I am 45 years old and have a pension policy, bought five years ago, it is a unit-linked insurance plan. I invest Rs20,000 every year. But I am not happy with the policy and would like to surrender it. Please tell me if the maturity value is taxable. Also, is partial withdrawal taxable? I would also like to know what are the tax implications if I hold my plan till maturity, that is, when I reach 60 years of age.
— Sudhir T.
A pension policy can be surrendered after three years of its inception. However, you should note that maturity proceeds or surrender policies of only life insurance are tax-free under section 10(10)D of the Income-tax Act. Since it is a pension policy, this section will not be applicable on the full amount.
There is no provision of partial withdrawal facility in most of the pension policies prevailing in the market. On completion of the benefit term, the policyholder gets an option to purchase an immediate annuity from any of the insurance firm.
The tax implications in case you hold the plan till maturity will be different from a normal life insurance policy as a pension policy is structured differently. In such policies, the policyholder can opt to commute a part of the accumulated fund, that is, up to 33% on date of vesting, and with the balance accumulated amount, annuity can be purchased from any insurance company of policyholder’s choice. There are two options available, you can use the entire amount available on vesting date for buying immediate annuity or you can commute 33% which is tax free and balance can be re-used to purchase immediate annuity. So, it is important for you to note that only the commuted value is tax-free and annuity payments (after investment of accumulated funds) are treated as policyholder’s income and are taxable accordingly.
I have a regular premium paying traditional endowment policy. I paid premiums for two years after which I stopped. My policy will complete four years in February. How can I exit this policy? What are the tax implications?
You need to refer to the policy conditions to know whether the policy has acquired surrender value (the amount accrued in a policy) before deciding to exit the policy. The surrender value is tax-free if the policy has completed three years from its date of issuance. However, under provisions of section 10 (10)D of the Income Tax Act, the premium paid in any year should not exceed 20% of the sum assured.
In case you do not plan to exit the policy, then you can check with your insurer as to how the policy can be revived.
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