt (including bonus) | 1,50,000 |
| Premium paid till second receipt | 2,50,000 |
| Premium already considered for calculation | 1,50,000 |
Computation
First Receipt: Capital Gains = A − B = 2,00,000 − 1,50,000 = 50,000
Second Receipt: C = 1,50,000 D = 2,50,000 − 1,50,000 = 1,00,000 Capital Gains = C − D = 1,50,000 − 1,00,000 = 50,000
Total Capital Gains = 50,000 + 50,000 = 1,00,000
Compliance Requirements
Record Keeping
Maintain records of:
- ULIP policy documents
- Premium payment receipts
- Bonus allocation statements
- Receipt of proceeds
Tax Return Filing
The capital gains must be reported in the tax return under the head "Capital gains".
Expert Legal Guidance
Understanding the taxation of ULIP proceeds is essential for taxpayers holding these policies. Anuj Desai & Associates provides expert advisory services on Direct Tax Code compliance, helping taxpayers compute capital gains correctly and ensure compliance with reporting requirements.