When it comes to buying a life insurance policy, the things that come to our mind are obvious. These include tax benefits at the time of investments and tax-free maturity proceeds. But what if I say that this isn’t the case for every product of life insurance companies? There is a specified provision for TDS and Tax on Surrender and Maturity of Life Insurance Policies.
*There is no tax, TDS on the insurance proceeds received upon the death of a policyholder.
Is Life Insurance Maturity Amount Taxable?
To understand if the life insurance maturity and surrender amount is taxable, let us divide the various life insurance policies into 4 categories.
- Single-Premium Policy
- ULIPs
- Traditional Policy like Endowment/Moneyback
- Pension Policy
The 2nd Step is to know when the policy was purchased.
- If the policy was purchased before 31st March 2012, the minimum sum assured should be 5 times of the premium. It’s necessary to claim tax-free proceeds on maturity and surrender of the policy.
- If the policy was purchased after 1st April 2012, the minimum sum assured should be 10 times of the premium. It’s necessary to claim tax-free proceeds on maturity and surrender of the policy.
- The pension policy does not come under this purview. It’s so because the pension policies don’t have any sum assured.
Sum assured is the amount received upon the death of a policyholder. In some policies, the sum assured for death and maturity can differ. However, the sum assured remains the same in most of the policies. The tax benefits are applicable for the sum assured upon death.
Also Read : Financial Planning for Salaried Employee
TDS and Tax on Surrender and Maturity of Life Insurance Policy – Budget 2019
Now, let us discuss the TDS and Tax on Surrender and Maturity of Life Insurance Policy one by one, as per budget of 2019. In this article, we will also cover the tax deduction reversal on surrender of the life insurance plan.
Policies Purchased Before 31st March 2012
Single-Premium Policy
Scenario 1
Tax on Maturity – Suresh had purchased a single premium policy (ULIP) in the year 2009. For the same, he had paid a premium of 1 Lakh. The sum assured is 1.5 Lakhs. The policy will mature in August 2019. The present fund value is 3 Lakhs. What would be the tax liability in the policy?
Since the sum assured is less than 5 times of the premium here, the maturity proceeds would be taxable.
As you can see, Suresh has made a profit of 2 Lakhs here. The gains would be added to his income. They would be taxed according to his tax slabs.
TDS – The insurance company would deduct 5% as TDS on the gain amount of 2 Lakhs.
Scenario 2
What if Suresh had a single premium policy (ULIP) in the year 2009? For which he had paid a premium of 1 Lakh and sum assured is 5 Lakhs. Since the policy was purchased before 2012 and the sum assured is 5 times of the premium amount. The gains would not be taxable. Besides, there would not be any TDS as well.
Scenario 3 – Surrender
Suppose the policy term in the above-mentioned case is 15 years and Suresh surrenders the policy in the 10th year. Same rules will apply. In other words, if the sum assured is less than 5 times, it would be taxable and TDS will apply.
If the sum assured is more than 5 times, no TDS and tax deduction would take place.
ULIPs and Traditional Policies – Regular Premium Policy
ULIPs and traditional policies have the same rules as mentioned above if purchased before 31st March 2012.
I have not discussed in much detail about surrender as these policies have already passed the usual 5-year/3-year tenure.
Policies Purchased After 31st March 2012
ULIPs And Traditional Policy
Scenario 1
Tax on Maturity – Suresh had purchased a ULIP/Traditional policy in August 2018. For the same, he had paid a premium 1 Lakh and sum assured is 10 Lakhs. The policy will mature in August 2033. So, what would be the tax liability at the time of maturity?
Since the sum assured is 10 times the premium here, the maturity proceeds would be tax-free.
Hence, no TDS would be deducted at the time of maturity.
Scenario 2
Tax on Maturity – Suresh had purchased a ULIP/Traditional policy in August 2018. For the same, he had paid a premium 1 Lakh and sum assured is 7 Lakhs. The policy will mature in August 2033. What would be the tax liability at the time of maturity?
Since the sum assured is 7 times the premium here, the maturity proceeds would be taxable.
5% TDS would be deducted at the time of maturity.
The gains (Maturity Value – Premium Paid) would be added to his income. Moreover, they would be taxed according to his tax slabs.
Also, the insurance company would deduct 5% as TDS on the gain amount.
Surrender and Tax Benefits Reversal
Let us take the above example and see what repercussions would follow in case you surrender the policy.
ULIPs
Suresh had purchased a ULIP in August 2018. For the same, he had paid a premium 1 Lakh and sum assured is 7 Lakhs. The policy will mature in August 2033. What would be the tax liability if he surrenders the policy in July 2019? (i.e. he does not pay the 2nd year premium.)
- Suresh will only get the surrender value in 2023. Plus, the gains in 2023 would be taxable in the policy.
- If Suresh had claimed tax benefits under the policy in the previous year under Section 80C, that would be reversed. (i.e. the deduction amount of the previous year would be added to this year’s income and taxed accordingly.)
- This reversal of tax is applicable until the 5th year. I.e. whether you surrender it in the 3rd year, 4th year or 5th year (if the 5th premium has not been paid). The previous year deduction would be added to this year’s tax amount.
What if the Sum assured is 10 Lakhs in the above-mentioned case? – the 2nd and 3rd Point will remain as it is in case Suresh surrenders the policy. Only the gains, if any, would not be taxable.
Traditional Policies
Suresh had purchased a Traditional policy in August 2017. For the same, he had paid a premium 1 Lakh and sum assured is 7 Lakhs. The policy will mature in August 2033. So, what would be the tax liability if he surrenders the policy in July 2019? (i.e. he does not pay the 2nd year premium.)
- Suresh will not get the maturity amount. The reason is that most traditional policies don’t have surrender value after 1 year, except for 1 or 2 policies in the market.
- If he gets the surrender value, the surrender value would be taxable.
- Also, if he had claimed any tax benefits, that would be reversed. The deducted amount would be added to his income.
Suppose if he surrenders after 2 years and the sum assured is 10 times the premium. In this case, neither the surrender value would be taxable nor the tax benefits would be reversed.
Single-Premium Policy
The rules are the same as the traditional policy. Nevertheless, you need to wait for at least 2 years before surrendering a Single Premium Policy.
Pension Policies
Pension policies don’t come under the purview of Section 10(10D) because there’s no sum assured in such policies.
Maturity of Pension Policies
Pension policies are tax-free at the time of maturity. You can commutate only 1/3rd of the total maturity amount. For the remaining 2/3rd amount, you need to buy an annuity which is taxable.
Pension Surrender
There are 2 rules regarding pension surrender.
- Suppose you had claimed tax benefits at the time of purchasing a pension policy. (80C benefits on the purchase of pension plan). In this case, the entire amount at the time of surrender would be taxable. The same would be added to your income and taxed accordingly.
- If you had not claimed the 80C tax benefits from this policy, then only the gains would be taxable. Also,the gains would be calculated as the difference between the maturity amount and the total premium paid.
The Grey Area!
Will indexation be considered in the case of ULIP gains? – As of now, there is no clarity on this.
So, how to file the gains of ULIPs and Traditional polices? – You can file ULIP gains in capital gains and traditional policy gains in income from other sources.
Now that you’ve finished reading this article, feel free to get in touch and share your views with us.
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