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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 a product brochure and there are such a lot of ifs and buts connected to any product.

It’s simply not potential for a layperson to know 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.

Effectively, I suppose there isn’t a level complaining. We must be taught to navigate by the jungle.

Over time, I’ve acquired a number of queries from readers and purchasers who’ve been saddled with all types 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 element akin to a refund, 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 may give up it and obtain a portion of the present worth of the coverage. Such worth known as the give up worth.

Most insurance coverage firms specify the method 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 12 months premium + Accrued bonus, if any) * give up worth issue

However it’s best to verify with the your insurance coverage firm for the precise give up worth, which may grow to be 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 reality additionally helps reply the primary query of the reader – will the coverage result in any payout? The straightforward reply is YES.

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

Taxation of Give up Worth

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

Give up worth may 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 must pay tax on the give up worth of your coverage, if:

  1. You may have paid at the least 3 full 12 months premium to your insurance coverage coverage.
  2. In case of single premium coverage, you have held the coverage for at the least 2 years.
  3. In case of ULIPs, this time period is minimal 5 years.

Nevertheless, if the above circumstances are not fulfilled, the give up worth taxation applies. You would need to disclose the earnings as part of your “Revenue from different sources” for the monetary 12 months by which you acquired the give up worth and taxes must be paid as per your tax bracket.

Within the question that I acquired from our pricey reader, the premium has been paid for 3 full years. Therefore, there’s NO TAX. My reader is protected. 

Pension plans and Give up Worth

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

You’ll additionally must reverse all of the tax advantages that you simply acquired beneath Part 80C of the Revenue Tax Act.

Let’s take a query on this that I had acquired 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 beneficial properties?


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

There are not any indexation advantages out there on the insurance coverage coverage. 

Does a Time period plan have give up worth?

Time period plans by their nature do not need any give up worth. They proceed so long as you pay the premium. In case of demise, the sum assured or the insurance coverage cowl quantity is payable to your dependents or nominees.

If you happen to cease paying the premiums, the coverage simply stops functioning. You don’t have any life cowl. So simple as that.

As a basic rule, you should purchase solely time period plans to your life insurance coverage wants. There are higher stand alone merchandise to maintain the funding necessities.

Observe 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 do not need to pay tax on such earnings which you’ve proven as life insurance coverage premiums. Presently, you may declare premium deduction of upto Rs. 1.5 lacs in any monetary 12 months (beneath previous tax regime).

Observe 2: It’s advisable and really helpful that you simply seek the advice of your tax advisor about particular features of taxation as relevant to you.



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