How are ULIP & Life Insurance Policies Taxed on Surrender & Maturity?

Insurance & Pension Products have been most miss-sold financial product in last few years. Most buyers are lured into it in the name of good returns, added life insurance along with tax savings. After a few months/years the policy holder realizes that he has been sold a dud product and the only way to get rid of it is to surrender or make it paid-up policy. In this post we tell you what would be tax implication on surrendering a life insurance policy and pension plans.

Tax on surrender of Life Insurance Policy or ULIP:

There can be two tax implications on surrendering of life insurance policy or ULIPs

  1. The surrender value may be taxable &
  2. The tax benefit on premiums paid in earlier years under section 80C can be reversed

We explain the conditions for above points so that you can decide accordingly and lessen your tax burden.

Also Read:  9 Tips to Buy the Right Life Insurance

The surrender receipts are tax free if following conditions are fulfilled:

  1. Policies issued before March 31, 2003
  2. Policies issued between April 1, 2003 and March 31, 2012 and the sum assured is more than 5 times of annual premium paid
  3. Policies issued after April 1, 2012 and the sum assured is more than 10 times of annual premium paid

As a special case for life insurance of the disabled and those suffering from ailments, the annual premium can be less than 15% of the sum assured – i.e. – Sum assured should be greater than 6.67 times the annual premium. This change was made in Budget 2013.

Additionally the tax benefit on premiums paid in earlier years under section 80C can be reversed if

  • In case single premium policy has not been held for at least two years
  • In case of traditional policies like endowment & money back haven’t paid at least 2 years premium or
  • atleast 5 years premium in case of ULIPs (unit linked insurance plan) is not paid

If policy is surrendered before the lock-in period, the surrender value would be paid after the lock-in period after deduction of applicable surrender charges.

Also Read: LIC Varishtha Pension Bima Yojana Review

Tax on Maturity of Life Insurance Policy or ULIP

The maturity value of Life Insurance Policy or ULIP is tax free if following conditions are fulfilled:

  1. Policies issued before March 31, 2003
  2. Policies issued between April 1, 2003 and March 31, 2012 and the sum assured is more than 5 times of annual premium paid
  3. Policies issued after April 1, 2012 and the sum assured is more than 10 times of annual premium paid

As a special case for life insurance of the disabled and those suffering from ailments, the annual premium can be less than 15% of the sum assured – i.e. – Sum assured should be greater than 6.67 times the annual premium. This change was made in Budget 2013.

Tax on Proceeds of Life Insurance Policy or ULIP on Death

The proceeds received from life insurance policy or ULIP on death of policyholder to their nominee is tax free under Section 10(10D).

Also Read: How much Time for Life Insurance Companies to Settle Death Claims?

How are Life Insurance and Pension Policies Taxed on Surrender and Maturity?

How are Life Insurance and Pension Policies Taxed on Surrender and Maturity?

Tax on Pension Plans/ ULPP:

Pension Plans and ULPP (Unit Linked Pension Plan) have adverse taxation at the time of surrender and maturity. The details are shown below:

Tax on Surrender of Pension policy or ULPP

The surrender value received on account of a Pension policy or ULPP is fully taxable.

Tax on Maturity of Pension policy or ULPP

Policyholder has the option to withdraw 1/3 of maturity amount as lump-sum and is tax free under section 10(10D). The rest 2/3 of corpus has to be used to buy annuity. Annuity income is fully taxable at applicable income tax slabs.

Tax on Proceeds of Pension policy or ULPP on Death

The proceeds received from life insurance policy or ULIP on death of policyholder to their nominee is tax free under Section 10(10D).

Download: Free ebook for Income Tax Planning for FY 2018-19

TDS on Life Insurance Policy and Pension Plans:

Budget 2014 (under new section 194DA) allowed deduction of 2% of the full surrender/maturity value in case the tax exemption under Section 10(10D) was not applicable and the value is more than Rs 1 Lakh. Budget 2016 reduced the TDS amount to 1% of the surrender/maturity value.

Budget 2015 has introduced the facility to fill Form 15G/15H in case your annual income is less than the minimum taxable limit and you don’t want TDS deducted on Life Insurance maturity payment. This would be effective from June 1, 2015.

Life Insurance Policy and Pension Plans in Income Tax Return?

In case the maturity/surrender value is tax free, you should mention the same in exempted income. In case the maturity/surrender value is taxable mention it in “Income from other sources” and pay tax on total maturity/surrender amount (without deduction of premium paid) received.

27 thoughts on “How are ULIP & Life Insurance Policies Taxed on Surrender & Maturity?

  1. A L Mendonca says:

    Why should you not deduct premiums -they are already taxed in the year of payment -that would be a case of double taxation
    If my Surrender value is 20 lakhs out of which premiums are 15 lakhs only 5 lakhs should be taxable . Your reading of the IT rules does not make logical sense.

    From Circular No. 7/2003 dated 05-Sep-2003, Finance Act 2003 – Explanatory Notes on provisions relating to Direct Taxes, http://www.incometaxindia.gov.in and reader inputs*

    10.3 The insurance policies with high premium and minimum risk covers are similar to deposits or bonds. To ensure that such insurance policies are treated at par with other investment schemes, amendments have been made in section 88 and clause (10D) of section 10. The existing clause (10D) of section 10 has been substituted so as to provide that the exemption available under the said clause shall not be allowed on any sum received under an insurance policy issued on or after the 1st day of April, 2003, in respect of which the premium payable in any of the years during the term of the policy, exceeds twenty per cent of the actual capital sum assured. In view of this, the income accruing on such policies (not including the premium paid by the assessee) shall become taxable. However, any sum received under such policy on the death of a person shall continue to remain exempt. The new provision also provides that the amounts received under sub-section (3) of section 80DD, shall not be exempt under this clause.

  2. Hello, Shall one continue even after maturity of ULIP policy? What are the benefits/disadvantages if we contiue to do so?
    Please Elaborate. I do have ICICI Prudential Life Gold policy which is about to mature now.

  3. Nasiuddin ansari says:

    I took the sbi smart wealth builder policy in 2015. There is an installment of Rs 98000 annually. I have deposited 3 installments but due to not getting 4th installment, the policy has now lapsed. Now if I surrender the policy, then I will get my deposit money back and what tax it will take.

  4. Sir, I have have paid Rs 100000 as 6th premium of ulip on 30 March, 2018 and got section 80c deduction from all six premiums.
    Sir I want to know at which date i can surrender the policy to avoid reverse 80c deduction.

  5. Vamsee Krishna says:

    Hi Sir, I paid 5-years Annual Premium Rs 24000 for ICICI Prudential. (total premium paid: Rs. 1,20,000 in 5-years)
    Year of starting the policy : September 2013.
    My Sum Assured is 3,60,000

    However on 6th year i did not pay and the policy was surrendered due to non-payment of premium.
    I received a cheque from ICICI Prudential for closure of value Rs. 1,39,000
    Pls suggest if this is taxable after 5-years completion.

  6. I had bought a 20 yrs Jeevan Saral policy in Nov 2009 (insured:500000 and annual premium:24040) for which I paid the premium for 5 years (2009-13). I have stopped paying premiums and the policy is now showing as paid up. I am planning to surrender the policy in Jan 2019, would I have to pay any tax on the surrender value?

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