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Is The Surrender Value of ULIP Taxable? Everything That You Need to Know

Life insurance is essential for everyone; at some point in time, we feel the need to purchase a life insurance policy for life insurance coverage or for making an investment. ULIP investment in India is a popular form of investment that helps policyholders earn from returns and also secure their families with life insurance coverage.
 

When you are buying a Unit-Linked Insurance Plan, you learn about the various components of a ULIP. But with so much information to absorb, it is possible that you may miss out on the taxation of ULIP plans. This is important since ULIP is a long-term wealth-creation product that can also offer tax* benefits. However, being a market-linked investment plan, there may be various reasons why one may choose to surrender a Unit-Linked Insurance Plan.
 

Apart from learning about the coverage benefits and the various ULIP charges, here is what you should know about the taxability of a ULIP once it is surrendered.
 

When Can You Surrender a Unit-Linked Insurance Plan?


There are no specific restrictions on the surrender of ULIP insurance. However, here are some things you need to consider before surrendering a Unit-Linked Insurance Plan. The lock-in period of a ULIP is 5 years. Surrendering the policy within this lock-in period will not only attract a penalty but will also render the surrender value taxable.
 

Even if you surrender the ULIP after the 5-year lock-in period, your investment will not have appreciated or increased to the extent it would have if you chose to complete the policy term. Therefore, this will again lead to the deduction of surrender charges as well as the loss of a long-term investment.
 

The right time to surrender the policy would be, in case of dire emergencies, after the premium paying period, in case the policy term is longer than the premium paying term. If you are investing in a ULIP through the Regular Pay option, then it is advisable to complete the policy term so that you can get the maturity benefits of the ULIP and any other loyalty additions for completing the policy term.
 

Of course, you can make partial withdrawals from your ULIP funds once the lock-in period is over in case you need some financial assistance from time to time. However, the complete withdrawal will result in the loss of the investment.
 

Taxability of ULIP in India


Before you buy a ULIP, it is always advisable to know about the various charges involved in purchasing a ULIP. For instance, there are mortality charges, premium re-direction charges, fund management charges, and more. You may also be charged if you exceed the maximum number of free fund switches allowed under the ULIP policy.
 

These fund switches enable you to move your investment allocation from one fund to another as per the options under the ULIP, so that you can realign your investment in case one or two of the funds do not perform as expected.
 

As we know, you can choose to surrender your ULIP insurance at any point in time. This can happen during the lock-in period or after the lock-in period. And both of them have their individual outcomes, which we can discuss here.
 


ULIP Taxability before Maturity

The ULIP surrender amount is also taxable; moreover, there are also discontinuation charges to be paid. If the ULIP is surrendered before the 5-year lock-in period, the total surrender value counts as income for the current financial year and is added to the policyholder’s total gross income.
 

After that, the applicable tax* slab of the individual will determine the amount of tax* to be paid on their total income for the year, which also includes the surrender value.
 

ULIP Taxability on Maturity


When you receive the maturity benefit or the returns on your ULIP, the taxability of ULIP on maturity will be as follows:
 

  • The maturity amount will not be taxed as the maturity benefit is tax*-free. Under Section 80C of the Income Tax* Act, the premiums paid towards the ULIP will be eligible for tax* deductions, while under Section 10(10D), the payout of the maturity benefit is exempt from taxes.

  • If the ULIP is surrendered after the completion of the 5-year lock-in period or after the policy maturity, there will be no penalty charges applicable. On maturity, the whole surrender amount will be free from taxation.


Our company also offers benefits such as loyalty additions and a refund of some of the charges on its ULIP plans if you withdraw or surrender the policy only on maturity.


The use of a ULIP calculator is also advised not only before you purchase a ULIP but also when you are investing in the ULIP. Apart from knowing how much you need to invest in the ULIP, this calculator can also help you know the expected returns you can earn from your investment. Of course, inflation and other factors will affect the actual returns, but with an expected inflation rate in the calculator, you can get a closer estimate of your returns.
 

Conclusion


Apart from just investing in a ULIP plan, you should also know how it can best protect your loved ones from unfortunate events and keep them secure in your absence. However, another important component is taxation which should also be considered since an investment with tax* benefits is an added advantage for any policyholder/investor.


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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

View all posts by Tata AIA Life Insurance

Frequently Asked Questions

Will I get all the policy benefits if I do not surrender my Unit-Linked Insurance Plan?

Yes, you will enjoy the life coverage benefit of the ULIP and the market-linked returns and tax* benefits if you choose to keep the ULIP policy until it matures. After maturity, the life cover will end, and you will receive a lump sum amount as the maturity benefit, which is your total fund value.

When is the right time to buy a ULIP?

The right time to buy a ULIP is when you understand the working of a ULIP, the various charges involved, and the taxability benefits it offers. Also, since ULIPs comprises so many different components, the premium will be higher than a simple life insurance plan. Therefore, your financial capacity should also be considered while purchasing a ULIP.

Disclaimer

  •  Insurance cover is available under the product.
  • The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not guaranteed issuance plans, and they will be subject to Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions please read the sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and does not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.
  • *Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.
  • THE LINKED INSURANCE PRODUCT DO NOT OFFER ANY LIQUIDITY DURING THE FIRST FIVE YEARS OF THE CONTRACT. THE POLICY HOLDER WILL NOT BE ABLE TO SURRENDER/WITHDRAW THE MONIES INVESTED IN LINKED INSURANCE PRODUCTS COMPLETELY OR PARTIALLY TILL THE END OF THE FIFTH YEAR.
  • Past performance is not indicative of future performance.
  • All investments made by the Company are subject to market risks. The Company does not guarantee any assured returns. The investment income and price may go down as well as up depending on several factors influencing the market.
  • Please make your own independent decision after consulting your financial or other professional advisor.