Mumbai Tribunal upholds capital gains treatment for unit linked insurance plan (ULIP)

In case of Balbirsingh Balwantsingh ^[1]  (Taxpayer), the issue before the Mumbai Tribunal was whether the receipts from premature withdrawal from unit linked insurance plan (ULIP) will be taxed under the head Capital gains (CG) or Income from Other Sources (IFOS). The taxpayer subscribed to ULIP at annual premium of INR0.18m per annum and received amount of INR1.5m in tax year 2015-16 on premature surrender. 

It is not clear whether the annual premium exceeded the premium to minimum capital sum assured threshold of 20% rendering ULIP not eligible for exemption under Section (S.) 10(10D) of the Income-tax Act 1961(ITA). It may be noted that post amendment by Finance Act (FA) 2021, a ULIP issued on or after 1 April 2021 with annual premium exceeding INR0.25m^[2]  is treated as taxable capital asset. For this purpose, such ULIPs are classified as “capital asset” under a separate clause of definition of “capital asset”. Furthermore, post amendment by Finance Act (FA) 2025 w.e.f. tax year 2025-26 onwards, the condition of annual premium exceeding INR0.25m is omitted such that all ULIPs to which exemption does not apply under S.10(10D) are treated as capital assets.

The Taxpayer treated ULIP as capital asset and accordingly treated the amount received from premature surrender of ULIP as CG. The computation resulted in a loss on applying indexation benefit to the premiums paid. The Taxpayer argued that since ULIP is a capital asset, he is entitled for indexation benefit. Reliance was placed on Mumbai Tribunal ruling in the case of Mihir K Jhaveri v. CIT^[3] , where it was held that the income received from maturity proceeds of ULIP is chargeable under the head CG and not IFOS.

The first appellate authority held that the difference between the amount received by the Taxpayer and the amount paid as premium is to be taxed under the head IFOS. Aggrieved by the same, the Taxpayer filed an appeal before the Tribunal. 

The Tribunal ruled in favor of the Taxpayer that ULIP is a capital asset where exemption under S.10(10D) is not availed and proceeds from such ULIP are taxable under the head CG. The Tribunal relied on general scope of definition of “capital asset” which, inter alia, includes property of any kind held by the Taxpayer whether or not connected to his business or profession. 

Although, the Tribunal upheld CG taxation, it did not agree with the Taxpayer’s contention that the amendment by Finance Act 2021 (FA 2021) treating ULIP specifically as capital asset is retrospective and clarificatory. On this aspect, the Tribunal held that that treating ULIP as capital asset is effective only from tax year 2020-21 as the amendment made by FA 2021 is with prospective effect and accordingly cannot be applied for tax year 2015-16. 

Furthermore, the Tribunal distinguished Mumbai Tribunal ruling in case of Mihir K Jhaveri (supra) relied by the Taxpayer. It held that that the premium paid in that case was single premium of INR5m i.e., premium exceeded INR0.25m threshold and hence treated as capital asset. In contrast, the premium payable in the present case was INR0.18m per annum. Furthermore, in Mihir K Jhaveri’s case, the amount received was maturity proceeds on expiry of the policy, whereas in the present case, the amount received was on account of premature withdrawal. However, despite such distinction, the Tribunal upheld CG taxation in the present case on the basis that ULIP qualified as “capital asset” under general scope of definition although not under specific limb relating to ULIP as inserted by FA 2021. 

^[1] TS-1190-ITAT-2025(Mum)
^[2] The premium cap of INR0.25m is applied on aggregate basis such that if there are multiple ULIPs issued on or after 1 April 2021 with aggregate annual premium exceeding INR0.25m, all of them are treated as taxable even if premium of individual ULIP does not exceed INR0.25m.
^[3] ITA No. 21/Mum/2023 AY 2014-15 dated 30 May 2023