Is the ULIP Policy Surrender Value Taxable?
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Is the ULIP Policy Surrender Value Taxable?

You can find out all the crucial information about the surrender of the ULIP policy in this article. Taxability of ULIPs both before and after maturity, taxability of ULIP policy surrender value, etc.

  • Mar 16, 2022
  • 4,689 Views

Investing in a life insurance policy is considered a long-term investment plan. This is because the longer you invest in an insurance policy, the better your returns. This goes with traditional and modern insurance plans like Unit Linked Insurance. ULIP is a financial tool that bridges the gap between various investment options and helps in significant tax savings. Today, ULIP is considered a more reliable long-term wealth creation option than others, despite being a life insurance product. This is because if you look at some of the best ULIP plans in India, you will note that an investor benefits from a good return on investment, protection, and tax-saving option in a single product.

However, despite being an excellent long-term investment option, many investors may have different reasons to surrender their ULIP policy. This article will discuss whether the ULIP policy surrender value is taxable. What are the charges and taxes to be paid if a policyholder discontinues the ULIP policy?
But what is the taxability of ULIP on maturity and ULIP surrender value tax?

What do you mean by ULIP policy surrender?

Surrender means to stop and submit. Here, ULIP policy surrender means you want to stop investing further and submit the policy to the insurer as a policyholder. This is done to receive the NAV of the ULIP policy as liquidity or ready cash.

When can you surrender a ULIP policy?

As a policyholder, you can surrender a ULIP policy as and when you wish to. However, you must know that every insurance policy has a mandatory lock-in period. In the case of ULIP policy, the lock-in period is five years. If you discontinue the ULIP policy before the lock-in period, you might have to pay the penalty, and the ULIP policy surrender amount is taxable. Thus, it is recommended not to discontinue the ULIP policy before the completion of five years.

The best time to surrender a ULIP policy is post its maturity time. Since you would have planned the long-term insurance and its maturity period, it is suggested that you extract the investment once it has reached maturity. This will help you in maximizing the returns. The best ULIP plans in India offer varied maturity periods of more than five years.

Taxability on ULIP surrender value

There can be two scenarios for surrendering the ULIP policy. One where the policy has not completed the lock-in period and the other where the policy has completed the lock-in period. Let us discuss them individually.

Taxability on ULIP before maturity

Prior to the Budget 2021 proposal, any gains made on ULIPs were entirely tax-free; however, going forward, the maturity amount will only be tax-free, provided the total yearly premium is up to 2.5 lakh. Any income earned from the annual premium that exceeds 2.5 lakh is subject to capital gains tax.

According to the experts, the ULIP policy surrender amount is taxable; if it is surrendered before the minimum lock-in period of five years, the total surrender value is considered income for the current fiscal year. Therefore, it is added to the total gross income for that fiscal year. Based on this value (total gross income after adding the deposited surrender value), the applicable tax slab is identified, and the individual has to pay taxes accordingly.

Note

If an individual discontinues the ULIP policy, they must pay additional discontinuation charges.

Taxability on ULIP on maturity

The tax on ULIP surrender value governing your ULIP’s maturity advantages are referred to as ULIP maturity taxation. As of right now, Section 80C deductions allows you to deduct the premiums you’ve paid for a ULIP. In accordance with the requirements of Section 10(10D) of the Income Tax Act of 1961, the payout you receive at the conclusion of the policy term is likewise tax-exempt. However, the following restrictions apply to these laws.
If you surrender your ULIP policy after the lock-in period is completed or after its maturity, you will not be charged any additional fee. Also, the taxability of ULIP on maturity is null, meaning it is exempt from taxes. Therefore, the entire surrender amount you receive after the ULIP policy maturity/lock-in period is tax-free.

The best way to calculate the surrender value of the ULIP policy and applicable taxes is to ask your insurer. Then, seek a professional’s help and avail the best options!

In this policy, the investment risk in the investment portfolio is borne by the policyholder.

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