LIC surrender-whether Capital Gain or Other Sources

Originally posted by : GAURAV AGARWAL
	can anyone tell me that when a person receives surrender value on Single premium LIC on its surrender whether it will be taxable under head Capital Gain as it can be said Extinguishment of right or whether it will be under head other sources.

if surrendered within 5 years of commencement then 80C benefit would get reversed, and the additional amount would get taxed as "income from other sources"

if the payment is made by LIC on completion of term, then whole amount is free from incometax. 

@ U S Sharma

Sir,no 80C benefit is available for single premium policy so the question of reversal does not arise.

single premium policy is one in which we have premium more than 20% of sum assured. 

Sub-section 3 of Section 80C of IT Act 1961, states that a deduction is available only to so much of the premium, which is not in excess of 20% of the Sum Assured on the policy. i.e. If S.A. is1.5 lakhs than only an annual premium up to30,000/- is eligible for deduction u/s 80C. Any amount in excess of30,000/- is not eligible for deduction.

Sub-section 4 of Section 80C of IT Act 1961, states that if the insurance contract is terminated in case of single premium insurance policy within 2 years from the date of commencement of insurance or in other cases before premiums have been paid for 2 years, tax deduction allowed earlier would become taxable as income.

As per section 10[10D( c )] of IT Act 1961, the entire amount is tax free only if the premium paid is not more than 20% of the Sum Assured on the policy, in any one year of the policy term. Otherwise, the entire sum at maturity gets clubbed with your annual income of that year (of maturity) and gets taxed accordingly. i.e. If S.A. is1.5 lakhs and you have paid an annual premium of more than30,000/- in any one year, the entire amount of maturity gets taxed.

(5) Where, in any previous year, an assessee—

   (i)  terminates his contract of insurance referred to in clause (i) of sub-section (2), by notice to that effect or where the contract ceases to be in force by reason of failure to pay any premium, by not reviving contract of insurance,—

  (a)  in case of any single premium policy, within two years after the date of commencement of insurance; or

  (b)  in any other case, before premiums have been paid for two years; or

  (ii)  terminates his participation in any unit-linked insurance plan referred to in clause (x) or clause (xi) of sub-section (2), by notice to that effect or where he ceases to participate by reason of failure to pay any contribution, by not reviving his participation, before contributions in respect of such participation have been paid for five years; or

(iii)  transfers the house property referred to in clause (xviii) of sub-section (2) before the expiry of five years from the end of the financial year in which possession of such property is obtained by him, or receives back, whether by way of refund or otherwise, any sum specified in that clause,

then,—

  (a)  no deduction shall be allowed to the assessee under sub-section (1) with reference to any of the sums, referred to in clauses (i), (x), (xi) and (xviii) of sub-section (2), paid in such previous year; and

  (b)  the aggregate amount of the deductions of income so allowed in respect of the previous year or years preceding such previous year, shall be deemed to be the income of the assessee of such previous year and shall be liable to tax in the assessment year relevant to such previous year.

UL insurance policy was taken for capital sum of Rs 5 lakhs and premium paid for the policy was Rs annual Rs100000.It was taken on 13.7.2006 and request for UL surrender was made on 07.09.2015 and sum amount of Rs 469443/ was received after deduction of TDS 9581.

Now my querry is on the facts that no claim was made u/s 80C

U/s 10DD the amount received whether matured sum or surrenderd value, in my opinion, is not taxable as annual premium does not exceed 20% of the sum assured.Again the same is also not taxable u/s 80C as the premium paid for 5 yrs.Had  it been for less than 5 years still the same would not have been taxable as no claim was made u/s 80C(as per 80C(5)

whether it is a capital gain or income from other sources...give anwers with relevant sections