Tax on Surrendering an Indian Life Insurance or ULIP Policy as an NRI

You stopped paying premiums on a ULIP three years ago, the fund value has grown to Rs 26,00,000, and you are now asking the insurer to surrender the policy. The relationship manager tells you the surrender value will be credited to your NRO account after TDS. The TDS deduction turns out to be Rs 1,05,000, far more than you expected from a policy you assumed was covered by Section 10(10D). What just happened is not a mistake. For a ULIP with Rs 3,00,000 in annual premiums, the policy crossed the Rs 2,50,000 aggregate limit drawn by the Finance Act 2021, the exemption fell away, and Section 195 pulled withholding at the capital-gains rate before the money moved.

Surrender is not maturity held shorter. The tax consequences are structurally the same as maturity, but surrender introduces its own timing questions, an IRDA lock-in complication, and the near-certainty that the NRI has overclaimed TDS that must be recovered by filing an Indian return. This guide covers when the surrender value of an Indian life insurance policy or ULIP is taxable and when it is not, the computation of what is taxable, the NRI-specific TDS mechanics, a worked example in full rupees, and what happens if a DTAA applies.

The 30-second answer: Surrendering an Indian life insurance policy or ULIP is tax-free only if the policy meets the Section 10(10D) conditions. The policy fails if any year's premium exceeds 10% of sum assured (for policies issued after April 1, 2012), or if it is a ULIP issued after February 1, 2021 with aggregate annual ULIP premium above Rs 2,50,000, or if it is a traditional non-ULIP plan issued after April 1, 2023 with aggregate annual premium above Rs 5,00,000. A failed policy's surrender gain is taxed as capital gains at 12.5% (equity-oriented ULIP) or Income from Other Sources at slab rates (traditional plan). The insurer deducts TDS under Section 195 for NRIs at the applicable rate, typically much heavier than the 2% under Section 194DA a resident would face. Recover the excess by filing an Indian ITR. Death benefit stays exempt in every scenario.

The starting point is always the exemption question, because surrender gains that fall inside Section 10(10D) face zero tax in India, which changes every subsequent calculation. Once the exemption falls away, the head of income determines the rate, the head depends on whether the policy is a ULIP or a traditional plan, and the rate determines both the eventual liability and the TDS the insurer is required to deduct. For NRIs the TDS problem is the most urgent, because it affects cash in hand before any return is filed.

When surrender is tax-free: the Section 10(10D) conditions

Section 10(10D) of the Income Tax Act exempts any sum received under a life insurance policy, including bonuses. The language sounds sweeping. It is not, and Parliament has steadily narrowed it since 2003.

Work through the conditions in order, because they stack:

Condition one: the 10% of sum assured rule. For any policy issued on or after April 1, 2012, no year's premium may exceed 10% of the actual capital sum assured. The test looks at every year individually, and a single breach in any one year removes the exemption for the entire proceeds. Policies issued between April 1, 2003 and March 31, 2012 had a softer limit of 20% of sum assured. Policies issued before April 1, 2003 had no such limit. If a policy covers a person with a disability specified under Section 80U or a disease specified under Section 80DDB, the ceiling is 15% of sum assured for policies issued after April 1, 2013.

Condition two: the ULIP aggregate cap. For any ULIP issued on or after February 1, 2021, the aggregate annual premium across all ULIPs held by the same person must not exceed Rs 2,50,000 in any year of the term. The cap is aggregate, not per policy: two ULIPs at Rs 1,50,000 each trip the limit. ULIPs issued before February 1, 2021 are grandfathered and are not counted toward this aggregate; they keep the old treatment subject only to the 10% rule.

Condition three: the traditional plan aggregate cap. For any non-ULIP life insurance policy issued on or after April 1, 2023, the aggregate annual premium across all such traditional policies must not exceed Rs 5,00,000 in any year of the term. The same aggregation logic applies. Traditional plans issued before April 1, 2023 are grandfathered.

All three conditions have to be satisfied simultaneously for a policy to be exempt. A policy that clears the premium-to-sum-assured ratio but breaches the rupee aggregate cap loses the exemption just as surely as a policy that fails the ratio test. There is no partial exemption: the policy is either inside 10(10D) or entirely outside it.

What stays exempt regardless. The death benefit, the sum paid to a nominee on the death of the insured, is exempt from tax in every scenario. No premium cap, no policy date, no ULIP versus traditional distinction touches it. If you are surrendering a policy and the concern is the investment payout rather than cover for your family, you are, by definition, outside the death benefit. Everything that follows applies to the investment portion of the payout.

What surrender does to an exempt policy. If a policy genuinely qualifies under 10(10D), the surrender proceeds are exempt. However, surrendering a life insurance policy within the first two years (for a traditional policy) or in a way that violates the terms of the IRDA-approved product structure can trigger a claw-back of the Section 80C deductions claimed on premiums paid in the years the policy was held. Under Section 80C(5), if a traditional life insurance policy is surrendered before it has been in force for at least two years, the deductions claimed are added back as income in the year of surrender. This is separate from the Section 10(10D) question, and it applies even if the surrender proceeds themselves are tax-free. For a ULIP, the equivalent is the Section 80C(5) restriction combined with the IRDA 5-year lock-in, discussed below.

The ULIP 5-year lock-in: an IRDA constraint, not a tax trigger

IRDA regulations require ULIPs to have a minimum 5-year lock-in period before surrender. Before 5 policy years are complete, the insurer does not credit the surrender value directly. Instead, the fund value after surrender charges is moved to a discontinued policy fund, where it earns a minimum guaranteed return set by IRDA (currently 4% per annum), and is paid out only after the 5-year lock-in period ends. The fund is not accessible as cash before that.

The lock-in is a product restriction. It is not a tax provision and does not determine taxability. If you surrender a ULIP in year 3, you will not receive the money until the 5-year mark, but the taxability at that point is still governed by Section 10(10D) and the Rs 2,50,000 aggregate cap, not by when you filled in the surrender form. What the lock-in does do is make the financial cost of early surrender heavy: surrender charges, the below-market 4% holding return during the discontinued phase, and the loss of the policy's investment momentum all combine to make early ULIP surrender a poor financial decision independent of the tax consequences.

For Section 80C purposes, surrendering a ULIP that has been in force for fewer than 5 years triggers the claw-back: all Section 80C deductions on ULIP premiums are added back as income in the year of surrender. This is a real additional tax cost that is often overlooked when NRIs calculate whether to continue a ULIP.

How taxable surrender proceeds are computed

Once a policy fails Section 10(10D), the computation of taxable income depends on whether the policy is a ULIP or a traditional plan.

ULIP: capital gains

The Finance Act 2025 settled the ULIP question by amending Section 2(14) and Section 45(1B). A non-exempt ULIP is a capital asset, and the gain on its surrender is charged as capital gains effective from April 1, 2026 (assessment year 2026-27 onwards). For an equity-oriented ULIP (one investing at least 65% in equity), the treatment mirrors an equity mutual fund: long-term gain (units held more than 12 months) is taxed at 12.5% on the gain above Rs 1,25,000 in the financial year under Section 112A, and short-term gain (12 months or less) is taxed at 20% under Section 111A. For a debt-oriented ULIP, the gain is added to total income and taxed at slab rates.

The taxable gain is the surrender value received minus the total premiums paid. No indexation is available for equity-oriented ULIPs after July 23, 2024.

Traditional plan: Income from Other Sources

A non-exempt traditional life insurance policy (endowment, money-back, guaranteed-return, whole-life savings plan) that fails 10(10D) falls under Section 56(2)(xiii), inserted by the Finance Act 2023. The surrender proceeds are taxed as Income from Other Sources at the individual's slab rate, up to 30% plus surcharge and cess. There is no capital-gains rate available here, regardless of how long the policy has been held.

The taxable amount is computed under CBDT Rule 11UACA. In the year the surrender proceeds are received, the taxable income is the sum received minus the aggregate premiums paid that have not previously been deducted under any other section. If premiums were claimed under Section 80C and the claw-back rule does not apply (because the policy was in force for more than two years), those premiums are still netted off under Rule 11UACA. The effect is that you are taxed on the gain over premiums paid, but at slab rates rather than the more favourable capital-gains rate.

TDS: how an NRI is treated differently from a resident

This is where the NRI's situation diverges sharply from a resident's, and where most of the cash-flow pain lives.

For a resident, the insurer withholds under Section 194DA on any taxable insurance payout (maturity or surrender) where the aggregate proceeds in the year exceed Rs 1,00,000. TDS is at 2% on the income portion (proceeds minus premiums paid), reduced from 5% by the Finance Act 2024 with effect from October 1, 2024. If the resident has no PAN on file, the rate jumps to 20%.

For an NRI, Section 194DA does not apply. The insurer withholds under Section 195, the general withholding section that applies to any payment to a non-resident. Section 195 requires deduction at the rate in force for the particular income. That means:

• For a non-exempt ULIP taxed as long-term capital gains: 12.5% plus applicable surcharge and cess on the gain portion.
• For a non-exempt traditional plan taxed as Income from Other Sources: deduction at the maximum marginal rate on the income portion, which is 30% plus surcharge and cess for income above the relevant slab thresholds.

The contrast with the resident's 2% is stark. An NRI surrendering a traditional plan that fails 10(10D) can face deduction at 30-plus percent on the gain before a single rupee arrives in the NRO account, even if the actual tax liability after filing is lower because the NRI has no other Indian income in that year. The excess is recovered only by filing an Indian ITR and claiming a refund, which takes time.

The Form 13 route. An NRI who knows a surrender is coming can apply to the tax department in advance for a lower or nil TDS certificate under Section 197 using Form 13. If granted, the certificate specifies a lower rate of deduction, and the insurer deducts accordingly. This avoids the overcollection problem entirely and is far preferable to the refund route. The certificate is specific to the transaction and valid for the financial year in which it is granted. The detailed mechanics and timelines are in the lower TDS certificate via Form 13 guide.

Section 195 and the insurer's responsibility. The insurer is obligated to deduct at source before paying. If it does not, the insurer faces liability as a defaulting deductor. As a practical matter, Indian insurers are conservative about Section 195 because the consequences of under-deduction fall on them, so they generally deduct at the higher rate unless a certificate is in place. Do not expect the insurer to volunteer a lower rate.

Worked example: ULIP surrendered after 7 years

Take a concrete case where all the numbers are visible.

Vikram is a UAE-based NRI. In March 2022 he took out a ULIP from an Indian insurer. The premium was Rs 3,00,000 per year, paid for 7 years (financial years 2021-22 through 2027-28). The policy was issued after February 1, 2021, which means the Rs 2,50,000 aggregate ULIP premium cap applies. His aggregate annual ULIP premium is Rs 3,00,000, which exceeds Rs 2,50,000. The policy therefore fails Section 10(10D) from the outset, and surrender proceeds will be taxable.

After 7 years of premium payments, Vikram surrenders the policy. The fund has grown to Rs 26,00,000.

Step 1: Total premiums paid. Rs 3,00,000 per year multiplied by 7 years equals Rs 21,00,000.

Step 2: Taxable gain. Surrender value of Rs 26,00,000 minus total premiums paid of Rs 21,00,000 equals Rs 5,00,000 taxable gain.

Step 3: Head of income. This is a ULIP, so the gain is taxed as capital gains. Assuming the ULIP is equity-oriented (invested more than 65% in equity) and the units were held for more than 12 months, the gain qualifies as long-term capital gains under Section 112A.

Step 4: The Rs 1,25,000 exemption. Section 112A exempts the first Rs 1,25,000 of long-term capital gains from equity-oriented funds and equity-oriented ULIPs per financial year.

Taxable LTCG = Rs 5,00,000 minus Rs 1,25,000 = Rs 3,75,000.

Step 5: Tax at 12.5%. Tax on Rs 3,75,000 at 12.5% = Rs 46,875. Add 4% health and education cess: Rs 46,875 plus Rs 1,875 = Rs 48,750. (Surcharge applies if total income crosses the relevant thresholds; assuming Vikram has no other Indian income in this year, no surcharge applies here.)

Step 6: What the insurer actually deducts (Section 195). The insurer deducts TDS on the income portion under Section 195 at the LTCG rate. On a gain of Rs 5,00,000 (the insurer deducts on the full gain, not net of the Rs 1,25,000 exemption, because the exemption is claimed in the ITR), TDS at 12.5% equals Rs 62,500. Add 4% cess: Rs 65,000 withheld by the insurer.

Step 7: Refund claim. Vikram's actual liability after applying the Rs 1,25,000 exemption is Rs 48,750. The insurer deducted Rs 65,000. Vikram files an Indian ITR for the year, declares the LTCG of Rs 5,00,000, claims the Rs 1,25,000 exemption, computes a liability of Rs 48,750, and claims a refund of Rs 16,250 (Rs 65,000 minus Rs 48,750) from the excess TDS.

Summary of the Vikram example:

Item	Amount
Surrender value received	Rs 26,00,000
Total premiums paid (7 years)	Rs 21,00,000
Taxable LTCG (before exemption)	Rs 5,00,000
Exempt under Section 112A	Rs 1,25,000
Net taxable gain	Rs 3,75,000
Tax at 12.5% plus 4% cess	Rs 48,750
TDS deducted by insurer (Section 195)	Rs 65,000
Refund on ITR filing	Rs 16,250

If the same policy had been a traditional endowment plan instead of a ULIP, the Rs 5,00,000 gain would have been taxed as Income from Other Sources at Vikram's slab rate. At 30% (assuming he has other Indian income in that year), the tax on Rs 5,00,000 would be Rs 1,50,000 plus cess of Rs 6,000, totalling Rs 1,56,000, more than three times the LTCG liability on the ULIP. The head of income, determined by the policy type, changes the economics dramatically.

The Rs 5 lakh rule for traditional plans post-April 2023: a closer look

The Finance Act 2023 drew the Rs 5,00,000 line specifically in response to large-ticket guaranteed-return plans being sold as tax-free savings instruments. The mechanics deserve a separate note because the aggregation rule is less intuitive than it looks.

The Rs 5,00,000 cap applies to the aggregate of premiums across all traditional non-ULIP life insurance policies issued on or after April 1, 2023. Policies issued before that date are not counted in the aggregate, and their maturity and surrender continue under the pre-2023 rules (subject only to the 10% of sum assured test and the older general conditions of 10(10D)).

So an NRI who held a Rs 4,50,000 annual premium traditional plan issued in 2021 (before the cut-off) and then buys a new traditional plan in 2024 with Rs 1,00,000 annual premium has a situation where only the 2024 policy is counted toward the Rs 5,00,000 aggregate. The 2021 policy is grandfathered. The 2024 policy on its own is below Rs 5,00,000, so it clears the cap. Both policies can be exempt independently at maturity or surrender.

Contrast that with an NRI who holds two traditional plans both issued in 2024, one at Rs 3,00,000 annual premium and one at Rs 2,50,000 annual premium. The aggregate is Rs 5,50,000, which exceeds Rs 5,00,000. Both policies lose the exemption. The cap is a joint assessment of all qualifying policies, and crossing the line anywhere condemns every post-April-2023 traditional policy in the portfolio.

For surrender specifically, the question is what the aggregate premium was across policy years from policy inception to the year of surrender. If surrender happens in year 5, the test looks at whether in any policy year the aggregate exceeded Rs 5,00,000. If it did in any year, the policy is taxable on surrender.

Policies that are always taxable: keyman insurance

Section 10(10D) expressly excludes keyman insurance policies. A keyman policy is one taken by an employer on the life of an employee who is a key person, with the employer as the proposer and premium payer. If such a policy is subsequently assigned to the insured employee or any other person, the sum received at maturity, on surrender, or at death is also taxable. There is no Rs 2,50,000 or Rs 5,00,000 question for keyman policies: they never qualified for the exemption in the first place.

If you are an NRI who is also a director or significant employee of an Indian company that holds a keyman policy on you, and the policy is being surrendered or assigned, get qualified advice before assuming any portion of the proceeds is exempt.

DTAA and the NRI surrendering a policy

A DTAA between India and your country of residence can in principle reduce the Indian withholding on surrender proceeds, but the scope depends on the income characterisation and the specific treaty.

For a non-exempt ULIP where the gain is capital gains, the relevant DTAA article is the capital gains article. Most Indian treaties, including those with the US, UK, UAE, Singapore, and Canada, permit India to tax gains arising from the disposition of assets situated in India. An Indian ULIP, with its underlying investments in Indian securities, is an Indian asset. The capital gains article therefore typically does not give the resident country an exclusive right to tax, and India retains the right to impose its capital gains rate. The treaty may provide relief from double taxation in the resident country via a foreign tax credit, not a lower rate in India at source.

For a non-exempt traditional plan where the gain is Income from Other Sources, the residual or other income article of the DTAA typically gives the resident country the primary right to tax, with India able to tax only if the income has its source in India. Since an Indian insurance policy's proceeds have their source in India, India typically retains the right to tax. Again, the treaty usually addresses double taxation at the resident-country level rather than reducing the Indian rate at source.

To claim whatever treaty benefit does exist at the time of TDS deduction, furnish the insurer with a valid Tax Residency Certificate from your country of residence and a completed Form 10F. Without these, the insurer applies the domestic Section 195 rate without any treaty reduction. The TRC and Form 10F mechanics are covered in the DTAA mechanics, TRC and Form 10F guide. For the resident-country side of double taxation relief, see the foreign tax credit and Form 67 guide.

Filing the Indian ITR after surrender

An NRI who surrenders a taxable insurance policy must file an Indian ITR for the relevant financial year if any income tax is payable or if a TDS refund is due. The year is the financial year in which the surrender value is received.

For a ULIP with LTCG, the gain is reported in Schedule CG of ITR-2 or ITR-3. For a traditional plan with income from other sources, the gain is reported in Schedule OS. In both cases, the TDS deducted by the insurer appears in Form 26AS and AIS, and the ITR reconciles the TDS against the actual liability to generate either additional demand or a refund.

The general mechanics of NRI ITR filing, ITR form selection, and the process of claiming TDS refunds are in the ITR filing for NRIs, AY 2026-27 guide. If the surrender generates income that also requires advance tax payments in subsequent years (because you expect similar income to recur), the advance tax for NRIs guide covers the instalment schedule and the Rs 10,000 threshold that triggers mandatory advance tax.

If the surrender value combined with other Indian income creates a large discrepancy between TDS and actual liability, and you want to avoid the extended refund wait, the TDS for NRIs and refunds guide explains the refund processing timeline and the alternative of a lower deduction certificate under Section 197.

The home-country treatment of surrender proceeds

Section 10(10D) is Indian law. It stops at the Indian border. Your country of residence taxes you on your worldwide income and applies its own rules to the proceeds.

UAE residents face no personal income tax and bear no home-country tax on the surrender value. The Indian position is therefore the only one to manage. The UAE-India DTAA limits India's taxing right in some categories, but as discussed above, capital gains from Indian assets and income sourced in India are generally taxable in India.

UK residents are taxed on the chargeable event gain of a foreign life insurance policy as income. The UK chargeable-event rules apply to offshore policies and treat the surrender as a taxable event, computing the gain as proceeds minus premiums paid (with some adjustments for partial withdrawals previously taken). Unlike with UK onshore policies, the top-slicing relief and basic-rate credit do not apply to offshore policies. An Indian traditional or ULIP policy surrendered by a UK resident therefore faces UK income tax on the gain, in addition to any Indian tax. The India-UK DTAA may give the UK primary taxing rights under the other income article, but does not reduce the Indian deduction at source; it reduces double taxation through foreign tax credit claimed in the UK return.

US residents and citizens face the most complex overlay. The funds underlying an Indian ULIP are Passive Foreign Investment Companies (PFICs), requiring Form 8621 and subject to the Section 1291 excess distribution regime if the QEF or mark-to-market elections have not been made. The ULIP wrapper itself may be a foreign trust, triggering Forms 3520 and 3520-A. For US persons, the surrender of an Indian ULIP is not simply a tax event; it can be a foreign trust distribution event with separate filing obligations. The India-US DTAA does not provide a clean exemption for investment-linked insurance proceeds. US persons holding Indian insurance policies should work with a CPA experienced in both Indian and US tax before surrendering.

Canada taxes residents on worldwide income and applies its own foreign-accrual property income rules, which can attribute income from certain offshore arrangements to Canadian residents before it is received. A Canadian resident NRI holding an Indian ULIP should assess whether the FAPI rules apply to the policy's investment income during accumulation, not just at the point of surrender.

The closing read

Surrendering an Indian life insurance policy or ULIP is not a clean exit from a complex situation. It is a new taxable event with its own computation, its own TDS mechanics, and its own home-country overlay. The three things to run before you instruct the insurer:

First, does the policy fall inside Section 10(10D)? Check the issue date, check the premium-to-sum-assured ratio, and check whether the policy crosses the Rs 2,50,000 annual aggregate for ULIPs (issued after February 1, 2021) or the Rs 5,00,000 annual aggregate for traditional plans (issued after April 1, 2023). If it does not cross either line and clears the ratio test, the surrender proceeds are exempt in India, and the TDS risk is minimal, though an ITR may still be required. If it crosses the line, you have a taxable event.

Second, what is the actual tax? For a ULIP, it is capital gains at 12.5% on the gain above Rs 1,25,000 if equity-oriented and long-term. For a traditional plan, it is income from other sources at your slab rate on the gain over premiums. The difference between these rates can be significant, and it is worth knowing before you surrender, because it may affect the timing of surrender (to fall in a year when other Indian income is low) or the decision to surrender at all.

Third, manage the TDS before the payout, not after. As an NRI, Section 195 will be applied at the higher rate unless you have a Form 13 lower-deduction certificate in place before the insurer processes the surrender. Without it, you will recover the excess by filing an Indian ITR, which is slow and creates a cash-flow gap between when you expected the money and when the refund arrives. Apply for Form 13 early, allow 4 to 6 weeks for the certificate to be issued, and hand it to the insurer before submitting the surrender request.

The insurance wrapper sold as a tax shelter, at the large-premium scale that was common in NRI sales, no longer provides the shelter. The surrender of such a policy is taxable in India, deducted at source under Section 195, and then taxable again in most countries of residence. The honest arithmetic on a policy that fails 10(10D) almost always favours surrendering, paying the Indian capital-gains tax, recovering the excess TDS, and redeploying into a transparent structure. What it does not favour is inaction driven by a "tax-free" claim that stopped being accurate the day the Finance Act 2021 or 2023 was enacted.

Related guides

• NRI life insurance maturity tax and Section 10(10D)
• TDS for NRIs and how refunds work
• Lower TDS certificate via Form 13
• DTAA mechanics, TRC and Form 10F
• DTAA relief for NRIs
• Capital gains tax for NRIs on shares and mutual funds
• ITR filing for NRIs, AY 2026-27
• Advance tax for NRIs
• Foreign tax credit and Form 67
• NRI tax calendar 2026 key dates
• NRI belated, revised and updated return (ITR-U)
• Responding to NRI tax notices
• Paying India insurance from NRE or NRO account
• NRE, NRO and FCNR accounts explained
• NRI residency and RNOR rules

Disclaimer

This guide is general information for NRIs and not personalised financial, tax, or insurance advice. Tax rules, including the Section 10(10D) premium thresholds, the Rs 2,50,000 ULIP cap effective February 1, 2021, the Rs 5,00,000 traditional-plan cap effective April 1, 2023, the Finance Act 2025 capital-gains treatment of non-exempt ULIPs under Sections 2(14) and 45(1B) effective April 1, 2026 (AY 2026-27), the Section 56(2)(xiii) and Rule 11UACA computation for traditional plans, the Section 194DA TDS rate (2% from October 1, 2024), Section 195 TDS for NRIs, and DTAA treaty positions, can change and their application depends on your specific policy documents, issue date, premium history, residential status, and other Indian income in the year of surrender. The home-country treatment in the UAE, UK, US, Canada, and other jurisdictions depends on personal circumstances, local law, and applicable treaties. Verify current rules with your policy insurer and consult a qualified chartered accountant or cross-border tax adviser before acting on any surrender, maturity, or repatriation decision.