Should I pay tax on my LIC and Max Life annuity income of ₹297,000?

Ans: As employer employee relation does not exist, said income is not chargeable under the head Income from Salary and accordingly, standard deduction of Rs.50000 is not available.

Ans: Broadly there are two types of Life Insurance Policy (1) ULIP (2) others
[ULIP insurance plan offers the dual benefit of investment to fulfil your long-term goals, and a life cover) and other policies]

1. ?P?olicy taken ?before 1st February 2021

The amount received on the maturity of your ULIP is free from tax as per section 10(10D) of the Income Tax Act, 1961?, if the ?amount of premium? paid is less than 10% of the sum assured you will receive? [For the ULIPs that are purchased before April 2012, the rate is 20%?].

2. ??P?olicy taken ?on or After 1st February 2021

After the amendments that were made with the 2021 budget, the returns from your ULIP will be taxed if the premium paid by you in a year exceeds Rs 2.5 lakhs.? ULIP proceeds will now be charged as a Capital gain (whether long-term or short-term will be decided by the tenure)

?Payouts from life insurance policies (excluding ULIPs) issued after April 1, 2023, will be taxable if the total annual premium exceeds Rs. 5 lakhs.

Ans: Understanding Your LIC Pension Plus Policy Structure

You paid Rs 50,000 premium yearly for 10 years.

You did not claim tax benefit under Section 80C.

So, tax exemption does not apply on contribution.

The policy vested 5 years back.

Since then, you are getting Rs 26,000 per year.

Now you want to discontinue and take around Rs 3 lakh.

Taxation on the Annuity Received (Rs 26,000 Yearly)

Annuity received from LIC is treated as income.

It is taxed as “Income from Other Sources”.

There is no exemption on annuity.

Even though you didn’t claim 80C, tax is still applicable.

You are showing annuity in ITR. That is correct.

Continue showing it every year till policy ends.

Taxation on Withdrawal of Balance Corpus (Rs 3 Lakhs)

LIC Pension Plus is a unit-linked pension plan.

ULPPs are taxed differently from ULIPs.

If you surrender after 5 years, you can withdraw fund value.

But full withdrawal is taxable.

Taxable as per your income tax slab.

No exemption under 10(10D) since it’s a pension policy.

Even though you didn’t claim 80C, that doesn't change taxation.

Why It Is Still Fully Taxable

LIC pension plan matures or is surrendered.

Payout is treated as pension income, not life insurance.

The corpus withdrawn is not tax-free.

Even if annuity had started, lump sum balance is taxable.

Tax is calculated on entire Rs 3 lakh corpus.

How to Report in ITR

Show Rs 3 lakh as income from other sources.

Mention it in schedule OS (other sources) of ITR.

Pay tax as per your slab.

No indexation or capital gain benefit applies here.

No deduction on original premium, as 80C not used.

So you don’t reduce your cost from the 3 lakh.

Can You Reduce Your Tax in Any Way?

Only if your total income is below Rs 3 lakh.

Senior citizen basic exemption is Rs 3 lakh.

Above that, tax applies at 5%, then 20%.

You can spread income if you have flexibility.

But for surrender, amount comes in one year.

What You Can Do with the Corpus Now

Avoid reinvesting in another LIC pension plan.

Don’t go for traditional endowment or ULIPs again.

Invest the Rs 3 lakh in mutual funds.

Use SWP to get income regularly.

This gives more tax efficiency.

Long-term capital gains on equity MF are taxed only above Rs 1.25 lakh at 12.5%.

You get better flexibility and liquidity.

Avoid Index and Direct Funds Going Forward

Index funds do not beat inflation consistently.

They give average returns, no downside protection.

Actively managed funds adapt to market changes.

Direct funds are for experts only.

No guidance or review is available.

You must invest via regular funds with a Certified Financial Planner.

This gives review, rebalancing, and long-term planning.

Avoid Annuity Products Again

Annuities give low returns.

They are fully taxable as income.

No flexibility once you start.

You lose control over your own money.

MF SWP is better alternative for retirees.

Gives better return and lower tax.

Check If You Hold Any Other Investment-cum-Insurance

If you have LIC endowment, ULIP or pension plans, review them.

Surrender them if returns are poor.

Reinvest into mutual funds or hybrid funds.

Get guidance from Certified Financial Planner.

Ensure your retirement money works hard for you.

Use the Proceeds for These Financial Goals

Maintain Rs 50,000–Rs 1 lakh in liquid funds.

Keep balance in hybrid mutual funds.

Start monthly SWP of Rs 2,000–Rs 2,500.

This gives regular income and preserves capital.

Add nominee and maintain updated records.

Review portfolio every year with your spouse.

Tax Filing Guidance for Senior Citizens

Use ITR 1 if pension and interest income only.

If mutual funds are sold, use ITR 2.

Show annuity as “Other Income”.

Show surrender value as income in same head.

Keep documents like policy copy, surrender letter, bank credit proof.

Retain for 6 years for tax safety.

Final Insights

You did right by not claiming 80C if PPF limit was exhausted.

But taxation still applies on annuity and withdrawal.

LIC pension plans do not give tax-free maturity.

Surrender amount is fully taxable under your slab.

Reinvest this wisely in mutual funds now.

Avoid annuities, index funds, and direct plans.

Use Certified Financial Planner to guide future income planning.

Maintain simplicity, tax efficiency, and flexibility in retirement.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment