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Is the Surrender Value of Endowment Life Insurance Plans Taxable?

Indians prefer to have peace of mind knowing that they have financial protection when a health related emergency occurs, or in the event of certain unfortunate circumstances.

Investment plans also act as tax-planning tools, as many avenues help reduce tax liability. There are different types of investment plans, and by choosing the right one, you can invest according to your needs and grow your savings.Read Less

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Written ByPalak Bagadia
AboutPalak Bagadia
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Palak Bagadia, Associate – Digital Marketing at Bajaj Allianz Life, with experience spanning content and performance marketing, recruitment, employee engagement in the BFSI industry.
Reviewed ByRituraj Singh
AboutRituraj Singh
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Rituraj Singh,With over 6.5 years of experience in the insurance industry, Rituraj Singh, Manager- Product & Brand Marketing at Bajaj Allianz Life Insurance overlooks new product launches, compliance, and brand projects, leveraging artificial intelligence and technology to enhance outcomes.
Written on: 7th July 2024
Modified on: 7th July 2024
Reading Time: 15 Mins
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In case you wish to have some financial backing for your expenses in the future, insurance plans are a preferred bet. Life insurance policies are becoming popular ways to ensure your family’s financial costs are covered should your untimely demise occur. One of the preferred way to get cover for your life is to consider signing up for an endowment policy. An endowment life insurance plan is a life insurance plan which helps the policyholder save regularly over a specific period of time so that he/she is able to get a lump sum amount on the policy maturity in case he/she survives the policy term.

Hence, this represents a kind of term life insurance, but with a savings scheme attached. In case of your unfortunate demise before the policy reaches its maturity date, your nominee(s) will get a payout as a death benefit. If you survive the term of the endowment plan, you get a maturity payout as per policy terms & conditions.

 

A Lowdown on the Tax Treatment of an Endowment Policy

 

In many cases, policyholders might not wish to continue with a life insurance plan. This may be for various reasons. Policyholders may fall short of funds, or there may be more suitable alternatives in the market. Whatever the reason for surrender of a policy may be, if a policyholder wishes to give up an endowment policy, it is crucial to be aware of the implications of tax. On amounts you receive as a result of the surrendering.

You can get two kinds of endowment plans. One is available with a profit, and the other is available without a profit. The plan that involves “a profit”, gives policyholders bonuses, if declared by the company. These are given as a result of your funds being invested in a company and the company making profits. The plans that are available “without a profit” offer you returns that are guaranteed, but no additional bonuses as such.

If you are making any kind of profit out of an endowment plan, there would be a tax component attached. Before you take the step to surrender an endowment plan, you should know about any tax liability you may have to face.

 

Taxability

 

If you have a conventional insurance policy, you are not liable to pay any tax on the surrender value of this kind of policy. This is provided the premiums of the first two years of the policy tenure have been paid in total. Furthermore, the time of issue of the policy matters in relation to taxability. If your conventional life insurance plan was issued before 31 March 2003, the amounts you accrue would be free from any tax liability. If the policy was issued between the period 1 April 2003 and 31 March 2012, then the surrender value would not be liable for any tax provided the death sum assured is equal to or more than five times the amount of the premium paid annually. For any policies issued on 1 April 2012, or after that date, the surrender value would not incur any tax, provided the death sum assured is equal to or more than ten times the premium paid annually. Such tax regulations are applicable to any endowment policy too.

If a sum that is received from a surrendered policy is attained on account of the following, the policyholder is exempt from tax:

  • If the policy is issued after 1 April 2003 but on or before 31 March 2012 and the payable premium for any year in the tenure of the policy is equal to or less than 10% of the death sum assured.
  • If the policy is issued after 1 April 2012 and the payable premium for any year in the tenure of the policy is equal to or less than 20% of the death sum assured.

 

Conclusion

 

An endowment plan is a sensible way to save money while you assure financial protection for your family and yourself. There are many insurance plans to choose from, so you can find one that fits your needs. You may take aid of a life insurance calculator for further assistance. This is a preferred way to allocate your wealth, while you get financial protection for your loved ones in your absence. You can avail certain tax advantages too as per provisions stated in Income Tax Act, 1961.

BJAZ-WEB-EC-01420/22

Disclaimers:
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IN THIS POLICY, THE INVESTMENT RISK IN INVESTMENT PORTFOLIO IS BORNE BY THE POLICYHOLDER

The Unit Linked Insurance Products do not offer any liquidity during the first five years of the contract. The policyholder will not be able to surrender or withdraw the monies invested in Unit Linked Insurance Products completely or partially till the end of the fifth year.

ULIPs are different from the traditional insurance products and are subject to the risk factors. The premium paid in ULIPs are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns.

Tax benefits as per prevailing Income tax laws shall apply. Please check with your tax consultant for eligibility

*The Guaranteed benefits are dependant on the policy terms, sum assured, premium and age along with other variable factors . For more details please refer to sales brochure.

 

 

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*Tax benefits as per prevailing Section 10(10D) and Section 80C of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy.

~Individual Death Claim Settlement Ratio for FY 2023-2024

1Premium Holiday has to be selected at inception to avail this benefit and also depends on other policy terms & conditions


Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116

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%%Above illustration is for Bajaj Allianz Life eTouch- A Non Linked, Non-Participating, Individual Life Insurance Term Plan (UIN: 116N172V03) considering Male aged 25 years | Non-Smoker | Policy Term (PT)– 30 years | Premium Payment Term (PPT) – 30 years | Sum Assured opted is Rs. 1,00,00,000 | Online Channel | Standard Life | 1st Year Premium is Rs. 6,238. 2nd Year onwards premium is Rs. 6,659. Total Premium Paid is Rs. 1,99,349 | Medical Rates | Yearly Premium Payment Mode | Death benefit opted is lumpsum payout and monthly installments (Lumpsum Payout Percentage : 45, Income Payout Percentage : 55) | Premium shown above is exclusive of Goods & Service Tax/any other applicable tax levied, subject to changes in tax laws, and any extra premium and is for illustrative purpose only. This is inclusive of all the discounts mentioned above.

##Tax benefits as per prevailing Section 10(10D) and Section 80C of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy.Above Tax benefit is calculated considering deduction of Rs. 150,000 and applicable tax rate of 31.20%.

@Term Insurance plan bought online directly from Bajaj Allianz Life Insurance has no commissions involved.

^^The Return of Premium amount is total of all the premiums received, exclusive of extra premium, rider premium and GST & /any other applicable tax levied, subject to changes in tax laws
Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116

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