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Is The Surrender Value Of ULIP Taxable?

Published On Sep 21, 2021 9:30 AM By InsuranceDekho

After the long-term capital gain tax was enacted, unit-linked insurance plans became a very appealing insurance product. Many investors buy ULIPs because they are a tax-efficient combination of insurance and investment. It provides annual benefits as an investment instrument as well as tax benefits as an insurance instrument, as ULIPs are considered an insurance product by the Internal Revenue Service.

Before investing in any financial instrument, the majority of people look at the annual tax benefit to reduce their tax obligation, but it's also a good idea to look at the tax implications on the maturity of an insurance policy, ULIP, or other investment. Section 104 of the Internal Revenue Code allows for ULIPs to be deducted. The amount of premium paid for ULIPs is deducted under section 80C, however, it's important to concentrate on the tax benefit at maturity.

Is The Surrender Value Of ULIP Taxable?

The following are some of the consequences of prematurely relinquishing your ULIP:

  • Surrendering During The Lock-in Time

Although ULIPs have a 5-year lock-in period, investors can withdraw their money before the lock-in period ends. Once you file a request for surrender, the risk coverage will expire; however, the surrender value will be paid only at the end of the 5-year period. Another essential factor to consider is that the investor is not compensated for the value of the fund at the time of surrender. Multiple deductions apply to any payments made beyond the lock-in period. Certain discontinuance charges are imposed when you apply to surrender your insurance. 

After discontinuance expenses have been subtracted, the remaining fund value is transferred to the Discontinued Policy (DP) fund. Your money will stay in the DP fund until the lock-in period ends. A fund management fee of up to 0.5 percent of the fund's value may be paid throughout this time period. This fund can also earn interest at a rate of roughly 4% per year, ensuring a minimum guaranteed return. All ULIP tax deductions will be accounted for as income and taxed according to your tax slab if you surrender your policy early. Tax Deducted at Source (TDAS) will also apply to the surrender value (TDS).

  • Reviving A Policy After It Has Been Surrendered

You can still revive a policy that has been surrendered before the lock-in term has expired. You have up to two years from the date of surrender to resurrect your surrendered ULIP and continue to benefit from it. The surrender charges that were previously collected are added to the DP fund value during the resurrection, and the outstanding premiums and associated charges are subtracted.

  • Surrendering Once The Lock-in Period Has Ended

ULIPs are long-term investment vehicles. Although there are no departure fees after the lock-in period, surrendering your plan is not recommended. Staying invested for long periods of time, such as 15-20 years, allows you to benefit from market regularisation while also spreading the costs of mortality, fund management, administrative, and other expenses throughout the policy's tenor.

Unit cancellation or market value reduction are used to cover the above-mentioned associated charges. As a result, the investment during the first five years is lower than in later years. As a result, giving up the money is a wise decision. As a result, surrendering the fund after the lock-in term devalues the investment.

Investors might swap funds if a plan is underperforming. However, before making a decision, keep in mind current market volatility and fund performance over time. Instead of relinquishing the policy to meet a cash crunch, ask for a partial withdrawal facility.

  • At The Age Of Maturity

When your Unit Linked Insurance Plan matures at the end of its term, the total amount received by you or your nominee is completely tax-free under section 10 of the Internal Revenue Code (10D). However, the tax benefit is only available if the Income Tax Act of 1961's insurance premium requirements is met.


ULIPs are excellent financial tools that can be used to bridge the gap between different investment possibilities while also saving money on taxes. Long-term wealth creation is more likely with life insurance products like ULIPs, which combine returns, protection, and tax savings into one policy.

ULIPs allow investors to invest their premiums in a variety of debt and equity funds, as well as inter-fund transfers via switches, all without incurring any tax penalties. A ULIP is a type of insurance in which the premium is invested in stock, debt, or money market assets.

Also read: Are ULIPs As Good As Mutual Funds?

Exploring ULIP Policy Surrender Rules

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.    

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