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Adhil Shetty: Dec 17 2012, 03:32 IST

I purchased a policy from an insurance company under the Plan Life Time Pension in 2003. I paid R90,000 in nine yearly premiums. Instead of getting life time pension benifit, I have received R1,18,000 as full surrender value. What amount is taxable under the Income Tax rules?

—Sukhdev Singh, Patiala

The life insurance policy is meant to provide insurance against any eventuality. Hence if the insurance is claimed because of death of the insurer, there is no tax. However, when the insurance is redeemed, tax is applicable. You are required to pay the taxes on the profit that exceeds your premium. The insurance company might issue Form 1099 to give you an exact idea about the capital gains. If it hasn’t, you can speak with them and get this form.

For example; you have paid R90,000 in premium till date. Your redemption amount is R1,18,000. This means you got a profit of R18,000. This profit will be added to your taxable income and taxed as per your income tax rate. On another note, you should not surrender your insurance policy without completing the term. It kills your returns. Moreover, this is not what insurance is supposed to be. If you want to redeem to earn returns, invest in mutual fund schemes.

I can save a maximum of R10,000 every month. Please suggest me some short-term plans where I can get the best returns.

—Surjit Singh, Kolkata

The choice of investing instruments depends on the age of the investor

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