Insurance and Taxation

Insurance and Taxation

Immediately after joining 1st job, your uncle advised you on to buy insurance policy to claim tax benefits or the maturity value. Have you thought of Taxation for policy surrendered before maturity and when kept till maturity?

Traditional plans and unit linked plans (Ulips) are taxed similarly however Pension plans are taxed differently. There would be three cases wherein taxation comes into consideration for these plans – Upon death of the insured, surrendering the policy before maturity and Maturity proceeds of the policy

·         Upon Death of the Insured

Traditional Plans, ULIPS & Pension plans are completely tax exempt under section 10 of income tax act for Insurance policy proceeds received by the family members in the event of death of the policy holder is.

·         Surrendering the policy before maturity

For Traditional Plans& ULIPS, In casethe policy is surrendered before maturity, the taxability would depend on whether the 5 premiums paid on the policy or not. If it’s been paid, taxability would be nil. Else, the surrender value will be added to total income for the year and taxed accordingly. In case of Pension plan, First of all, the premiums that have been claimed as part of deduction under section 80C will be reversed and you will have to pay tax on it, Secondly, the entire surrender value will be added to your income and you will have to pay tax on it according to your tax slab. According to latest rules of IRDA, 2/3rd of the surrender value received should be used to purchase annuity plan

·         Upon Maturity

If the policy is live till Maturity the maturity proceeds are completely tax free whereas in case of pension plan, the maturity proceeds under pension plans are tax free up to 1/3rd of the amount, Rest 2/3rd of the maturity amount needs to be used to purchase annuity plans as specified by IRDA.