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

Ans: As I understand from given facts, it is pension plan purchased through employer. Pension from employer is chargeable as Income from Salary at slab rate. Further, TDS can be claimed as refund by filing ITR, if there is no tax liability.

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.