Income Tax if one surrenders insurance policy

In short yes under most circumstances money received by surrendering your insurance policy is exempted. However, there are certain conditions that should be fulfilled.

1. In normal policies if premium paid for 2 years.
2. In case of single premium policy if premium is paid for 2 years
3. In case of ULIP's premium should be paid for 5 years.

Further, any policy taken before 2003 is also exempted from tax.

Further, if insurer become disable surrender value is exempted from tax.

Best way to check whether money received by surrendering is exempt or not is by check the conditions under 80C where deduction is claimed.

For instance, ULIP policies must be held for 5 years. So surrendering before 5 years, will bring receipts under tax scope.

Similarly it applies to fixed deposits under 80C.