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).

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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.

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

  1. If deduction under 10C has not been claimed in the year of investment,on what amount tax will be paid,entire maturity value or maturity val-invested premium?(policy does not qualify for 10D)

  2. i had taken icici ULIP policy in Sept2016. My sum assured is 10 Lac & premium for 1 yr is 1Lac, which i had to pay for 5yrs. i have paid for 2 yrs only.
    But now i want to surrender the ULIP, after payin 2-premiums. Now this surrender value, will go in debt fund for remaining 3yrs @3.5%. I will get this surrendered value in 2021.

    Will this amount be taxable when i rcve in 2021?

  3. I have invested in icici prulife amount of 23 lakhs devided in 12-6-2-3 lakhs but i was misled with info and i have an nri account its been few months n now found out that have to pay every year but they did not tell me this when policy was bought so if i surrender how much fine will i face and wid i have to pay tax amd wud i not get my money within lockin period lockin is for 7-10 years

  4. My policy Equity1 ULIF was issued in Feb 2012. My policy term is 15years, I have continued my premium paid up to 7years i.e. (2012 to 2018). I want to go for Full Surrender now, Sum Assured-2Lakhs, Annual Premium-12000, and Total Value of Units Rs 120000 as on August 2018.

    My question:

    1. In this stage, if I go for full surrender, Will there be any deduction from the total amount?
    2. Is there any chance of TDS deduction? If TDS deducted, How Will I show it in the IT return?
    3. Will I need to show the received surrender amount without TDS deduction in IT return “other sources of income” column OR will it exempt under 10(10d)?
    4. After the date of surrender, what is the payout time of the surrender amount from the side of the insurance company?

    Please reply. Thanks.

  5. I bought ULIp with 24000 annual premium and 240000 sum assured in 2007. It got matured in 2017 and the company provided settlement option of 4 years. I want to surrender my policy now.

    Will there be a tax liability?
    If yes then tax will be calculated on total surrender value or incremental value?
    Rgds

  6. As per Circular No. 7/2003 dated 05.09.20013 (the relevant portion for Section 10 (10D), it states that while computing the amount taxable out of the maturity proceeds, premium paid by the assessee shall be excluded. In view of this, the income accruing on such policies (not including the premium paid by the assessee) shall become taxable.

    Considering the above, whether the entire lic surrender value amount will be taxable ( in cases where tax exemption
    under sec 10(10d) is not available)

    or

    the taxable amount will be the surrender value amount minus the premium paid amount for the policy.

    Please inform.

    In the second case case where total premium paid amount is more than surrender value amount, it will result in negative cash flow. In such case, can the negative difference amount be shown as “Loss” under “Income from other sources” in Income Tax Return?

    Please inform.

  7. For Maturity proceeds of ULIP which we have to show under exempted income under section 10(10D), I would like to know if we show the complete sum received at maturity OR sum received minus total premium paid. Here I look at premium paid as an invested value versus an expense. Please guide. Thanks

  8. ALOK SINGHANIA says:

    Is Ulip maturity recd taxable even if no deduction was made under 80 C when the Ulip were purchased.

  9. I have a IPru assured pension plan with no sum assured or insurance. I have this from 2010 and want now to surrender it. Will it be taxable.

  10. I took the policy in 2010. Payed single premium of 192000. Terminated the policy in 2017 and got 255685 in 2017. 1% TDS is deducted at source. Gain is Rs 63.6K. Shall I need to pay tax for the gain or total of 255685?

  11. 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 !!!!

  12. 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

  13. 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).

  14. 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?

  15. John Anthony says:

    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.

  16. how can i know tds is deducted on my lic policy at maturity?

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