New IT Rule 8AD on Computation of Capital Gains u/s 45(1B)

Central Board of Direct Taxes has notified the

Income-tax (2nd Amendment) Rules, 2022 to insert new IT Rule 8AD on ‘Computation of Capital Gains under Section 45(1B)‘, vide Notification 8/2022 dated 18/01/2022. Rule 8AD contains provisions for computation of capital gains under section 45(1B) of the income tax act. The current article briefs the new Rule 8AD on Computation of 1

Section 45(1B) of the Income Tax Act

Section 45(1B) provides that when a person receives an amount under Unit Linked Insurance Policies (ULIP), to which exemption under Section 10(10D) does not apply, any profits arising from such receipt shall be chargeable to tax under the head capital gains. The CBDT has notified Rule 8AD for computation of income deemed as capital gains in such cases.

Section 10(10D) of the Income Tax Act

Under Section 10(10D) of the Income Tax Act, the amount invested and the amount received as proceeds from Life Insurance is exempt from Income Tax. Thus, any sum received on maturity of a life insurance policy or death benefits is tax-free. Also, Life Insurance is not subjected to TDS (Tax Deducted at Source) making it an ideal tool for saving taxes. For more details on Life Insurance Income Tax Exemption,

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Rule 8AD - Computation of Capital Gains under Section 45(1B)

Amount Received for the first time under the specified unit-linked insurance policy

If the amount is received for the first time under the specified unit-linked insurance policy during the previous year, the capital gains arising from receipt of such amount will be calculated following the following formula

A-B where, A -The amount received for the first time under a specified unit-linked insurance policy during the previous year, 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 amount as referred to in A;

Amount Received at Any time under the specified unit-linked insurance policy

If the amount is received under the specified unit-linked insurance policy during the previous year, at any time after the receipt of the amount as referred to in clause (i), the capital gains arising from receipt of such amount will be calculated in accordance with the formula: C-D where, - C- The amount received under a specified unit-linked insurance policy during the previous year, at any time after the receipt of the amount as referred to in clause (i) including the amount allocated by way of bonus on such policy excluding the amount that has already been considered for calculation of taxable amount under this sub-rule during the earlier previous 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 as referred to in „C‟ as reduced by the premium that has already been considered for calculation of taxable amount under this sub-rule during the earlier previous year or years.

CBDT Clarfication

The capital gains as computed under the above formulas 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 comprising unit-linked insurance policies. Explanation: For this rule, the expression “specified unit-linked insurance policy” shall mean any unit-linked insurance policy referred to in sub-clause (c) of clause (14) of section 2 of the Act.

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Frequently Asked Questions

Common questions about Computation of Capital Gains Rule 8AD.

Rule 8AD provides the method to compute capital gains arising from the receipt of amounts under Unit Linked Insurance Policies (ULIPs) which do not qualify for exemption under Section 10(10D) of the Income Tax Act.

Section 45(1B) applies when a person receives an amount under a ULIP policy, and the exemption under Section 10(10D) does not apply to that amount. In such cases, any profits arising from the receipt of the amount are chargeable to tax under the head "Capital Gains".

For the first receipt of amount under a specified ULIP during a previous year, the capital gains are computed as A - B, where A is the amount received (including bonuses) and B is the aggregate of premiums paid till the date of receipt.

For any subsequent receipt of amount under the same ULIP in a previous year, the capital gains are computed as C - D, where C is the amount received (including bonuses) and D is the aggregate of premiums paid till the date of receipt, reduced by premiums already considered for taxation in earlier years.

The capital gains computed under Rule 8AD are deemed to be capital gains arising from the transfer of units of an equity-oriented fund set up under a ULIP scheme of an insurance company.

A "specified unit-linked insurance policy" refers to any ULIP defined under sub-clause (c) of clause (14) of Section 2 of the Income Tax Act.

Yes, Section 10(10D) continues to provide exemption for amounts received under life insurance policies, including maturity proceeds and death benefits. However, this exemption does not apply to amounts received under ULIPs that are taxable under Section 45(1B).

The article does not mention any special provisions or grandfathering clauses for ULIPs issued before a specific date. Rule 8AD appears to be applicable to all ULIPs that do not qualify for exemption under Section 10(10D).

The article does not provide any information about TDS applicability on amounts received under ULIPs that are taxable under Section 45(1B) and Rule 8AD.

The article mentions that the official notification related to Rule 8AD is Notification No. 8/2022 dated 18/01/2022 issued by the Central Board of Direct Taxes (CBDT). A link to the notification is provided at the end of the article.