The surrender value is usually a sum of what has been allocated towards savings and the earnings thereon. From this a surrender charge will be deducted. This varies from one policy to another. As per a recent guideline from the Insurance and Regulatory Development Authority (IRDA), Life Insurance companies have been told not to levy surrender charges if the policyholder has been holding the policy and paying premiums for more than 5 years.
Usually, a regular premium policy will have a surrender value only after the policyholder has paid the premiums for 3 continuous years. If you are opting for a premature surrender of your policy, the overall tax liability will depend on the number of premiums you have paid to the company. If you have paid a minimum of five premiums, you will have no tax liability. On the other hand, if you have not paid this minimum number, then the surrender value of the policy gets added to your total income for that financial year. Depending on your net income including the surrender value, you are then liable to pay income tax as per your income tax bracket.
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