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.
There can be two tax implications on surrendering of life insurance policy or ULIPs
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:
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
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
The maturity value of Life Insurance Policy or ULIP is tax free if following conditions are fulfilled:
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.
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?
Pension Plans and ULPP (Unit Linked Pension Plan) have adverse taxation at the time of surrender and maturity. The details are shown below:
The surrender value received on account of a Pension policy or ULPP is fully taxable.
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.
The proceeds received from life insurance policy or ULIP on death of policyholder to their nominee is tax free under Section 10(10D).
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.
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.
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I have purchased a LIC SAMRIDHI PLUS Policy on 24th may 2011 sum assured was 550000/- and premium paid Rs.500000/- (one Time) . Same has been surrendered on August 2017. Total surrendered value received 886567 after deducting TDS @1%. Please suggest what will be the treated in Taxable Income. Is the total surrendered value will be the Taxable Income !!!!
I have purchased SBI Life-Life Long Pension Plus on 13th October 2011 with payment mode as single premium, i have withdrawn the same in Dec 2017 i have completed almost 6 years. Now i need to pay on on entire amount or the difference of premium and surrender value.
Kindly Suggest
I would like to know whether entire amount of ulip surrender value is taxable or only accuure amount ( surrender -primium paid)? In case of non compliance of sec 10(10d).
entire maturity/surrender amount
I bought single premium ULIP in 2006 with premium as 50000 and sum assured as 300000. I paid top up amount of 20000 in 2008.
Please assist if closure proceed as policy surrender in 2018 will be taxable or not. If taxable, any deduction applicable here?
The surrender amount would be tax free as the annual premium paid is more than 5 times the sum assured.
I had a ULIP thru ICICI Prudential,which I surrendered after 12 years. RS 6400+ (1%) was deducted as "Surrender Tax"in the process of the payout. Is this allowed by ICICI Prudential? & if so, should I get a tax certificate as proof that tax has been deducted?
Its not surrender tax, its TDS deducted while paying maturity/surrender amount and is totally legal. You can check the same in Form 26AS. Also you can ask them for the TDS certificate which they would mail you.
how can i know tds is deducted on my lic policy at maturity?
The final settlement statement would show that. Also you can look at your Form 26AS