How will partial withdrawal or surrender of my 2008 ULIP policy impact my taxes?

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: ULIP pension plans are a mix of investment and insurance. You have invested in HDFC's ULIP pension plan since 2009 with a monthly SIP of Rs 4,000. Now, your plan's value is Rs 21 lakhs. It's crucial to understand how this affects your taxes.

Taxation on ULIPs
ULIPs have a specific tax treatment. The premiums paid for ULIPs are eligible for tax deduction under Section 80C. However, the tax treatment at the time of maturity or withdrawal is essential to understand.

Maturity Proceeds
The taxability of maturity proceeds from ULIPs depends on whether the premiums paid exceed 10% of the sum assured. If the premium paid does not exceed 10% of the sum assured, the maturity proceeds are tax-exempt under Section 10(10D). Let's evaluate this for your plan.

Evaluating Your ULIP
To determine the taxability, we need to check the sum assured of your ULIP. If the annual premium of Rs 48,000 (Rs 4,000 x 12) does not exceed 10% of the sum assured, your maturity proceeds will be tax-exempt.

Tax on Partial Withdrawals
Partial withdrawals from ULIPs are also tax-free if they meet the above conditions. However, if the conditions are not met, the proceeds will be taxed.

Adding to Salary for Tax Calculation
If the maturity proceeds are taxable, they will be added to your income for that financial year. This means it will increase your total taxable income, and you will have to pay tax according to your income tax slab.

Breaking Down the Tax Implications
Let's dive deeper into the tax implications.

Scenario 1: Maturity Proceeds are Tax-Exempt
If your ULIP's sum assured is such that the annual premium is less than 10% of the sum assured:

No Tax on Maturity: The entire Rs 21 lakhs will be tax-exempt.
Scenario 2: Maturity Proceeds are Taxable
If the premium exceeds 10% of the sum assured:

Taxable Amount: The Rs 21 lakhs will be added to your income for the year.
Tax Calculation: The amount will be taxed according to your income slab.
Understanding Your Current Financial Situation
You have diligently invested in a ULIP for over a decade. Your disciplined approach has resulted in a significant corpus. Now, you need to make informed decisions about your future investments and tax liabilities.

Future Investment Strategies
Diversify Your Portfolio
While ULIPs offer a mix of investment and insurance, it's essential to diversify. Consider investing in mutual funds, PPF, and other debt instruments.

Benefits of Mutual Funds
Higher Returns: Equity mutual funds generally offer higher returns compared to ULIPs.

Flexibility: You can switch between different funds and redeem your investments as per your needs.

Systematic Investment Plan (SIP): SIPs help in disciplined investing and rupee cost averaging.

Disadvantages of Index Funds
Index funds track a specific index. They have lower expense ratios but lack the potential to outperform the market. Actively managed funds, on the other hand, have fund managers making strategic decisions to outperform the market.

Regular Funds vs. Direct Funds
Direct Funds: These have lower expense ratios but require more active management and market knowledge from the investor.

Regular Funds: These come with the expertise of a Certified Financial Planner (CFP) and an advisor, providing guidance and regular reviews.

Investing Through a Certified Financial Planner (CFP)
A CFP can offer personalized advice, helping you choose the right mix of investments based on your goals and risk tolerance. They provide ongoing support and adjustments to your portfolio.

Creating a Balanced Portfolio
Your current investments in ULIPs have served you well. Now, it's time to create a balanced portfolio that includes:

Equity: For growth and higher returns.

Debt: For stability and regular income.

Fixed Income: For safety and guaranteed returns.

Tax Planning Strategies
Proper tax planning can help reduce your tax liability and increase your net returns. Here are some strategies to consider:

Maximize Section 80C: Continue to invest in tax-saving instruments like PPF, ELSS, and life insurance.

Use Section 80D: Take advantage of deductions for health insurance premiums.

Capital Gains Planning: Plan the sale of assets to minimize capital gains tax.

Health Insurance
Ensure you have comprehensive health insurance to protect your savings from medical emergencies. This also provides tax benefits under Section 80D.

Emergency Fund
Maintain an emergency fund to cover 6-12 months of expenses. This fund should be in liquid and safe investments.

Estate Planning
Consider estate planning to ensure your assets are distributed as per your wishes. This can include writing a will and setting up trusts.

Final Insights
Your journey with ULIP has been fruitful. However, diversifying your investments and planning your taxes effectively can enhance your financial security. By consulting a CFP and creating a balanced portfolio, you can achieve your financial goals and enjoy a comfortable retirement.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: To be specific
To get clear reply & tax calculation, I suggest you to please furnish the details : ULIP Policy & Company, Period of Premium paid in years & Annual Premium amount.
Thanks.

Ans: Understanding Your LIC Pension Plus Policy Structure

You paid Rs 50,000 premium yearly for 10 years.

You did not claim tax benefit under Section 80C.

So, tax exemption does not apply on contribution.

The policy vested 5 years back.

Since then, you are getting Rs 26,000 per year.

Now you want to discontinue and take around Rs 3 lakh.

Taxation on the Annuity Received (Rs 26,000 Yearly)

Annuity received from LIC is treated as income.

It is taxed as “Income from Other Sources”.

There is no exemption on annuity.

Even though you didn’t claim 80C, tax is still applicable.

You are showing annuity in ITR. That is correct.

Continue showing it every year till policy ends.

Taxation on Withdrawal of Balance Corpus (Rs 3 Lakhs)

LIC Pension Plus is a unit-linked pension plan.

ULPPs are taxed differently from ULIPs.

If you surrender after 5 years, you can withdraw fund value.

But full withdrawal is taxable.

Taxable as per your income tax slab.

No exemption under 10(10D) since it’s a pension policy.

Even though you didn’t claim 80C, that doesn't change taxation.

Why It Is Still Fully Taxable

LIC pension plan matures or is surrendered.

Payout is treated as pension income, not life insurance.

The corpus withdrawn is not tax-free.

Even if annuity had started, lump sum balance is taxable.

Tax is calculated on entire Rs 3 lakh corpus.

How to Report in ITR

Show Rs 3 lakh as income from other sources.

Mention it in schedule OS (other sources) of ITR.

Pay tax as per your slab.

No indexation or capital gain benefit applies here.

No deduction on original premium, as 80C not used.

So you don’t reduce your cost from the 3 lakh.

Can You Reduce Your Tax in Any Way?

Only if your total income is below Rs 3 lakh.

Senior citizen basic exemption is Rs 3 lakh.

Above that, tax applies at 5%, then 20%.

You can spread income if you have flexibility.

But for surrender, amount comes in one year.

What You Can Do with the Corpus Now

Avoid reinvesting in another LIC pension plan.

Don’t go for traditional endowment or ULIPs again.

Invest the Rs 3 lakh in mutual funds.

Use SWP to get income regularly.

This gives more tax efficiency.

Long-term capital gains on equity MF are taxed only above Rs 1.25 lakh at 12.5%.

You get better flexibility and liquidity.

Avoid Index and Direct Funds Going Forward

Index funds do not beat inflation consistently.

They give average returns, no downside protection.

Actively managed funds adapt to market changes.

Direct funds are for experts only.

No guidance or review is available.

You must invest via regular funds with a Certified Financial Planner.

This gives review, rebalancing, and long-term planning.

Avoid Annuity Products Again

Annuities give low returns.

They are fully taxable as income.

No flexibility once you start.

You lose control over your own money.

MF SWP is better alternative for retirees.

Gives better return and lower tax.

Check If You Hold Any Other Investment-cum-Insurance

If you have LIC endowment, ULIP or pension plans, review them.

Surrender them if returns are poor.

Reinvest into mutual funds or hybrid funds.

Get guidance from Certified Financial Planner.

Ensure your retirement money works hard for you.

Use the Proceeds for These Financial Goals

Maintain Rs 50,000–Rs 1 lakh in liquid funds.

Keep balance in hybrid mutual funds.

Start monthly SWP of Rs 2,000–Rs 2,500.

This gives regular income and preserves capital.

Add nominee and maintain updated records.

Review portfolio every year with your spouse.

Tax Filing Guidance for Senior Citizens

Use ITR 1 if pension and interest income only.

If mutual funds are sold, use ITR 2.

Show annuity as “Other Income”.

Show surrender value as income in same head.

Keep documents like policy copy, surrender letter, bank credit proof.

Retain for 6 years for tax safety.

Final Insights

You did right by not claiming 80C if PPF limit was exhausted.

But taxation still applies on annuity and withdrawal.

LIC pension plans do not give tax-free maturity.

Surrender amount is fully taxable under your slab.

Reinvest this wisely in mutual funds now.

Avoid annuities, index funds, and direct plans.

Use Certified Financial Planner to guide future income planning.

Maintain simplicity, tax efficiency, and flexibility in retirement.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment