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Is the amount received under surrender of a life insurance policy exempt from taxation?
K. Sivaraman
As per the provisions of Section 10 (10D) of the Income-tax Act, 1961 (‘the Act’), any sum received under a life insurance policy, including the sum allocated by way of bonus other than the amount received under the circumstances below, is exempt from taxes.
• Any sum received under sub-section (3) of section 80DD or sub-section (3) of section 80DDA*; or
• Any sum received under a Keyman insurance policy; or
• Insurance policy issued on or after April 1, 2003, but before March 31, 2012, where the premium payable for any year during the term of the policy exceeds 20 per cent of the sum assured.
• Insurance policy issued on or after April 1, 2012, where the premium payable for any year during the term of the policy exceeds 10 per cent of the sum assured (provided where policy is issued after April 1, 2013, for life insurance of a person with severe disability under section 80U or disease or ailment under section 80DDB, 10 per cent shall be substituted by 15 per cent)
*Section 80DDA is substituted by Section 80DD, with effect from April 1, 2004.
Further, Finance Act 2021 inserted a proviso to Section 10(10D) of the Act, wherein the above exemption would not be available for any Unit Linked Insurance Premium (ULIP) issued on or after February 1, 2021, where the premium payable for any year during the term of the policy exceeds ₹2.50 lakh. Further, the government vide Notification no. 8/2022 dated January 18, 2022, and Circular no. 2/2022 have notified the method of computation of capital gains in respect of the ULIPs
Further, the surrender value of a life insurance policy is allowed as a tax-free benefit only if it fulfils the below-mentioned conditions:
• If it is a single premium policy, the surrender value would be tax-free if the plan is surrendered after the completion of the first two years
• In any other case, the surrender value would be tax-free if the premiums of the first two years have been fully paid and then the plan is surrendered
• In case of ULIP, the surrender value would be tax-free if the plan is surrendered after the completion of the first five years of the plan.
The writer is a practising chartered accountant
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