Did u know that surrender value of your insurance policy can be taxable ?

Did u know that surrender value of your insurance policy can be taxable if proper care is not taken?

Life insurance policies are popular among customers because of their tax saving nature. The premiums paid up to Rs.1.5 lakhs are exempted from the taxable income under Section 80C.

Similarly, the benefits received under a life insurance plan, whether on maturity or death, are tax-free under Section 10 (10D). Furthermore, the Section 10 (10D) benefit has no upper limit. In case you surrender the policy, the surrender benefits are tax-free provided they fulfill some conditions. Want to know what these conditions are?

Here are the instances when you can claim tax exemption on your surrender value –

In case of single premium policies, if surrender happens after the first two years of buying the plan, the surrender value if tax-free.

For regular premium plans, the surrender value is tax-free if the premiums for the policy are paid for at least 2 full years.

For Unit Linked Plans, the surrender value becomes tax-free only if the policy is surrendered after 5 years.

For pension plans, the surrender value is always taxable. It is taxed at your income tax slab rate in the year the value is received. Only 1/3rd of the entire pension corpus can be withdrawn tax free under section 10(10)A at the time of vesting.

If you do not fulfill these conditions, the surrender value received would be taxed at your income tax rate.

Reversal of 80C Benefit

To add to the agony, if the above-mentioned conditions, i.e. 2 years of premium payment for Traditional Life Insurance Policies and 5 years for ULIPs are not paid, then even the 80C benefit received at the time of policy inception would be reversed! The entire tax rebate for the period would be reversed and would be added to your taxable income.

For example, you pay 1 year premium for a traditional policy and then stop paying your further premiums and your policy lapses, the entire amount of the premium paid would be reversed as the amount had previously been deducted under section 80C and taxed according to your existing income tax slab.

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