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Is there a tax implication on surrendering life insurance when changing tax regimes?

Ramalingam

Ramalingam Kalirajan  |8077 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Sep 02, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
Visu Question by Visu on Aug 27, 2024Hindi
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will there be a tax implication on the surrender value of the Life insurance policies irrespective of the tax regime? How much rate of tax is applicable for voluntarily surrendering the policy. This will help me to take a decision to for surrendering policy where Surrender charges also applicable .?

Ans: Yes, there can be tax implications on the surrender value of life insurance policies, depending on the specific conditions under which the policy was issued and the tax regime you are under.

If the policy premium exceeds 10% (or 20% for older policies) of the sum assured: The surrender value may be taxable as income under "Income from Other Sources."

Rate of Tax: The applicable tax rate would be based on your income slab in the year of surrender, irrespective of the tax regime (old or new).

Surrender Charges: These charges reduce the payout but are not tax-deductible.

Before surrendering, consider the tax impact, your income slab, and the surrender charges to make an informed decision.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner,

www.holisticinvestment.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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Will there be any tax to be paid by me for surrendering value of the life insurance policies irrespective of the tax regime? How much rate of tax is applicable for voluntarily surrendering the policy? Please answer my query because it will help me take a decision.
Ans: Yes, there could be tax implications when you surrender a life insurance policy in India, depending on the policy terms and the premium payments.

Here's a breakdown:

1. Tax Deduction Claimed under Section 80C:

If the premium paid on the policy was claimed as a deduction under Section 80C, then the surrender value could be taxable.

Conditions: For the policy to remain tax-exempt under Section 10(10D), the premium paid should not exceed 10 per cent of the sum assured (for policies issued after April 1, 2012) or 20 per cent of the sum assured (for policies issued before April 1, 2012).

2. Surrender Before Minimum Lock-in Period:

If you surrender the policy before completing the minimum lock-in period (usually 5 years), the entire surrender value becomes taxable. The deductions claimed under Section 80C in earlier years will also be reversed.

3. Tax Rates:

Old Tax Regime: The surrendered amount is added to your income and taxed according to the applicable income tax slab rate.

New Tax Regime: Since you do not get exemptions or deductions under the new tax regime, the surrender value is still considered income and taxed as per your slab rate.

4. When is Surrender Value Tax-Free?

If the premium-to-sum-assured ratio is below the threshold (10 per cent or 20 per cent as mentioned above) and the policy has been held for the full term, the surrender value can be tax-exempt under Section 10(10D).

Given that tax rates depend on your income bracket, it’s crucial to consult with a tax advisor for personalised advice.

Typically, the rate would be as per your slab rate, which could be between 5 per cent to 30 per cent, plus cess and surcharge, depending on your total income.

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Hi Mam, Hope you are doing well. I am very worried about my son who is now 12.5 years old and studying in 7th standard in a very reputed school. Since childhood, he has no interest in studies, unless we doesn't seat in front of him, he doesn't study. Every teacher from his kindergarten days upto now has the same complaint that he is doesn't pay attention in class and the result is he doesn't get good marks in the exam. When we scold him for studies, he does it for that particular time only and then get back to his non-interest mode again and start to run from studies. He will play video games, goes to play around with his friends, he will find some or the other reason for not doing studies or homework. The irony is that he is not interested in any sports or any other kind of activities. In every summer holidays, we make him to join some sports or music classes, but there also he doesn't show interest and do things just for the sake of showing. From last year, we have started sending him to tuitions also, but no change in attitude. This year we have found a teacher of his reputed school who is retired and taking tuitions, we are sending him to her and she is charging a big amount for tuitions. please guide how can we change his attitude and make him more serious in any activity he does as he doesn't have interest in anything (we have observed doing everything we can).
Ans: Hello Sunil!!

I am doing great, thank you for asking, God bless you!

I can totally understand when you say you are worried.

Your son is 12.5, he will soon be a teenager. There will be different challenges, I want you to read up on parenting a teenager and be ready to handle him well.

The problem as I see it is that everyone of you, his teachers included have made studies like a burden for him.... and subjected the young child to a lot of anxiety, he just wants to run away form it....
"Every teacher from his kindergarten days upto now has the same complaint that he is doesn't pay attention in class".... this statement of yours... it is the teacher's duty to ensure the child listens to him/her, how can she start labeling a child like this. From a young age your son has been conditioned to believe that he is not not good in studies, he doesn't focus and he doesn't sit in one place. All my sympathies are with your son...every child comes with immense potential and it's our duty as parents and teachers to nurture the child.

The following is what I propose so that we bring him back to loving to learn ( not score marks, that should never be the barometer)-
1. Love your child the way he is now
2. Give him lot of positive strokes
3. Have one on one sessions for any activity you plan for him... let him choose the activity, empower him
4. choose a teacher, who can get along with him and help him develop a positive attitude towards studies and life in general
5. look for a school where they nurture him... not just a reputed one...less number of students and a teacher who is invested in her/ his students,

If you can connect with me, I can help him. Have had many a students in this kind situation.
This is my website..
https://transformme.co.in/

Loads of best wishes to the whole family..

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