This video will discuss the tax implications of the surrender of life insurance endowment plans
Remember, lot of people claim tax deduction for life insurance endowment plan premiums
In India, there are three stages when tax can impact an investment
The first stage is the initial stage when you have bought the life insurance plan. The investor has to check before buying whether he or she will get tax benefits
The second stage is the intervening stage between buying the plan and maturity of the plan
The third stage is the maturity of the plan
In case of life insurance plans, you initially get the benefit of Section 80C
If your premium is upto Rs 1.5 lakh i.e. the limit of Section 80C, you get the tax deduction provided your yearly premium doesn't exceed 10% of sum assured
If you have bought a plan for a 20 year term, the company announces some bonus or getting partial sum insured in case of a money back plan
All these payments in the intermediate stage are tax free
The maturity amount is also tax exempt. So, life insurance is typically tax exempt in the three stages
If someone has surrendered the plan before two years of the inception of the plan, then the surrender value would be taxable
It would also be added to the income of the person and hence taxed as per the tax slab
If the person surrenders the plan after two years, it is also exempted from tax
If the person surrenders the life insurance endowment plan before 5 years, the surrender value will not be taxed, but the tax deductions claimed, will have to be foregone
So, to continue availing Section 80C benefits, you need to continue the plan for 5 years
If you are taking the proceeds of surrender value the minimum stipulated period is 2 years
Remember, you don't recover your life insurance endowment plan premiums till well into the term of the plan