Learn How An Endowment Policy Can Help You Save Money Tax

Endowment policy is a chief type of life insurance policy. A life insurance policy is essentially a long-term financial investment. You can buy a policy with tenure ranging from five years to 30 years or more. The policy pays the benefit, either in case of maturity or policyholder’s demise during the term. However, sometimes, you may want to give up the plan before the end of its tenure due to the inability to pay the premium or any other reason. In such a situation, although you can surrender the plan, you must be aware of the tax implications.

Tax Rules On The Endowment Life Insurance Policy

The tax rules on life insurance depend on the type of plan you hold. The surrender value is exempted from tax only on the fulfilment of the following conditions.

• If you hold traditional life insurance policies like an endowment plan or a money-back plan, the surrender value is tax-free only if you have regularly paid the premium for the first two years of the policy tenure.
• If you hold a single premium life insurance policy, the surrender value will be tax-free in your hands if you have held the policy for at least two years from the date of purchase.
• If you hold a unit linked insurance plan or ULIP, the surrender value is exempted from tax only if you surrender the policy after five years from the date of purchasing the plan.

Apart from the above conditions, the date of policy issue also determines the taxability on the surrender value.

• If you have purchased the life insurance before 31st March 2003, the full surrender value is exempted from tax.
• If you have purchased the policy between 1st April 2003 and 31st March 2012, the surrender value of your life policy will be exempted from tax if the sum assured is at least five times the annual premium.
• If the policy you hold was issued on or after 1st April 2012, you need not pay any tax on the surrender value provided the sum assured of the plan is at least ten times more than the annual premium amount.
• If the policy was issued on or after 1st April 2013 and if you are categorised as disabled as per the definition provided under Section 80U of the Indian Income Tax Act, 1969 or if you suffer from an ailment listed under Section 80 DB, the surrender value is exempted from tax if the sum assured is at least 6.7 times the annual premium amount.

Suppose you don’t meet any of the criteria mentioned above while surrendering the life insurance policy. In that case, the proceeds you receive or the surrender life insurance policy amount you get will be taxable.

• The tax exemption you may have claimed for premium payment under Section 80C of the IT Act will be reversed, and you would have to pay an additional tax on the exemption you claimed earlier when the policy was active.
• The surrender value that you may receive will not be tax-free under Section 10 (10D), and the amount will be treated as ‘income from other sources’ and taxed as per the existing tax bracket.

Conclusion

So, if you are thinking about surrendering your endowment life insurance policy, you must understand the tax implications and determine whether the surrender value qualifies for the tax exemption, or you may have to incur dual tax.

Also read: What Factors Determine Endowment Policy Premiums?

5 Points to Be Consider When Purchasing an Endowment Policy