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Tax Implications of Surrendering Life Insurance Policies

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Financial Planner - Answered on Aug 30, 2024

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Asked by Anonymous - Aug 30, 2024Hindi

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.

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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Question by Arunangshu - Jul 13, 2021Hindi

I have a Life Time Super Pension Policy of ICICI Prudential with following details: Sum Assured: 0 (Zero) Premium paid for 1st 10 years and is under extended vesting period. Current value of the fund is almost twice the value of total premium paid. I understand the maturity/ Surrender Value comes under section 10 (10D) of Income Tax Act 1961. My queries are: If I surrender the policy before the extended maturity, whether the whole SV amount will be tax exempt as the as the sum assured is less than 5 times the annual premium OR in case it is taxable, whether the whole SV or the SV minus my premium payment only will be taxable. In case I wait till the extended maturity and opt for annuity, what is the tax implication?

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.

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