Give up worth taxation – should know insurance coverage details

It doesn’t want iterating that insurance coverage (specifically the funding selection) is a brilliant advanced product. Learn by means of a product brochure and there are such a lot of ifs and buts connected to any product.

It’s simply not doable for a layperson to grasp and consider the product and make an knowledgeable resolution. Think about those that purchased the insurance policies 10, 15 or 20 years in the past.

On high of it, there are tax legal guidelines.

Properly, I assume there is no such thing as a level complaining. We should be taught to navigate by means of the jungle.

Over time, I’ve obtained a number of queries from readers and purchasers who’ve been saddled with every kind of insurance policies. Some they’ve continued to pay premium for, others stopped (as they realised the rip-off).

I want to take up one about give up worth taxation of a life insurance coverage coverage. 

I’ve an LIC coverage in my title: LIC New Jeevan Anand – Plan 815 (issued in November 2014). I paid solely 3 premiums until Nov 2016 and stopped any funds thereafter.

I wish to give up these two insurance policies. The query is will I obtain any factor from the coverage? Will there be any tax implication – I perceive that insurance coverage payouts are tax free?

What’s give up worth?

Give up worth is the quantity that an individual will obtain from the insurance coverage firm if s/he decides to terminate a life insurance coverage coverage (with an funding part resembling a reimbursement, endowment or ULIP) earlier than its maturity date. Merely put, you might be cashing out your coverage.

So, in the event you purchase a coverage for 20 years however you determine after 10 years that you don’t want to proceed with the coverage, then you possibly can give up it and obtain a portion of the present worth of the coverage. Such worth is named the give up worth.

Most insurance coverage corporations specify the system that helps you arrive on the give up worth. For instance, in case of a standard coverage, it’s one thing like this:

(All premium paid – first yr premium + Accrued bonus, if any) * give up worth issue

However it’s best to examine with the your insurance coverage firm for the precise give up worth, which may develop into decrease.

You must also know {that a} coverage will get a give up worth solely after 3 years of premium fee. As per LIC’s web site: “Give up worth is payable solely after three full years premiums are paid to LIC.”

This truth additionally helps reply the primary query of the reader – will the coverage result in any payout? The easy reply is YES.

The reader has paid 3 premiums and therefore there’s a worth connected to the coverage. Nonetheless, this worth might be a lot decrease than what you may have paid to this point.

Taxation of Give up Worth

The second query is – will the receipt be tax free?

Give up worth might be taxable. However chill out! The tax implications happen solely beneath sure circumstances.

Let’s take the query about give up worth taxation.
You’ll NOT should pay tax on the give up worth of your coverage, if:

  1. You will have paid not less than 3 full yr premium in your insurance coverage coverage.
  2. In case of single premium coverage, you have held the coverage for not less than 2 years.
  3. In case of ULIPs, this time period is minimal 5 years.

Nonetheless, if the above circumstances are not fulfilled, the give up worth taxation applies. You would need to disclose the revenue as part of your “Revenue from different sources” for the monetary yr by which you obtained the give up worth and taxes must be paid as per your tax bracket.

Within the question that I obtained from our pricey reader, the premium has been paid for 3 full years. Therefore, there may be NO TAX. My reader is secure. 

Pension plans and Give up Worth

In case of PENSION plans, in the event you give up earlier than maturity, your complete give up worth is taxable at your present revenue tax bracket price.

You’ll additionally should reverse all of the tax advantages that you just obtained beneath Part 80C of the Revenue Tax Act.

Let’s take a query on this that I had obtained earlier.

I had a ULIP from AVIVA particulars as follows-

  • Coverage: Aviva pension Elite-unit linked
  • Date commenced -11/2009
  • Plan time period – 20 years
  • Date redeemed – 06/2016
  • Premium – Rs. 4 lakhs p.a. 
  • Paid premium 24 lakhs -upto 11/2014 (6 years)(from nri funds)
  • Worth of redemption Rs. 31.7 lakhs 
  • TDS paid Rs. 32,000

What are the tax implications and does one apply indexation to the positive aspects?


Since, this can be a pension plan and has been surrendered earlier than maturity, your complete quantity is taxable as per revenue tax bracket relevant in India. 

There aren’t any indexation advantages obtainable on the insurance coverage coverage. 

Does a Time period plan have give up worth?

Time period plans by their nature shouldn’t have any give up worth. They proceed so long as you pay the premium. In case of loss of life, the sum assured or the insurance coverage cowl quantity is payable to your dependents or nominees.

When you cease paying the premiums, the coverage simply stops functioning. You haven’t any life cowl. So simple as that.

As a normal rule, you can purchase solely time period plans in your life insurance coverage wants. There are higher stand alone merchandise to care for the funding necessities.

Notice 1: Insurance coverage premiums paid for self or partner or youngsters is topic to exemption upto sure limits beneath Part 80C of Revenue Tax Act. You shouldn’t have to pay tax on such revenue which you may have proven as life insurance coverage premiums. At present, you possibly can declare premium deduction of upto Rs. 1.5 lacs in any monetary yr (beneath previous tax regime).

Notice 2: It’s advisable and advisable that you just seek the advice of your tax advisor about particular points of taxation as relevant to you.