3 Tax Implications of ULIP Surrender
Author: Naveen Kumar
Many of us are aware that 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. These investments can potentially provide high growth during the long Ulip tenure. What’s more, you get annual tax deduction of upto Rs 1.5 lakh for your premium payment under Section 80C.
It is always a great idea to do a thorough research before buying an Ulip since there is a five year lock-in period for your money. But then, occasions may arise when 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, especially three most important implications.
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 when you exit the Ulip. Even if you surrender the policy much earlier than the end of the lock-in period, 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 five annual premiums. If you have paid five annual premiums and the five 5 year 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 five years would be taxable. The surrender value amount that you get, would be added to your prevailing year’s income and you will need to pay tax according to your income tax slab. But wait, for there’s more! Any deduction that you had claimed in previous years under Section 80C on the basis of the Ulip premiums would be reversed. They would be added back to your income in the year you get the surrender value amount.
It is must be too evident to you that premature Ulip exits are painful for investors. Since “prevention is better than cure”, it is better to take an informed decision while buying the Ulip and avoid premature exit as far as possible.
Suggested video: 3 Tax Implications Of Premature Ulip Exits
