Income tax news: How the profits on redemption of ULIP policies are taxed?

livemint.com:

ULIPs are basically life insurance policies and enjoy exemption under Section 10(10D) on maturity proceeds provided the premium paid did not exceed 10% of the sum assured for any of the premium paying terms.

There was no clarity on how the maturity proceeds of ULIP policies would get taxed in case the premium paid exceeded 10% of the sum assured. Part clarity was provided when the tax laws were amended in 2021 to provide for taxation of some of the ULIP policies, where the premium paid for such policies exceeded 2.50 lakh in a year, issued after 1 st February 2021.

For these policies, the difference between premium paid and maturity proceeds is to be taxed as equity-oriented schemes under Section 112A and taxed at a flat rate of 10% after the initial one lakh which is to be taxed at zero rate. No indexation is allowed in respect of such policies.

However, there is still no clarity about the taxation of the ULIP policies which are not covered under Section 112A. Since the specified ULIP policies are treated as capital assets for the purpose of Section 112A, in my opinion non specified ULIP policies should also be treated as capital assets and be taxed under Section 112 if they have been held for more than three years.

So the difference of ₹1,17,377/- will be long-term capital gains and taxed under Section 112 after applying the indexation on the single premium paid. In my opinion, the difference cannot be taxed under the head “Income from other Sources."