Can My Son Surrender His LIC Policies Before Moving Abroad?

Ans: considering citizenship changes and the associated tax implications on LIC policies is wise for your son. Surrendering these policies could indeed reduce his future tax burden as a resident of another country. Let’s go over some key points regarding this decision.

Dual Taxation Risks on Policy Maturity
Potential Double Taxation: If your son becomes a tax resident of another country, his worldwide income may be taxable there. This includes any proceeds from Indian LIC policies, which could lead to double taxation.

Taxable in India on Maturity: Certain LIC policy proceeds are taxable in India upon maturity, particularly if the sum assured is below a specific premium-to-sum-assured ratio.

Complex Tax Reporting: He may have to report these policy earnings in both India and his new country of citizenship, leading to more complex tax filings.

Evaluating Surrendering LIC Policies
Immediate Surrender Value: If the LIC policy is surrendered before maturity, he would receive the surrender value, which might be lower than the maturity amount but could save him from future taxation abroad.

Avoid Future Taxable Events: By surrendering the policy, your son can avoid potential tax issues on future policy payouts, including long-term foreign tax on maturity proceeds or accrued income.

Penalty-Free Options: In some cases, LIC policies allow for partial or full surrender without significant penalties after a certain policy tenure. It’s worth reviewing his specific policy terms.

Potential Alternative Investment Options
Mutual Funds and NPS: If he has an investment horizon and can manage moderate risk, he could reinvest the surrender value in mutual funds. Actively managed funds in India can offer tax-efficient returns for long-term goals compared to LIC policies, especially if his tax residency shifts.

Top Tax-Efficient Options: Tax-free bonds, hybrid mutual funds, or other options that align with his risk profile can offer more flexible and efficient returns. Investing through a Certified Financial Planner can ensure a suitable asset mix.

Insurance Coverage Alternatives: If LIC policies also provide insurance, he may want to consider term insurance in the new country for essential risk cover without tax complexities.

Important Steps Before Surrendering Policies
Calculate Surrender Value: He should review the surrender value and compare it with the remaining tenure and expected benefits of the LIC policies to make an informed decision.

Consult a Tax Expert: Dual taxation implications can be complex, especially with international treaties and tax laws. Consulting a tax expert in both India and the new country is advisable.

Consider Exchange Rate Impact: The value of the maturity proceeds might fluctuate with exchange rates. Surrendering the policy can give him more control over the funds in his currency of choice.

Final Insights
Your son’s decision to surrender LIC policies before changing citizenship can offer relief from dual tax obligations, simplify his tax filing process, and provide him with a more flexible and tax-efficient investment portfolio. Examining his goals, needs, and future tax considerations will allow him to make the most effective decision.

Best Regards,
K. Ramalingam, MBA, CFP

Chief Financial Planner

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