Redemption of ULIP not exempt u/s 10(10D) is taxable as capital gains – ITAT

Redemption of ULIP not exempt u/s 10(10D) taxable as capital gains not income from other sources, ITAT allows benefit of indexation

ABCAUS Case Law Citation:
ABCAUS 3795 (2023) (08) ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) in sustaining the addition made by CPC by treating the entire gross amount of redemption of high premium insurance policies as income from other sources under section 10(10D) of the Income Tax Act, 1961 (the Act).

The return of the assessee was processed at Centralized Processing Center (“CPC”) by making disallowance/adjustment u/s 10(10D) of the Act.

The CIT(A) confirmed the addition observing that for the insurance policy issued on or after 1st April 2003 but on or before 31st March 2012 and the premium payable, exceeds 20% of the actual capital sum assured, for any of the years (during the term of the policy, the whole maturity amount is taxable under the head income from other sources.

Before the Tribunal, the assessee contended that he had not claimed exemption u/s 10(10D) of the Act which is available for the life insurance. However, he had offered it as capital gain on account of the fact that this was related to Unit Linked Insurance

Plan and that amount in question was out of the redemption proceeds from two Unit Linked Insurance Plans.

It is the case of the assessee that since it was a long term investment would be taxed under the head “capital gains”.

On the other hand, the stand of the Revenue was that the amount received on redemption/maturity of unit linked insurance scheme is subject to tax under the head “income from other sources” instead of capital gains.

The lower authorities had declined the claim of the assessee on the basis that section 10(10D) of the Act, does not provide exemption in the case where the premium paid exceeds the pecuniary limits. Therefore, entire receipt ought to have been offered as “income from other sources”.

The Tribunal opined that lower authorities mis-directed themselves by not considering the distinction between the ordinary life insurance scheme and ULIP. In the assessee’s case, it was unit linked insurance scheme and was related to the units of mutual fund allotted to the assessee in respect of the money paid by him. Therefore, CIT(A) ought to have considered the issue from that perspective since the transactions are akin to mutual fund therefore, deserves same treatment. Merely, because life is insured by the transaction would not alter basic character of transaction.

The Tribunal observed that It is pertinent to note that a new provision has been inserted w.e.f. 01.04.2021 by Finance Act, 2021 i.e. Section 45(1B) of the Act which provides that in respect of unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply, any profits or gains arising shall be chargeable to income-tax under the head “Capital gains”.

The Tribunal observed that the objective of inserting of this provision is stated to subject the matured/redeemed amount to tax which otherwise was exempt u/s 10(10D) of the Act. Hence, it can be construed the receipt fell under the head “capital gains” but not under “income from other sources”.

Accordingly, the ITAT directed the AO to allow indexation and tax the amount under the head “capital gains”.

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