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I Have A HDFC Unit Linked Pension Plan: Is Reinvesting in New Smart Life Pension Plan Taxable?

Vipul

Vipul Bhavsar  |97 Answers  |Ask -

Tax Expert - Answered on Apr 04, 2025

Vipul Bhavsar is a chartered accountant from The Institute of Chartered Accountants of India. He has over 16 years of experience in corporate advisory, taxation and financial reporting.
His interest areas are consulting, income tax, GST and due diligence.
He founded his CA firm, V J Bhavsar and Associates, in 2010 through which he offers services like virtual CFO, trademark registrations, company /LLP formation, MIS reporting, audit, tax and TDS compliances, accounts receivable/payable management and payroll processing.... more
Asked by Anonymous - Mar 17, 2025Hindi
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Hello Sir - I have taken a HDFC Unit Linked pension plan in 2008 and the fund value is approx. 49 lakhs. The policy matures in 2030 and allows for commutation of 1/3rd of fund value (with mandatory annuity for balance 67%). My HDFC Life Relationship manager is suggesting that he will transfer the proceeds of this fund to a new HDFC Smart life pension plan (via surrender of old policy and immediate reinvestment as single premium in the new policy) for a term of 5 years. At the vesting date, I will be allowed to remove 60% of the fund value as tax free commuted pension and will need to take annuity only for remaining 40% of fund value. This is beneficial for me (since tax free commutation under new pension plan is 60% as per new IRDAI rules instead of current 33%). In such a case, will the surrender of old policy and immediate reinvestment into new smart pension plan be a taxable transaction in India? I have claimed 80CCC benefits for part of premium paid in the past. HDFC Life has informed that the surrender and immediate reinvestment would not be taxable as I am not actually receiving any amount (the amount is fully being reinvested in the new pension plan). Is this advice by HDFC correct? Thanks for the advice.

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
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Ramalingam

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Thank you for the response! It was indeed detailed! Couple of questions After posting my question, I read that since policy was issued before Feb-2021 (even the last payment of 5th year was made by Jan-2021) Capital gain is 100% tax exempted. life coverage from policy is 30L. Exactly 10x of annual pay! FMC for the funds I chose is 1.35%. ICICI do pay minimum 0.3% loyalty which will partially offset the FMC 1) Given there is no Capital tax under section 10 (10D) and I’m not in need of funds now, isn’t it wise to continue with the policy till maturity? (I would definitely minimize the market volatility risk by moving to lesser risk funds in the last 5 years) 2) Since Fund value exceeded the insurance coverage, will mortality charges still apply? I read the policy document but didn’t understand. If it’s applicable, Typically how much it would be? Approx. % (I’m 43 now) 1) Given
Ans: Thank you for the follow-up!

Continuing the Policy: While the tax exemption and loyalty additions are beneficial, mutual funds generally offer more flexible investment options. For a personalized plan, it’s best to consult a Certified Financial Planner (CFP) to align with your goals.

Mortality Charges: Mortality charges won’t apply as long as the fund value exceeds the cover amount. However, if the market dips and the fund value falls below the cover, they will charge accordingly.

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Ramalingam

Ramalingam Kalirajan  |10270 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Mar 19, 2025

Asked by Anonymous - Mar 17, 2025Hindi
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Hello Sir - I have taken a HDFC Unit Linked pension plan in 2008 and the fund value is approx. 49 lakhs. The policy matures in 2030 and allows for commutation of 1/3rd of fund value (with mandatory annuity for balance 67%). My HDFC Life Relationship manager is suggesting that he will transfer the proceeds of this fund to a new HDFC Smart life pension plan (via surrender of old policy and immediate reinvestment as single premium in the new policy) for a term of 5 years. At the vesting date, I will be allowed to remove 60% of the fund value as tax free commuted pension and will need to take annuity only for remaining 40% of fund value. This is beneficial for me (since tax free commutation will be 60% instead of current 33%). In such a case, will the surrender of old policy and immediate reinvestment into new smart pension plan be a taxable transaction in India? I have claimed 80CCC benefits for part of premiums paid in the past. HDFC has informed me that the surrender value will not be taxable as no amount is received by me and the full amount is reinvested into the new policy (HDFC will also not do TDS). Is this correct? Thanks for your advice.
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

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Asked by Anonymous - Aug 15, 2025Hindi
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I have debt of rs. 20lakhs which include pl and credit card bill payments and my monthly income is 28k only please suggest how to I am debt free
Ans: 1. Assess and List Out All Debts
List each loan and credit card with:
• Amount owed
• Monthly EMI or minimum payment
• Interest rate
This will help you understand which debts are costing you the most and need to be prioritized.

2. Create a Bare-bones Budget
• List your essential expenses only: rent, food, utilities, transportation.
• Allocate most of your income toward debt repayment: Many people use a “60-30-10” rule—spending 60% of income on debts, 30% on essentials, and 10% on minor needs or savings, if possible.
• Cut all non-essential expenses (entertainment, eating out, subscriptions).

3. Prioritize Payments
Pay expensive loans first: Focus on debts with the highest interest rate (usually credit cards)—this is called the Avalanche Method.
Always pay at least the minimum on all debts to avoid penalty charges or further damage to your credit score.

4. Talk to Your Lenders
Request lower interest rates or extended loan tenures. Some banks and NBFCs might offer hardship or restructuring programs.
Ask about converting credit card balances into loans with lower EMIs.
Check if you qualify for a debt consolidation loan to combine all debts into one EMI at a lower rate.

5. Explore Additional Income Sources
Take up a side job or gig: tutoring, food delivery, freelancing, weekend work, etc.
Sell unused items online.
Any extra amount should go directly to debt repayment.

6. Avoid Taking On New Debt
Don’t use credit cards or personal loans for discretionary spending.
Avoid “payday loans” or instant loans with high interest.

Sample Monthly Action Plan
Step Amount Allocated
Income (per month) ?28,000
Essentials (rent, food, etc.) ~?8,000-?10,000
Debt repayments ?16,800-?18,000+ (60%+)
Other (emergency savings) ?0-?2,000
If your current minimum payments are more than your income allows, you must negotiate with lenders, as defaulting will further hurt your financial health and credit score.

Mindset Tips
• Celebrate small wins; every rupee paid reduces your stress.
• Stick to your plan—discipline will help you get through this.
• Don’t lose hope—many have successfully cleared similar debts with patience and perseverance.

Final Note
Your current income is not sufficient to clear such a large debt in a short time. Becoming debt-free will require:
• Aggressively cutting expenses
• Increasing your income wherever possible
• Negotiating with lenders for the best possible repayment terms
Seek help when needed and stay disciplined throughout the journey.

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DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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