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Life insurance policies are long-term financial tools that provide protection and savings. However, you might consider surrendering your life insurance policy before maturity due to changing financial goals or constraints.
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Understanding the tax on life insurance surrender value is essential in such cases. This article will help you know the surrender value, its tax implications, and whether it's a financially sound move.
Term Plans
Surrendering a life insurance policy involves terminating/exiting the plan before its maturity date and paying all premiums back. For example, if you bought a 30-year policy but decide to surrender it after 10 years, the amount (premiums paid minus GST) you receive is the surrender value.
The surrender value in life insurance is the amount you receive if you terminate your policy before maturity. It is calculated based on the premiums paid, the duration of the policy, and bonuses (if applicable).
example, suppose you have a 20-year life insurance policy but surrender it after 10 years. In that case, the insurer will pay you a lump sum, your cash surrender value—usually the total premiums paid minus applicable charges.
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The tax implications of surrendering your life insurance policy depend on several factors, including the type of policy and when it was issued. Here’s a breakdown of the key tax rules:
For traditional life insurance policies, such as endowment and money-back plans, the tax exemption on surrender value is applicable under the following conditions:
Premium Payments: To enjoy tax-free surrender value, you must regularly pay premiums for the first two years of the policy tenure.
If you hold a single premium life insurance policy, the surrender value will be tax-free only if:
Policy Duration: You have held the policy for at least two years from the purchase date.
For ULIPs, the tax exemption applies if:
Holding Period: The policy is surrendered five years after the purchase date.
If a ULIP is surrendered before the 5-year lock-in period, the surrender value becomes taxable as per your income tax slab, and any prior 80C deductions may be reversed.
Surrendering a pension plan also has specific tax implications:
Taxable Proceeds: The surrender value received from pension plans is taxable under the ‘income from other sources’ category, with no provision for tax exemption.
Reversal of Premium Exemptions: Similar to life insurance, any tax exemptions claimed for premium payments will be reversed.
The date of policy issuance also affects taxability:
Before 31 March 2003: Full surrender value is exempt from tax.
Between 1 April 2003 and 31 March 2012: Surrender value is tax-free if the sum assured is at least five times the annual premium.
On or After 1 April 2012: Surrender value is exempt if the sum assured is at least ten times the annual premium.
On or After 1 April 2013: For individuals categorized as disabled under Section 80U or suffering from specified ailments, the surrender value is exempt if the sum assured is at least 6.7 times the annual premium.
Before surrendering your life insurance policy, it's vital to understand the tax implications. Depending on the type of policy, the duration of the premium payments, and the issuance date, the surrender value may or may not qualify for tax exemptions. Be sure to evaluate your options and consult a financial advisor to understand how surrendering your policy might impact your tax obligations. Being informed lets you make a more strategic decision that aligns with your financial goals.
Note: You should also check the benefits of term life insurance if you are plan to purchase the term insurance plan.
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Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
+Rs. 487/month (Rs.16/day) is starting price for a 1 crore term life insurance for an 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 38 years of age.
Prices offered by the insurer are as per the approved insurance plans | #All savings and online discounts are provided by insurers as per IRDAI approved insurance plans | Standard Terms and Conditions Apply | **Tax Benefits are subject to changes in tax laws.| Policybazaar Insurance Brokers Private Limited
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+Rs. 820/month is starting price for a 2 crore term life insurance for an (NRI) 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 38 years of age.
+Rs. 1,443/month is starting price for a 5 crore term life insurance for an (NRI) 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 38 years of age.
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