Is Income Tax to be Paid on ULIP Surrender?


Majority of people have questions about the tax consequences of a ULIP surrender after five years. The answer is that if users have finished five years of service, there would be no surrender payment and the surrender valuation would be exempt from tax. If users surrender the ULIP before five policy years, the surrender amount is generated at the ordinary income tax rate at the applied slab percentage.

What is ULIP Policy?

ULIP policy provides the opportunity to create wealth while supplying the safety of a life insurance payout. In ULIP policy, a portion of the premium is devoted to the life coverage, while the remainder is delegated to a prevalent sum of funds known as a pot of money that also invests in capital appreciation, borrowing, or a mixture of the two. The rates of return on the investment opportunities are determined by the quality of the fund that users choose.

Why invest in ULIPs?

Most investors buy a ULIP policy as they’re the most feasible tax relief component. This is because they blend both insurance and annuity equipment, providing annual advantages as an investment product and ULIP tax benefits as insurance components.

Before continuing to invest, the majority of the population look at the ULIP tax benefits to see whether they can save money on taxes. ULIP policy includes a tax reduction under Section 80C equivalent to the total ULIP fee paid, but it is important to concentrate on the ULIP tax benefit on maturity.

According to the legislation, once the ULIP matures at the end of its length of service, the overall sum obtained by users or nominees is exempt from paying taxes under Section 10. (10D). However, the ULIP tax benefits are only available if the circumstances outlined in the Income Tax Act of 1961 are encountered about insurance rates.

ULIP Plan Calculator

A ULIP plan calculator is a virtual method for quantifying ULIP premiums and estimating the money created by a ULIP scheme over its entire reign. The ULIP plan calculator is simple to use and free. It has several different factors, such as tenancy, return on capital, and economic goals. Before actually investing in a ULIP, many use a ULIP plan calculator to determine the approximate premium increases as well as expected gains from a ULIP policy.


What exactly is a lock-in period in a ULIP?

A lock-in period is a set period wherein the insured person will not obtain the pay-outs when he or she surrenders or cancels the ULIP policy. Once the insured person has completed the lock-in period, which in ULIP is 5 years, will he or she can obtain the amount of compensation.

It is advisable to avoid entering and leaving a ULIP as shortly as the lock-in period expires. The following are some possible explanations:

Charges for ULIPs are significant in the first few years: In the particular instance of a ULIP, the high price allotment fee is subtracted before the investor’s receipt of the high price, and the financing allotment fees, wealth management fees, and policy service charges are subtracted, be it through component termination or by trying to adjust the NAV. The adjustment is greater in the first year and gradually decreases with time. By the end of the lock-in period or beyond, such fees are reduced to the point where they do not affect the financing. Furthermore, if users leave after the lock-in period has expired, they will not receive the full advantages. In the end, ULIPs will provide users with lower yields.

Continue to participate in the ULIP game to realise the rewards: The ULIP is a long-term investment plan. Users can leave a ULIP after 5 years; however, doing so is not advised even after the lock-in period has ended. To realise the advantages, users must continue investing for a significant period, say 15-20 years. If you believe your funds are underperforming, you should consider switching them. If the effectiveness is solely determined by market volatility, as it is in the particular instance of shares, users might like to wait until the market matures before withdrawing their ULIP.