3 Tax Implications Of Premature Ulip Exit

Before you surrender an unit linked insurance plan (Ulip) you need to be aware of the tax implications for you from this tax saving investment.

Hello and welcome to FundooMoney, your 24X7 buddy for all your money matters. Unit linked insurance plans (Ulips) offered by life insurance companies are financial products that provide a combination of life insurance and market-linked investment, especially in equities, that can potentially provide high growth during the long tenure of the Ulip. What’s more, you get annual tax deduction of upto Rs 1.5 lakh for your premium under Section 80C.

It is always a great idea to do a thorough research before buying an Ulip since there is a 5 year lock-in period of your money. But you might still want to make a premature exit of the Ulip due to reasons such as a lack of fit with your changing financial goals. Under such circumstances, you need to be aware of tax implications of a premature exit from an Ulip. We will discuss them at length in just a little while.

Here are three tax implications people need to know before actually making a premature exit from an Ulip.

Check if you have completed five annual premiums
As we have mentioned, Ulips have a five year lock-in period during which no withdrawals are allowed. There are tax implications on the timing of the withdrawal. Even if you surrender the policy much earlier, you need to wait for this period to get over in order to receive the proceeds of the surrendered policy.

Find out when surrender proceeds are tax free

The tax treatment of withdrawal amount depends upon whether you have paid the 5 annual premiums or not. If you have paid the 5 annual premiums and the 5 years lock-in period is over, entire surrender proceeds is tax free.

When you need to pay tax on surrender proceeds

If you have discontinued the policy before paying the fifth annual premium, the surrender proceeds you get at the end of 5 years would be taxable. The surrender value amount that you get, would be added to your prevailing year’s income and you need to pay taxes as per your income tax slab. Any deduction that you had claimed in previous years under Section 80C on the basis of Ulip premium would be reversed and added back to your income in the year you get the surrender value amount.

We hope you found this useful. Do share with us your thoughts on the other things people need to do before making a premature exit from an Ulip, by writing in the comments section. For more such actionable personal finance information and regular uploads, subscribe to our channel. Also, visit our website, download our mobile app and stay connected with us on Instagram, Pinterest and Slideshare.