Lifef insurance maturity amount taxable or not

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ramesh (Querist)
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12 June 2016 Sir,

I have taken a SBI Life insurance paying single premium of Rs.100000.00 after 5 years i surrendered it, got 116000.00 after deducting TDS, in this case my question is whether maturity amount 116000.00 is taxable or not.

Thanks in Advance

Murtaza I Bhagat

Murtaza I Bhagat (Expert)
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12 June 2016 Surrendering Life Insurance Policy

Surrendering the insurance policy means exiting from the insurance policy before the maturity. It is the voluntary termination of the insurance contract by the policyholder. But what does it mean to surrender a policy? How to surrender a policy? In our article on Discontinue Life Insurance Policy: Surrender,Paid Up,Loan we discussed the various options available to an insurance policy holder if (s)he wants to discontinue the policy.

Let the Policy Lapse
Surrender the Policy
Make the Policy Paid up
Take loan against the policy

We also gave an overview of Surrendering the insurance policy. In this article we shall discuss in detail about surrendering the policy, tax implications of surrendering the policy, calculating the surrendering value, how to surrender a policy.
Overview of Surrendering the Insurance Policy

Surrendering the policy means exiting from the policy before the maturity. It is the voluntary termination of the insurance contract by the policyholder before the maturity or premature encashment of the life insurance policy. On surrendering a policy:

The life cover or protection ends.
The tax benefit, if availed of on the premium paid till then,may be reversed if surrendered before premium has been paid for two years and 5 years for ULIP products after the date of commencement of policy.
On surrendering before the maturity date the cash value that you receive is called the surrender value of a policy.
Policies usually acquire a surrender value after premiums have been paid for three years.
If any extra premium is paid towards riders such as Accident benefit etc, it is usually excluded.
The surrender value is calculated by the insurance company depending upon the time for which the policy was in effect (the age of the policy), the total duration of the policy, the premiums paid and any bonus accrued.
If the policy is in its initial stages (3-4 years old) the surrender value is only about 30% of the premiums paid plus any bonuses that may have accrued till then. The closer you are to the maturity date of your policy, the higher is the amount you get when you exit. Towards the end of its term, this can be as high as 80% of the premium. Even after three years, during the early stages of policy the surrender value is just a fraction of the total premiums paid.

Tax implications of Surrendering a Policy

Tax benefits on buying a life insurance policies come are: deductions under 80C section and tax benefit on benefits received under section 10(10D) . Tax treatment of policy on maturity or death of policyholder, on receipt of surrender or paid-up value, is similar. From our article Life Insurance

Benefit is available to Individual assessee and Hindu Undivided Family assessee.
In case of individual assessee – Himself/herself, spouse, children of such individual
In case of HUF assessee – any member of HUF.
For insurance policies issued before 01 Apr 20013 to on or after April 01 2012, deduction under 80C is allowed for only so much of the premium payable as does not exceed 10% of the actual capital sum assured. Before Apr 1 2012 the limit was 20% of sum assured.
Insurance products give you deduction of up to Rs 1,00,000 from taxable income under 80 C, subject to the life cover being at least five times the premium. If it is less than the minimum, the amount that can be claimed under Section 80 C for tax savings reduces appropriately. For example, if you take a single premium insurance policy with life cover of 1.25 times, then the amount claimed under 80 C will be only R 25,000 for Rs 1,00,000 premium paid. Ref:YourOwnAdviser
Premiums paid towards a life insurance policy qualify for tax deductions under Section 80C, with a limit of 1 lakh in a financial year, is restricted to 20% of the sum assured of the life insurance policy.
Under Section 10(10D), any amount received under a life insurance policy,from the maturity or claims on a life insurance policy, including bonus, is not taxable provided some conditions are met.
For policies bought before 1 Apr 2012, The proceeds from the maturity or claims on a life insurance policy were exempt under Section 10(10D) if the premium was not more than 20% of the sum assured or the sum assured was at least five times the premium paid.
For policy bought after April 1, 2012 the sum assured needs to be at least 10 times the premiums paid,
For policies whose premium is greater than 10% of Sum Assured getting money on maturity or even surrendering them early means you will be subject to tax on whatever you receive.

Let’s try to understand these conditions by example for deductions under section 80C.

For a sum assured of Rs. 10 lakh, the maximum premium that one can pay to claim deduction for policy bought after 1 Apr 2012 under section 80C is 10% of Sum Assured i.e Rs. 1 lakh.

Mr. Mehta takes life insurance plan with Sum Assured of Rs 2 lakh before 1 Apr 2012 . The maximum premium benefit he can avail is 20% of 2 lakh i.e Rs 40,000. If he pays premium of Rs 50,000 only Rs 40,000 will be considered. So one should always take Sum Assured as 5 times the annual premium to fulfill the 20% condition.

Mr. Khanna takes life insurance plan with Sum Assured of Rs 2 lakh after 1 Apr 2012 . The maximum premium benefit he can avail is 10% of 2 lakh i.e Rs 20,000. If he pays premium of Rs 50,000 only Rs 20,000 will be considered.

For tax benefit under section 10(10D)

Mr Khan pays 1 lakh of premium per year for a policy with Rs. 5 lakh sum assured bought after 1 Apr 2012, so premium is greater than 10% of Sum Assured (50,000) .

Three years later,he would have paid Rs 3 lakhs.
Let’s say when he surrenders after 3 years its surrender value is Rs 3.5 lakhs. As his annual premium was greater than 10% of Sum Assured so benefit received is taxable.
So, 3.5 lakhs is added to his income and he would need to pay upto Rs 1.05 lakhs as tax (if in the 30% bracket).
His investment: Rs 3 lakhs. His return: Rs 2.45 lakhs

Reversal of 80C benefits : According to 80C rules, tax savings on traditional life insurance plans will have to be reversed if :

you do not keep single premium policy in force for two years after the date of commencement of the policy OR
regular premium policy premiums are not paid for two years.

For ULIPS it’s 5 years. The amount of deduction allowed under Section 80C in earlier years shall be deemed to be income of the customer and (s)he will be liable to tax in the year of surrender of policy. So if you do not pay any additional premium after buying a regular premium policy, not only do you not get any surrender value, you will also have to reverse the Section 80C tax savings you have taken. It will be a double whammy for you!

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