Let's understand the tax implication of surrendering an endowment life insurance plan
An endowment life insurance plan is a policy that is a mixture of insurance coverage and savings plan. Investing in this is eligible for tax benefit under section 80C of the Income Tax Act. Though these plans look attractive by providing multiple solutions, they should be avoided since they fail to provide an adequate life cover and usually fail as a good investment product.
If one is already invested in this plan and now wants to get out of it, they can surrender the policy. It is never too late to quit a bad investment. It is likely that a huge chunk of the invested amount might be deducted as a penalty, but it may still be wise to surrender it.
There's a small implication on how endowment policy is taxed if surrendered. The surrender value upon maturity is tax-free only if the premiums of the first two years have been fully paid. If the policies are purchased on or after April 01, 2012, the surrender value would be tax-free only if the sum assured is more than 10 times the annual premium amount. For example, if the annual premium is Rs 2 lakhs, the sum assured must be at least Rs 20 lakhs.
And if the policy was issued between April 01, 2003, and March 31, 2012, the surrender value would be tax-free only if the sum assured is more than five times the amount of the annual premium. If the policy was issued before March 31, 2003, the surrender value would be completely tax-free.
If the investor thinks of surrendering the life insurance policy, it is better to understand the tax implications of surrender. But do ensure you have an adequate life cover if you have financial dependents. And for that, purchasing a pure term plan is the best and cheapest option.