Hello Sir, I have a life stage pension plan with icici prudential which i began in the year 2010 the current value of it is around 4,25,000/- due to some financial needs i want to surrender the policy.There is no surrender charge in the policy but tax will be deducted on the above value as told to me by the employee of the company.Is that tax TDS and at what rate will it be deducted? Will i be able to claim refund while filing return the next year if my income is below taxable limit?

Ans:

1. It may be noted that a pension plan is taxable. Only life insurance policies with the stipulated life cover would be exempt from income tax. The surrender value is added to the income of the policyholder and offered to tax if he has availed of the tax benefits while paying premium. If he has not availed tax benefits, then the excess of surrender value over the premium paid will be added to income and taxed at marginal rate of tax.

2. If you extended till maturity and opt for annuity, the income will be added to the income of the policy holder and taxed accordingly. You however would be able take the commutation benefit as tax free. IRDA has set a cap of commutation of up to 60% of the corpus in 2019.

Ans: You have invested in a unit-linked pension plan since 2008.

The current fund value is Rs. 49 lakhs.

The plan matures in 2030.

As per the policy, you can withdraw 33% tax-free and the rest must be used for annuity.

Your relationship manager is suggesting surrender and reinvestment into a new pension plan.

The new plan allows 60% tax-free withdrawal instead of 33%.

You need to evaluate whether this switch is beneficial from a taxation and financial perspective.

Taxation on Surrender of Old Pension Plan
Pension plans under section 80CCC get tax benefits during investment.

If you surrender, the surrender value is taxable as per your income slab.

HDFC claims that no tax will apply as the amount is reinvested directly.

However, as per income tax laws, surrendering a pension plan leads to taxation.

Even if reinvested, the surrender value is added to taxable income.

Since you have claimed 80CCC benefits, surrendering can result in tax liability.

Misconception About Tax-Free Transfer
HDFC is not deducting TDS, but that does not mean no tax is due.

Income tax liability exists even if the amount is not received in hand.

If tax authorities later verify, you may face penalties or additional taxes.

You need written confirmation from HDFC and a tax expert’s opinion.

Evaluating the New Pension Plan Offer
The new plan allows 60% withdrawal instead of 33%.

The remaining 40% must still go into annuity.

Annuity income is fully taxable every year.

The new plan has additional charges, which can reduce returns.

The lock-in period of 5 years restricts flexibility.

If your goal is wealth creation, better options exist.

Should You Switch to the New Plan?
The tax-free withdrawal of 60% seems attractive, but consider the surrender tax.

If you are in the highest tax bracket, surrendering can be costly.

Locking funds in another pension plan reduces flexibility.

Instead, investing in mutual funds can give higher returns and better control.

You can withdraw systematically without annuity restrictions.

Reinvesting in a pension plan limits future financial choices.

Better Alternatives for Retirement Planning
Instead of shifting to another pension plan, consider equity mutual funds.

Mutual funds allow withdrawals with lower tax impact than annuities.

Debt mutual funds provide stability while maintaining flexibility.

Systematic withdrawal plans (SWP) help manage retirement income efficiently.

Combining equity and debt investments gives better post-retirement security.

What Should Be Your Next Steps?
Consult a tax expert before surrendering your pension plan.

Get written confirmation from HDFC on taxation treatment.

Compare annuity income vs. mutual fund withdrawals for retirement.

Ensure flexibility in withdrawals rather than locking into another pension plan.

Build a diversified portfolio that balances risk and liquidity.

Finally
Surrendering your pension plan may trigger tax liability.

Reinvesting in another pension plan may not be the best financial decision.

You need flexibility and better returns for retirement.

Mutual funds offer tax-efficient and high-growth alternatives.

Evaluate all options before making a final decision.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

Ans: Returns on all ULIPs purchased between April 2012 to February, 2021 are completely tax free if the premium was less than 10% of sum assured. For ULIPs purchased before April 2012, the maturity amount was tax free if the premium was less than 20% of sum assured for that policy.

It is strongly advisable to consult CA to understand various scenarios

Vipul Bhavsar
Chartered Accountant
www.capitalca.in

Ans: Thank you for sharing the updated surrender value and maturity amount details.

You will get Rs. 2 to 2.25 lakhs if you surrender now.

On maturity, you may get Rs. 21 lakhs after 15 more years.

Now, let’s assess both options from practical, financial, and emotional angle.

Comparing Current Value vs Future Value

If you hold, you will pay Rs. 5.4 lakhs more over 15 years.

The return will be Rs. 21 lakhs. That includes your Rs. 3.6 lakhs already paid and Rs. 5.4 lakhs more.

Net gain is around Rs. 12 lakhs over 15 years.

This gives you less than 5% annual return.

Also, this money is locked for 15 years. No liquidity.

If You Surrender Today

You get Rs. 2 to 2.25 lakhs in hand now.

No more premium to be paid. Rs. 36,000 saved annually.

That frees up cash every month. Rs. 3,000 monthly is useful for other priorities.

If you invest through SIP in mutual funds, you get better returns.

Debt pressure also reduces faster with this Rs. 2 lakh.

Emotion vs Logic

Rs. 21 lakhs after 15 years may sound attractive.

But this is slow growth. And not flexible.

You must not make decisions from emotional attachment.

LIC policies sound secure, but are poor wealth creators.

You can get better cover with term plan and better returns with mutual funds.

Decision Summary

Surrender now gives flexibility, cash flow, and debt support.

Continuing gives low return, poor liquidity, and future burden.

From Certified Financial Planner’s view, surrendering is the right choice now.

Once your debt is under control, start SIPs in regular mutual funds through MFD with CFP support.

You will grow faster and stay more financially stable.

You have taken right steps by evaluating surrender now.

Make the change and move to better financial future.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment