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ULIP Taxation on Surrender: What You Need to Know
Table of Content
What Are ULIP Plans?
An ULIP plan is a unique kind of financial product. This product blends life insurance with market-linked investments. While a portion of your premium ensures life cover, the rest is invested in funds of your choice—equity, debt or a mix of both.
What Is ULIP Policy Surrender?
Surrendering a ULIP policy means voluntarily exiting the plan before it reaches maturity. In simple terms, the policyholder chooses to terminate the ULIP and withdraw the investment early. People might decide to surrender their ULIP owing to urgent financial needs, better investment alternatives, low returns or shifting life priorities. When a ULIP is surrendered, the insurer pays out the current fund value after deducting any applicable charges.
ULIPs come with a mandatory five-year lock-in as regulated by the Insurance Regulatory and Development Authority of India (IRDAI). Surrendering the policy before this period can result in penalties, and the surrender proceeds will likely be taxable, which could reduce overall benefits.
Tax on ULIP Surrender
Surrendering a ULIP can attract tax, depending on factors like date of policy issuance, premium amount and the sum assured Tax treatment is as per Section 10(10D)* of the Income Tax Act, 1961 by which the maturity or surrender proceeds are tax-exempt only if annual premium does not exceed 10% of the sum-assured and is not exceeding Rs 2.5 lacs . The proceeds will be taxed under the head “Income from Capital Gains”.
Let’s look at the key conditions that determine taxability.
Tax Rules Depending on Lock-In
Surrender Before 5 Years
If you surrender your ULIP after the end of the five-year lock-in, then the policy may become ineligible for tax benefits depend upon whether policy is compliant with Section 10(10D)* of Income Tax Act,1961. The surrender value is added to your income under Capital Gain and applicable tax rate applied. Also, any deductions earlier claimed under Section 80C* might get reversed.
The amount is moved towards a Discontinued Policy Fund and paid out only after the lock-in comes to an end. Moreover, TDS might get deducted if Section 10(10D)* conditions aren’t met.
Surrender After 5 Years
Surrendering after the five-year lock-in doesn’t automatically make the proceeds tax-free. Tax exemption depends on whether the policy qualifies as per Section 10(10D)*. For policies issued post 2021, the annual premium must not surpass ₹2.5 lakh. If it does, the gains might get taxed as capital gains.
Also, partial withdrawals are allowed after the lock-in and are generally tax-free if the policy is compliant under Section 10(10D)*.
Tax Rules Based on Policy Issue Date
ULIPs Issued Before 1st February 2021
Policies issued before 1st February 2021 follow the older rules, which do not include the ₹2.5 lakh premium cap. If they meet certain conditions of Section 10(10D)*, particularly the premium not surpassing 10% of the sum assured, then the surrender proceeds are completely tax-free, irrespective of when you surrender the policy.
ULIPs Issued On or After 1st February 2021
For ULIPs issued on or post 1st February 2021, Budget 2021 introduced a premium cap of ₹2.5 lakh per year. If the overall premium paid across all the ULIP plans surpasses this limit, then the surrender proceeds are not completely exempt and are taxed as capital gains.
Conclusion
Surrendering a ULIP policy is always an option, but the tax treatment depends on when you surrender and when your policy was issued. Exiting before the lock-in of five years generally results in tax liabilities and reversal of tax benefits if claimed earlier under Section 80C*
However, surrendering after the lock in period of five years might endow tax-free benefits as per Section 10(10D)*, if conditions are met. Budget 2025 has offered more clarity on taxation rules by stating that non-exempt ULIPs shall always be taxed as “capital gains” and not “income from other sources”. Always make sure to evaluate your financial goals, premium capacity and policy timeline before making any decision. For clarity on charges and taxes, it is a prudent move to consult your insurer or a financial advisor.
Want to explore better financial options? Check out HDFC Life’s latest ULIP plans and ULIP calculator for smarter investments.
FAQs on Taxability of ULIP on Surrender
What Does ULIP Policy Surrender Value Mean?
What happens if I surrender my ULIP policy?
Is ULIP taxable in 2025?
Are Tax Benefits Available on Surrendering a ULIP Policy?
Are ULIPs issued before 1st February, 2021, exempt from surrender tax?
The surrender value is the amount you receive if you exit your ULIP before maturity. It depends on the current fund value, post deducting certain applicable charges. If surrendered before five years, then the amount is moved towards a Discontinued Policy Fund and paid post the lock-in, subject to tax.
If you surrender your ULIP before five years, then tax benefits get reversed if the same was claimed under Section 80C*, and the payout is added to your taxable income. Post five years, surrender might be tax-exempt as per Section 10(10D)*, provided premium limits and other conditions are met. Always check out surrender charges and fund value before proceeding.
Yes, ULIP taxation rules apply in 2025, especially if the annual premium exceeds ₹2.5 lakh for policies issued on or after 1st February 2021. In such scenarios, surrender or maturity proceeds are taxed as capital gains.
Tax benefits might be available based on when you surrender the ULIP and your policy details. If surrendered post five years and Section 10(10D)* conditions are met, then the proceeds can be tax-free. However, early surrender usually results in loss of tax benefits claimed earlier and added income tax liability.
Yes, ULIPs issued before 1st February 2021 are exempt from the ₹2.5 lakh annual premium cap. If they meet Section 10(10D)* conditions—like the premium being less than 10% of the sum assured—surrender proceeds are generally tax-free, regardless of the year of surrender, provided the five-year lock-in is completed.
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Francis Rodrigues
Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.
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* Tax benefits & exemptions are subject to the conditions of the Income Tax Act, 1961 and its provisions. Tax Laws are subject to change from time to time. Customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.
The Unit Linked Insurance plans do not offer any liquidity during the first five years of the contract. The policyholders will not be able to surrender or withdraw the monies invested in Unit Linked Insurance Products completely or partially till the end of fifth year.
Unit Linked Insurance plans are different from the traditional insurance products and are subject to the risk factors. The premium paid in ULIP policies 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. HDFC Life Insurance Company Limited is only the name of the Insurance Company, The name of the company, name of the contract does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document of the insurer. 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.
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