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In this policy, the investment risk in the investment portfolio is borne by the policyholder.
Kotak e-Invest
Features
Ref. No. KLI/22-23/E-BB/492
ULIP surrender tax is levied on premature withdrawals from ULIPs, typically within the lock-in period, subject to specific conditions and charges. This tax impacts the surrender value and returns of the policy.
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 the Unit Linked Insurance Plan. It is a financial tool that bridges the gap between various investment options and helps in significant tax savings.
Today, despite being a life insurance product, ULIPs are considered a more reliable long-term wealth creation option than others. If you look at some of the best ULIPs in India, you will note that an investor benefits from a good return on investment, protection, and tax-saving option in a single product.
Despite being an excellent long-term investment option, many investors may have different reasons to surrender their ULIP policy. This article will discuss taxation on ULIP, What charges and taxes will be paid if a policyholder discontinues the ULIP policy? And what are the ULIP tax exemption and ULIP surrender taxation?
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.
Long-term capital gains (LTCG) tax will apply to ULIPs, similar to the tax on all equity-oriented investments. A 10% tax rate will also be imposed on long-term capital gains (LTCG). However, no tax will be imposed in the event of an individual’s death.
As a policyholder, you can surrender a ULIP policy when you wish to. However, you must know that every insurance policy has a mandatory lock-in period. In the case of the 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 after its maturity. Since you would have planned the long-term insurance and its maturity period, extracting the investment once it has reached maturity is suggested. This will help you maximize the returns. India’s India’s best ULIP plans offer more than five years of maturity periods. offer more than five years of maturity periods.
There can be two scenarios for surrendering the ULIP policy. One where the policy has not completed the lock-in period, and the other has completed the lock-in period. Let us discuss them individually.
Before 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 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.
The tax on the ULIP surrender value governing your ULIP’s maturity advantages is called ULIP taxation. Section 80C deductions allow 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 after 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.
If you are facing a financial emergency and need funds urgently, you can surrender your ULIP policy. However, the surrender charges can be high, and you may not receive the entire amount invested.
If you are unsatisfied with the returns generated by your ULIP policy, you can surrender it. However, market-linked investments can be volatile, and returns can fluctuate.
If your financial goals have changed, and your ULIP policy no longer aligns with them, you can surrender the policy. For example, if you bought the policy for your child’s education, but your child has already completed their education, you can surrender it.
If you find a better investment opportunity that offers higher returns than your ULIP policy, you can surrender the policy. However, before you surrender your policy, compare the returns offered by the new investment opportunity with the ULIP policy.
Due to financial constraints, you can surrender the policy if you find it difficult to pay the premiums for your ULIP policy. However, remember that surrendering the policy can hurt your financial goals.
ULIP taxation rules depend on when you purchased the ULIP. there are rules for ULIP taxation based on following purchase timelines:
You will benefit from the previous tax rules if you purchased a ULIP before 1 February 2021. However, these changes apply only to ULIPs purchased after 1 February 2021. The EEE advantage, LTCG tax exemption, and other benefits make ULIPs highly attractive, especially for first-time investors.
Combining the benefits of insurance and investment, ULIPs offer individuals a unique avenue to achieve their long-term financial goals while protecting their loved ones. Let us understand the key features of ULIP plans, shedding light on what makes them an attractive choice for investors.
ULIPs offer a unique combination of life insurance and investment. A portion of the premium provides life insurance coverage, while the remainder is invested in various equity, debt, or balanced funds, depending on the policyholder’s preference and risk appetite.
Policyholders can choose from various fund options based on risk tolerance and financial goals. ULIPs also offer the flexibility to switch between different funds, allowing investors to adjust their portfolios in response to market conditions without incurring additional charges.
ULIPs provide premium payment options, including regular, limited, and single premium payments. This flexibility ensures that policyholders can select a payment schedule that aligns with their financial situation and planning.
ULIPs offer transparency in terms of charges and fund performance. Policyholders receive regular updates on the value of their investment, the charges deducted, and the performance of the chosen funds.
ULIPs have a mandatory five-year lock-in period. This feature encourages long-term investment discipline, which is crucial for achieving financial goals.
Designed to cater to investors’ evolving needs, ULIPs provide many benefits that make them a preferred choice for individuals seeking long-term financial growth and protection.
ULIPs provide tax benefits under Section 80C of the Income Tax Act, allowing deductions up to ₹1.5 lakhs on the premium paid. The maturity proceeds are tax-free under Section 10(10D), provided certain conditions are met. However, for policies issued after February 1, 2021, if the annual premium exceeds ₹2.5 lakhs, the returns are taxable as capital gains.
The investment component of ULIPs allows policyholders to participate in capital market growth. Over the long term, this can result in substantial wealth creation, helping policyholders achieve their financial objectives, such as buying a home, funding children’s education, or planning for retirement.
ULIPs provide life insurance coverage, ensuring financial protection for the policyholder’s family in the event of the policyholder’s untimely demise. The sum assured or the fund value, or higher, is paid to the beneficiaries.
Policyholders can switch between equity, debt, and balanced funds, usually without incurring any charges, up to a certain number of switches per year. This flexibility helps manage risk, optimize returns based on market performance, and change financial goals.
After the completion of the lock-in period, ULIPs allow partial withdrawals. This feature provides liquidity and can be beneficial in financial emergencies or specific financial needs.
The surrender value of ULIP policies is subject to ULIP taxation in certain circumstances. If the policy is surrendered before the completion of five years, the surrender value will be subject to ULIP taxation as per the income tax slab rate of the policyholder. However, if the policy is surrendered after the completion of five years, the surrender value will be tax-free.
It is important to note that the surrender value is calculated after deducting various charges such as premium allocation, fund management, mortality, etc. Therefore, it is advisable to carefully evaluate the surrender value and the tax implications before surrendering the ULIP policy. It is also recommended to consult a financial advisor or a tax expert to understand the taxation of ULIP policy surrender value.
The best way to calculate ULIP returns policy and applicable taxes is to ask your insurer. Then, seek a professional’s help and avail the best options!
1
ULIP (Unit Linked Insurance Plan) is an investment product that provides life insurance and investment benefits. Suppose the policyholder decides to terminate the ULIP policy before its maturity date. In that case, they may receive a surrender value, which is the accumulated fund value of the policy minus surrender charges.
2
Yes, the ULIP policy surrender value is taxable per the Income Tax Act 1961. If the policyholder surrenders the ULIP policy before completing five years, the surrender value is added to the policyholder’s income and taxed as per their income tax slab rate.
3
If the policyholder surrenders the ULIP policy after completing five years, the surrender value is tax-free. However, if the policyholder has availed of any tax benefits on the premiums paid during the policy term, they may have to pay tax on the gains in the year of surrender.
4
No, tax benefits are available only on the premiums paid during the policy term and not on the surrender value. The surrender value is taxed as per the Income Tax Act of 1961.
5
The surrender value of the ULIP policy is calculated by deducting the surrender charges from the accumulated fund value. The surrender charges vary from insurer to insurer and usually decrease with the policy’s tenure. The accumulated fund value is the total value of the investments made by the policyholder, including capital gains and losses, as per the prevailing market conditions.
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Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
In this policy, the investment risk in the investment portfolio is borne by the policyholder.
Kotak e-Invest
Features
Ref. No. KLI/22-23/E-BB/521
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
