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?

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).

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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.