Tax Implications of Surrendering Insurance Policy

What are the Tax Implications of Surrendering an Insurance Policy?

Surrendering a life insurance policy? It may affect your taxable income! It's crucial to know these aspects before making huge financial decisions

 

Written by : Knowledge Centre Team

2026-01-09

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5 minutes read

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People put a lot of thought into signing up for a life insurance plan, followed by a series of documentation and a dedicated premium payment. However, situations may arise where you will be required to terminate it for personal reasons. Sometimes, there are sudden financial crises, and other times, situations that require urgent attention. Now, the act of terminating the policy before its maturity period is called surrendering an insurance policy. This process will provide you with immediate access to the accumulated funds (minus the additional charges) However, surrendering a life insurance policy has tax consequences, depending on whether the payout remains exempt under Section 10(10D) and whether any deductions you claimed earlier (for premiums) get reversed under Section 80C(5).

If you are one of the many people who enjoy the life insurance tax benefits, then you might be required to let go of them when you surrender the plan. 

Key Takeaways 

  • Surrendering a life insurance policy in India can significantly change your outlook on the taxable income that you currently have

  • Tax implications vary depending on which type of policy you hold and the duration for which you had it

  • The policies that currently offer life insurance tax benefits may not be so beneficial after the surrender

  • Learn about the terms of Sections 80C and 10(10D) of the Income Tax Act before modifying your life insurance plans

  • You may seek professional help, as financial matters require an expert perspective. They might even open your eyes and present you with other alternatives

What Happens Next After Surrendering a Life Insurance?

The tax treatment of surrendering different types of life insurance policies varies from plan to plan and also on the duration for which you held it. One must know their categoryto understand how their taxable income in India will affect them. It will help them determine whether or not the surrender value of an insurance policy is taxable under the Income-tax Act (and whether any earlier deductions get reversed).

Traditional Life Insurance Policies:

Endowment plans and whole life policies are traditional plans that offer a tax deduction of up to ₹1.5 lakh on premiums paid under Section 80C of the Income Tax Act. Meanwhile, upon meeting certain criteria, even the maturity proceeds are tax-free under Section 10(10D). However, when you surrender the plan, these implications may occur:

  1. Before 2 Years: On terminating these plans before the end of two years of initiation, you may have to pay the tax for all the premiums paid previously that you claimed under Section 80C.

  2. After 2 Years: If you cancel the plan after two years, the previously paid premiums are not taxable, but the surrender value may be eligible for your taxable income. It is possible if the premiums paid exceed 10% of the sum assured, depending on the policy terms.  

Learn More: How to Surrender A Life Insurance Policy?

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Unit-Linked Insurance Plans (ULIPs):

These plans, which combine insurance and investment, also fall under Section 80C and offer tax-free maturity under Section 10(10D). Now, when you surrender a ULIP plan, you are liable for the following tax implications, depending on at which stage you do so.  

  1. Before 5 Years: On cancelling a ULIP plan before 5 years, all your previous premiums that were deducted under Section 80C become taxable, along with the surrender value added to your taxable income in India. 
  2. After 5 Years: Surrendering ULIPs after five years does not lead to any reversal according to Section 80C. However, the surrender value may still be taxable if the ULIP proceeds are not eligible for exemption under Section 10(10D), for example, for certain ULIPs issued on/after 01.02.2021, where premium conditions are not met (except on death).
     

Single Premium Policies:

For single-premium policies, where the policyholder pays the entire premium upfront at the start of the term, the tax benefits under Section 80C apply only under certain conditions. This means the tax is deductible only if the sum assured is at least 10 times the one-time premium paid. Otherwise, the maturity proceeds are taxable.

  1. Before 2 Years: Here, if you cancel the policy within two years of the start of the term, the tax deduction of the premium is reversed, and the sum assured (and/or any amount received) falls under taxable income in India. 
  2. After 2 Years: If you cancel the single premium plan after two years, the surrender value may be taxable. It basically depends on whether the sum assured is less than 10 times the premium paid or not. 
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Did You Know?

As of September 2025, the GST Council has removed GST on all individual health and life insurance policies
 

Source: GST Council Press Release

save tax with Term Plan

Alternatives for Surrendering a Life Insurance Policy

There are so many ways to keep your cover and enjoy the life insurance tax benefits while tackling financial emergencies. Here’s a little help!

  • Policy Loan: You can take a loan against your life insurance policy cash value. It is flexible with lower interest rates, and you can save the coverage plan, too. 
  • Partial Withdrawal: Plans like ULIPs allow you to withdraw a set amount from your funds while keeping the plan active. You can continue paying premiums for the remainder of the term and use some of the funds during the most critical hours. 
  • Paid-Up Policy: A method to discontinue future premium payments and reduce the sum assured while keeping the plan active. Converting your policy to a paid-up policy leaves you with some life cover. 

Conclusion

If you are a policyholder enjoying the life insurance tax benefits, but circumstances call for extreme measures, understanding the taxability of the surrender value of a life insurance policy is essential. As there are some tax implications on the taxable income in India for terminating the life insurance ahead of the maturity, you must carefully read all documents before proceeding with it. If possible, look for alternatives to surrendering the policy so you do not lose the life cover and the plan's financial value. iSelect Smart360 Term Plan by Canara HSBC Life Insurance is an example of a policy offering comprehensive coverage and maximum tax benefits.

Glossary

  1. Surrender Value: The cash value minus any surrender charge that a policyholder receives on terminating a plan before maturing
  2. Section 80C: A tax deduction on the premiums paid for a life insurance policy falls under Section 80C of the Income Tax Act
  3. Section 10(10D): A tax exemption on the death or maturity benefit received upon the death of the policyholder or policy maturity
  4. Endowment plans: A combination of a life insurance policy and a long-term savings plan with low risk
  5. Unit-Linked Insurance Plans (ULIPs): A plan with the dual benefits of a life insurance policy and investment opportunities
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Uncertain About Insurance

FAQs

If you surrender a life insurance policy, the cover will terminate, and you will receive the accumulated sum minus some applicable charges and taxable amounts. Tax on a surrendered life insurance policy depends on the type of policy and the duration after which you surrender it.

If the payout is exempt under Section 10(10D), TDS under Section 194DA does not apply; if it is not exempt, TDS can apply under Section 194DA (currently 1%, subject to threshold conditions).

If you surrender a ULIP plan after 5 years, Section 80C reversal does not apply, but taxability of the amount received still depends on whether the ULIP payout is exempt under Section 10(10D) (including applicable premium-threshold conditions)

However, there is no way to completely avoid paying the surrender charges. Still, you can save the maximum by checking if the policy has crossed the lock-in/minimum period and consider alternatives, such as policy loan/partial withdrawal/paid-up (if available).

Yes. Overall, the surrender value is taxable, even though the amount may vary based on the plan you choose and the duration you held it. Eligibility for tax exemption differs by policy type and issuance date.

Tax on surrender value is calculated in two steps: first, determine whether the surrender receipt is exempt under Section 10(10D), and if it isn’t, then compute the taxable income portion and apply the applicable slab rate (plus surcharge/cess).

 

Step 1: Check if it’s exempt

If the amount received on surrender qualifies for exemption under Section 10(10D), then it is not included in taxable income (and typically no TDS under Section 194DA applies).

 

Step 2: If not exempt, compute the taxable part

If the surrender receipt is not exempt under Section 10(10D), then:

 

Any Section 80C deduction claimed earlier for premiums may get reversed (added back to income) if the policy is terminated within the minimum holding period (commonly 2 years for traditional policies and 5 years for ULIPs).

​

The amount received (or the income component, depending on the applicable rule) is taxed as per the applicable provisions, and insurers may deduct TDS under Section 194DA where applicable.

 

The cash surrender value of a life insurance policy in India may be subject to tax or qualify for tax exemption, depending on the policy's issuance date, the premium-to-sum-assured ratio, and the policy's active period.

The tax on surrender of life insurance in India depends on compliance with Section 10(10D) and the timing of the surrender.

 

Tax-free if conditions were met:

 

  • Premium not more than 10% of the sum assured (policies from 1 Apr 2012).

  • Not more than 20% (1 Apr 2003 - 31 Mar 2012).

  • Total annual premium caps: ₹2.5 lakh for ULIPs (from 1 Feb 2021), ₹5 lakh for others (from 1 Apr 2023).

 

Taxable if conditions are not met:

 

  • Before lock-in (2 years traditional, 5 years ULIPs): 80C deductions reversed + full surrender amount taxed at slab rate.

  • After lock-in:

    • Traditional plans: Tax = surrender value − total premiums paid.

    • ULIPs (non-exempt): Gains taxed as capital gains.

    • TDS 2% deducted by insurer if the taxable portion is greater than ₹1 lakh (claimable later)

Surrendering a life insurance policy in India is not taxable in every instance. Tax applies only to the amount of cash surrender value that is above the total premiums paid, as this excess is treated as a taxable gain or income.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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