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

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  • 16th Mar 2022
  • 233

Is the ULIP Policy Surrender Value Taxble?

Investing in an 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 both traditional insurance plans and modern insurance plans like the Unit Linked Insurance Plans. ULIP is a financial tool that serves in bridging the gap between various investment options and, at the same time, helps in significant tax savings. Today, ULIP, despite being a life insurance product, is considered a more reliable long-term wealth creation option compared to others. This is because if you look at some of the best ULIP plans in India, you will note that an investor is getting the benefit of a good return on investment, protection, and tax-saving option all in a single product.

However, despite being a good long-term investment option, many investors may have different reasons to surrender their ULIP policy. In this article, we will discuss whether the ULIP policy surrender value is taxable, what are the charges and taxes to be paid if a policyholder chooses to discontinue ULIP policy, what is the taxability on ULIP on maturity, how to calculate surrender value of ULIP policy and other important details related to the policy’s surrender.

What do you mean by ULIP policy surrender?

Surrender means to stop and submit. Here, ULIP policy surrender means that as a policyholder, you want to stop investing further and are submitting the policy to the insurer. 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 comes with a mandatory lock-in period. In the case of ULIP policy, 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 other charges. Thus, it is recommended to not 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 of 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

According to the experts, if the policy is surrendered before the minimum lock-in period of five years, the full surrender value is considered as an income for the current fiscal year and 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

There are additional discontinuation charges to be paid if an individual chooses to discontinue ULIP policy.

Taxability on ULIP on maturity

In case you surrender your ULIP policy after completion of the lock-in period or post its maturity, you will not be charged with any additional fee. Also, the taxability on ULIP on maturity is null, meaning it is exempt from taxes. Therefore, the entire surrender amount that you receive after the maturity/lock-in period is tax-free.

The best way to calculate the surrender value of ULIP policy and taxes applicable to it is to ask your insurer. Seek out a professional’s help and avail the best options available!

- A Consumer Education Initiative series by Kotak Life

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