Direct Tax Alert - Mechanism for computing capital gain and Securities Transaction Tax Rules for ULIPs notified

Background

• The Finance Act, 2021 had amended the provisions of section 10(10D) of the Income-tax Act, 1961 (IT Act) to exclude certain¹ Unit Linked Insurance Policies (ULIPs) from the ambit of exemption under the aforesaid section. The Finance Act, 2021 further amended the provisions of section 45 of the IT Act by inserting sub-section (1B) to include - any sum received under the ULIPs (to which exemption under section 10(10D) is not applicable) to be treated as capital gains in the manner as maybe be prescribed.  
• The mechanism to compute the said capital gains was neither prescribed by the Finance Act, 2021 nor by the newly inserted section 45(1B) of the IT Act.
• The Central Board of Direct Taxes (CBDT) vide its notification² dated 18 January 2022 inserted Rule 8AD to Income-tax Rules, 1962 (IT Rules) to provide the mechanism to compute capital gains from certain specified ULIPs.
• Further, in addition to the above, in order to ensure compliance from the ULIP issuers i.e., the life insurance companies, the CBDT has further amended³ Securities Transaction Tax Rules, 2004 and incorporated insurance companies as a prospective compliant of its provisions.

We at BDO in India, have summarised the said Notifications and provided our comments on the same.

Rule 8AD of IT Rules

(1) Formula to determine capital gains, if any amount from ULIPs including bonus is received for the first time is as under:

A - B

 

Where,

A = Amount including bonus received for the first time under the specified ULIP during the previous year

B = Aggregate premium paid during the term of ULIP till date of receipt of amount as referred in ‘A’ above. 

(2) Formula to determine capital gains, if any amount from ULIPs including bonus is received in years subsequent to the first year, is as under:

C - D

 

Where, 

C = Amount including bonus received in previous year (after the receipt of the amount as referred above) excluding the amount that has been considered for computing capital gains under the said sub-rule, in case of years subsequent to the earlier previous year or years.

D = Aggregate premium paid during the term of ULIP till date of receipt of amount as referred in ‘C’ above reduced by the premium that has been considered for computing capital gains under the said sub-rule, during the earlier previous year or years.

Further, the said rule has extended its scope and has covered capital gains arising on transfer of units of equity-oriented fund schemes under ULIPs of Insurance Companies.

STT Rules for Insurance Companies

• The Securities Transaction Tax Rules, 2004 (STT Rules) were introduced vide the Finance Act (No. 2) of 2004. The STT Rules were devised to levy STT in order to curb the tax avoidance on account of tax-payers not declaring their financial market transactions.
• The CBDT vide notification² dated 18 January 2022 has amended the STT Rules by introducing Securities Transaction Tax (1^st Amendment) Rules, 2022 (‘STT Amendment Rules).
• STT Amendment Rules prescribe the person responsible for collection, payment, furnishing STT Returns to the Authorities in case of Insurance Companies. Accordingly, necessary substitutions/ insertions have been made in the erstwhile STT Rules to bring insurance companies under the ambit of STT Rules, which are as under:

​ Rule 5A

The said rule prescribes persons in case of an Insurance Company who shall collect STT and deposit the same with the Central Government on the 7^th of the month following the month of collection. Persons prescribed are:

• ​​Managing Director as defined in section 2(54) of the Companies Act, 2013, (MD) or
• Whole Time Director, as defined in section 2(94) of the Companies Act, 2013 (WTD)

who are authorised by the Board of Directors of such companies shall collect and pay STT.

It is to be noted that the MD is the one who is entrusted with substantial powers to manage the affairs of the company by virtue of articles of association or agreement or resolution passed in the general meeting/by Board of Directors.

Further, WTD is a director in whole-time employment of the company.

Rule 6 - prescribed mechanism for payment of STT to the Central Government by authorised persons in case of Mutual Funds and Recognised Stock Exchanges has now been substituted to include insurance companies as well.  

Rule 7 - prescribed manner of furnishing STT Returns, has been amended to incorporate ‘Form 2A’ - Return of Taxable Securities Transactions for Insurance Companies wherein they will furnish their STT Returns on entering the requisite details. 

Further, the Forms shall be furnished by the MD and WTD, using either digital signature or via electronic verification code. The CBDT has also prescribed an authority to formulate and implement a mechanism to ensure that the returns are duly captured, retrieved, archived, and data is transmitted in a secure manner.

The MD and WTD of an Insurance Company have been notified as authorised persons for signing and verifying the STT Returns.

BDO Comments

The said Rule 8AD provides a much-needed clarity on computation of capital gains on receipts from ULIPs which has been announced almost after a year since the time the provisions in relation to taxability of ULIPs were amended in the Finance Act, 2021.

Further, the STT Amendment Rules lays down several compliances to be made by the insurance companies with respect to STT. This adds to compliance requirements of insurance companies which are already being heavily regulated by the Insurance Regulatory and Development Authority of India (IRDAI). Moreover, the said mechanism brings all such transactions under the lens of the regulators from the policy issuers end.

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