A definitive guide to Surrender Value Taxation

UNOVEST

A definitive guide to Surrender Value Taxation

Do you have to pay tax or not?

July 2017

By: Vipin Khandelwal Navi Mumbai

Rs. 500

SURRENDER VALUE TAXATION ? DO YOU HAVE TO PAY TAX OR NOT?

DISCLAIMER

The information presented in this guide is based on current tax laws and their interpretation. The author is a SEBI Registered Investment Adviser. However, he is not registered with IRDA ? the insurance sector regulator. This guide intends to educate and inform investors. The author cannot be held responsible for any gain/loss caused to the reader by acting upon the advice or recommendations.

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SURRENDER VALUE TAXATION ? DO YOU HAVE TO PAY TAX OR NOT?

Index

INTRODUCTION

#1 IS THE SURRENDER VALUE OF AN INSURANCE POLICY TAXABLE?

#2 IS AN INSURANCE POLICY A CAPITAL ASSET?

#3 TDS ON YOUR INSURANCE POLICY PAYOUT

#4 IS THE SURRENDER VALUE OF MY INSURANCE POLICY TAXABLE?

#5 TRADITIONAL PLANS AND SURRENDER VALUE TAXATION

#6 PENSION PLANS AND SURRENDER VALUE TAXATION

#7 ULIPS AND SURRENDER VALUE TAXATION

#8 SINGLE PREMIUM PLANS AND SURRENDER VALUE TAXATION

#9 HOW TO SHOW THE SURRENDER VALUE IN THE INCOME TAX RETURN?

#10 DO I HAVE TO REVERSE THE TAX BENEFITS TAKEN UNDER SECTION 80C?

RECAP

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SURRENDER VALUE TAXATION ? DO YOU HAVE TO PAY TAX OR NOT?

Introduction

Insurance has been one of the most mis-sold products in the history of financial services. This has happened more so in the last 2 decades.

As investors realised their mistake, each one of them wanted to get out of it and make amends as soon as possible.

Thus started the surrender of these unwanted policies.

The product structure itself was difficult to understand and on top of it the tax laws made the whole process even worse.

Very few understood that the surrender of their policy could attract the taxman's attention. And it did!

Over the last few years, I have been receiving several queries about taxation of surrender values of insurance policies. It is not possible to answer every query on my blog article or through emails that I receive.

Hence, I have created this step-by-step guide to help you understand the various aspects of taxation related to different types of insurance policies. With this guide, you can know if you need to pay any tax on the receipts from your insurance policy.

I look forward to your comments and feedback. Send me an email to vipin@unovest.co. Happy to hear about how this guide helped you, if at all.

In your service, Vipin Khandelwal

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SURRENDER VALUE TAXATION ? DO YOU HAVE TO PAY TAX OR NOT?

#1 Is the surrender value of an Insurance Policy taxable?

The most important principle to be kept in mind to determine the taxability of your insurance policy is the one provided by Section 10 (10D) of the Income Tax Act, 1961.

The section states that any receipt of amount on maturity of an insurance policy is not considered as a part of taxable income, if:

a) The insurance policy was bought during April 1, 2003 to March 31, 2012 and has a Sum Assured equal to or more than 5 times the premium.

b) The insurance policy was bought after April 1, 2012 and has a Sum Assured equal to or more than 10 times the premium*.

* In case of disability, such Sum Assured is considered as 7.5 times the premium.

Effectively, if you brought an endowment plan in 2009 with a sum assured of Rs. 10 lakhs and a yearly premium of Rs. 1 lakh, then on maturity, any amount received through this policy is tax free under Section 10 (10 D).

If in the above case, the sum assured is only Rs. 5 lakhs, then the entire amount becomes taxable.

DEATH BENEFIT IS COMPLETELY TAX-FREE. It is to be noted that any benefit received on the death of the insured person is completely tax-free irrespective of any section.

Any other amount received through a policy that does not fall under the above categorization is subject to tax on maturity.

So, that was taxation on maturity of a life insurance policy.

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