Purchased ULIP long back but now decided to surrender it? First, understand the taxation on ULIP Surrender. Many of us buy ULIPs either because forced by someone or with our own intention to invest. However, after few years, we feel that ULIPs are not worthy to invest in. Hence, we wish to surrender. There may be a certain loss if you surrender. However, understanding the taxation on ULIP surrender is also important for you.
To understand how the entire taxation part of ULIP (especially after the 2021 Budget), then refer my latest post “Budget 2021 – All about the Taxation of ULIPs”. However, in this post, my concentration is on the taxation of ULIP surrender.
Taxation on ULIP Surrender – Before or after 5 Yrs
Let us divide this issue into two parts. One is if you are surrendering before 5 years completion. Another is after 5 years.
Taxation on ULIP Surrender – Before 5 years
We all know that ULIPs will come with 5 years lock-in. But you are allowed to discontinue the policy before 5 years also. However, you will get the invested money after 5 years.
If you stopped the premium payment and requested for surrender before 5 years’ completion, then risk-cover will cease. But as I told you, the surrender value incurred is paid only at the end of the 5-year term. One more important aspect you have to consider is that you will not get the fund value as on the surrender date. The pay-out made post the lock-in period is subject to multiple deductions. When you apply for surrendering your policy, certain discontinuance charges are levied.
After deducting the discontinuance charges the remaining fund value is transferred to the Discontinued Policy (DP) fund. Your funds will continue to remain in the DP fund until the end of the lock-in period. During this tenure, a fund management fee may be charged, not exceeding 0.5% of the fund value. This fund is also eligible to earn interest at about 4% per annum to provide a minimum guaranteed return.
Now let us understand the taxation rule on whatever the money you receive after the lock-in.
a) If you claimed the benefit under Sec.80 C
If you claimed the deduction under Sec.80 C during your policy period, ULIP surrender before 5 years is considered as premature closure. Hence, all tax deductions claimed against ULIP will be accounted as income and taxed according to your tax slab. The surrender value will also be subjected to Tax Deducted at Source (TDS).
Do remember that it is not the last year’s deduction only added to your income, but all the previous years where you claimed the deduction under 80C are added to your income. Assume that you purchased the ULIP in 2016 and for the FY 2016-17, 2017-18, and 2020-21, you claimed the deduction under 80C but not claimed the deduction for FY 2018-19 and 2019-20. Then, whatever the deduction you claimed for those 3 financial years is considered as an income while receiving the surrender value after 5 years. However, two financial years where you have not claimed 80 C benefits are not considered as income.
b) If you have not claimed the benefit under Sec.80 C
Here is the confusion. There is no clarity on this aspect. Only one Insurer (Edelweiss Tokio Life Insurance) is mentioned as below.
“If the policy is surrendered before the lock-in period of 5 years, then the entire surrender value will be treated as income for the current year and will be added in Gross Total Income and thus will be taxed as per applicable tax slab rate of the individual.”
This means the entire amount (not profit) is taxable as per your tax slab in the year when you receive such premature ULIP amount after 5 years.
But no other insurers are clear on this and in fact, I found that Income Tax law is also silent on this. Hence, my assumption is that if you surrender ULIP before 5 years and if you availed any tax benefit under 80 C, then it will be reversed as I mentioned above. However, if you have not availed any tax benefit under Sec.80 C, then the surrender value is tax-free because you are receiving it after 5 years of lock-in.
Taxation on ULIP Surrender – After 5 years
Here it is very clear. If you surrender your ULIP policy after the completion of 5 years, then the entire surrender value is tax-free. In fact, there are no exit charges applicable on ULIPs if you surrender them after 5 years of completion.
Sir
I have a ulip policy of lic ednoment plus.I have paid 4years of premium.it has completed 5years at last june 2022.But i am unable to surrender it by the system.please give me soluation process.
Dear Ashim,
Approach the insurance company.
Dear Basu Sir,
I have a doubt regarding HDFC ULIPs.
1. I read user reviews of HDFC Life ULIPs that they are charging hidden charges like Annual charges 4% and monthly 2% charges on premium. But neither their website nor benefit illustration shows these charges. They publicize ULIP telling only two charges, that is FMC and MC. If that is true, then why IRDAI is not punishing HDFC life? if you see youtube reviews of HDFC life ULIPs, its quite evident that they charge lots of hidden charges. Is it legal? can they charge customers without notice?
regards
Dear Rajesh,
They can’t do so. If you have proof that they are charging which is not mentioned in the policy document, then you have all rights to complain against them. But as per me, many insurers do not charge unnecesserily. Many confuse few expenses as not disclosed.
Dear Basu Ji,
Thanks for the above article.
I invested in an ULIP scheme on 31.08.2016 for an annual premium of Rs. 5 lakhs. I continued the policy for 3 years and discontinued the premium from August 2019 due to some personal reasons. The fund value after adjustment of discontinuance charges was transferred to Policy Discontinuation fund which would supposedly give a return of around 4% after expenses for the remaining of the 5 year lock-in period till 31.08.2021. I am a NRI and I did not avail the deductions for 80(C) on the premium paid for this policy for any assessment year from 2016-17. Yesterday I received a call from the Insurance Company and they are telling me that there will be a Income Tax deduction on the pay-out proceeds of this policy since there was no life cover attached to the Policy Discontinuation Fund. Is this correct as per the recent changes in IT rules after the budget announcement in Feb 2021? The Insurer is yet to come back on the amount to be deducted and I have requested for the same. In the meantime, I would request you to let me know your views on the following:
1) Will the new rule of deducting IT will apply to the above policy since it was taken in 2016 and the funds were locked-in for 5 years in the Policy Discontinuation Fund?
2) If yes, will the IT will deducted on the full pay-out amount of Rs.16 lakhs or only on the Rs.1 lakh which is the return over my original investment of Rs.15 lakhs?
3) Even if they deduct IT, will I be able to claim the amount deducted from IT since I did not claim any deduction in the previous years under Section 80C?
Look forward to your kind advice please.
Dear Venkat,
If there is no Sum Insured in the ULIP, then obviously it will attract TDS. TDS is applicable only on the return part but not on the premium part. Yes, by showing your ITR, you can claim back such TDS.
Dear Basu ji,
Assume I have 2 policies, LIC Arogya Rakshak and another from HDFC ERGO. I get hospitalized and incur an expense of 2 lac rupees. I use HDFC policy for cash less payment. Can I still make a claim and get payment from this LIC policy? Or is it a restriction that we can only make claim to 1 policy.
(Apologies for asking on this blog post but the post on LIC policy is not allowing to post comment due to captcha error.)
Thanks for the detailed review. This is very helpful.
Dear Alok,
You can claim from both and get the money. The reason is one is defined benefit and another is indemnity policy.