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Life Insurance Redemption Tax

When you cash in a capitalisation policy, a unit-linked plan or a pension fund in Portugal, only the gain is taxed, and the tax falls with the age of the contract: 28%, 22.4% and then 11.2%. But the relief exists only if at least 35% of your premiums went in during the first half. Enter the redemption, the premiums and the years to see the tax and your net.

Enter the amount the insurer pays you (already net of the product's charges) and the total premiums you paid in. "Premiums in the first half" are those paid during the first half of the contract's life: that figure is what decides whether you get the relief. The marginal rate is optional: it only drives the aggregation comparison.

IRS due
€560.00
Effective rate on the gain
11.2%
Taxable gain
€5,000.00
You keep
€14,440.00
Premiums paid in the first half50%
The 35% of premiums conditionMet
Age bandAfter the first 8 years: three fifths
Share of the gain excluded60%
Income excluded from tax€3,000.00
Income taxed at 28%€2,000.00
IRS with no exclusion at all€1,400.00
Saving from the exclusion€840.00

Applies to ramo «Vida» insurance, pension funds and mutual-association products. It does not cover the PPR (its own regime, Art. 21 EBF), non-residents, or the Madeira and Azores rates.

Video: how to use the calculator

1

What this calculator does

It works out the IRS due on redemption and what you actually keep. It starts from the gain (the positive difference between the redemption amount and the premiums you paid), applies the exclusion your contract qualifies for, taxes the rest at 28% and shows the effective rate on the gain. It also shows what you would save by waiting for the next age band and, if you enter your marginal IRS rate, whether aggregation is cheaper.

2

Only the gain is taxed, not the payout

This is the part that frightens people when the money arrives: the tax is not charged on the €15,000 you receive, but on the positive difference between that payout and the premiums paid or amounts invested (Art. 5(3) IRS Code). Redeem less than you put in and there is no income and no tax, and the loss is not deductible either. The capital you handed over comes back to you without being taxed a second time.

3

The age-based relief: 28%, 22.4% or 11.2%

The rate is always the flat 28%; what changes is the base. Art. 5(3) IRS Code excludes one fifth of the gain from tax if you redeem after five years and before eight years of contract, and three fifths if you redeem after the first eight years. Because the exclusion reduces the income rather than the tax, the effective rate on the gain goes from 28% to 22.4% and then to 11.2%. Before five years there is no exclusion at all: you pay the full 28%.

4

The 35% condition: what really decides it

The exclusions are not automatic with time. Art. 5(3) grants them only when the premiums paid in the first half of the contract represent at least 35% of the total premiums. Anyone saving monthly passes the test without thinking about it: half the life of the contract carries half the premiums, and 50% is above 35%. Anyone who tops the contract up heavily near the end fails it and loses the relief entirely: the same contract, same gain, same number of years, back to 28%. That is why the calculator asks you the question: it cannot be guessed from the holding period.

5

Aggregate or keep the flat 28%

The 28% is withheld as a final tax, so you need not declare anything. But Art. 71(9) IRS Code lets you opt for aggregation: you add this income to the rest and tax it at the progressive Art. 68 rates, and the withholding becomes a payment on account (Art. 71(10)). Because the exclusion has already reduced the income, aggregation applies to the reduced base and pays off when your marginal rate is below 28%, typically on low incomes. Careful: aggregation covers all income in the same category, including interest and dividends, and can raise the rate applied to the rest of your income.

6

What this calculator does not do

It does not cover the PPR, which has its own regime in Art. 21 of the Tax Benefits Statute, with its own rates and a penalty for redeeming outside the legal conditions. It does not handle non-residents or the Madeira and Azores rates. And it does not net off the product charges or any surrender penalty the contract may apply: those reduce the amount paid to you before this calculation begins, so enter the figure the insurer quotes you, already net of charges.

Worked example

You cash in €15,000 from a capitalisation policy into which you paid €10,000 of premiums, €5,000 of them in the first half, after 9 years of contract. The gain is €5,000. Because the contract ran past eight years and the first-half premiums are 50% of the total (above the 35% required), three fifths of the gain is excluded: only €2,000 is taxed, the IRS is €560.00 and you keep €14,440. The effective rate is 11.2%, not 28%. Now the contrast that matters: had you back-loaded the top-ups so that only 20% of the premiums went in during the first half, you would lose the relief entirely and the tax would be €1,400.00, which is €840 more for the same gain, on the same contract, over the same nine years.

Frequently asked questions

How much tax do I pay when I cash in a capitalisation policy in Portugal?
You pay 28% on the gain (the difference between the redemption and the premiums paid), but an exclusion lowers the effective rate: nothing before five years, one fifth of the gain excluded after five years and before eight years (an effective 22.4%), and three fifths after the first eight years (an effective 11.2%). All of it conditional on having paid at least 35% of the premiums in the first half of the contract.
Do I have to declare the redemption on my IRS return?
If the insurer is Portuguese, the 28% withholding is final and the tax is settled: you declare nothing. You only declare if you opt for aggregation (Anexo E) or if the product comes from a foreign provider with no Portuguese withholding, in which case the income goes in Anexo J. The insurer sends you a statement with the gain and the tax withheld.
Why was my age-based relief not applied?
Almost always because of the 35% condition: if the premiums paid in the first half of the contract do not reach 35% of the total, Art. 5(3) IRS Code grants no exclusion at all, even on a twenty-year contract. It catches people who paid small amounts at the start and topped up heavily in the final years. The calculator shows how much would have had to go in during the first half to pass the test.
Is it worth waiting before cashing in?
Between four and five years, and especially close to eight, it can be worth a lot: in the example above, going from six to eight years of contract cuts the tax from €1,120 to €560. The calculator tells you how many years remain to the next band and what the tax would be there. Weigh that against the return on the product and the alternatives: a term deposit is also taxed at 28% on its interest, but with no age-based relief.
Does this apply to a PPR?
No. The PPR has its own regime in Art. 21 of the Tax Benefits Statute: redemption within the legal conditions is taxed at a reduced rate and, outside them, there is a penalty. The five- and eight-year rules and the 35% condition on this page come from Art. 5(3) IRS Code and apply to ramo «Vida» insurance, pension funds and mutual-association products that are not PPRs.
What if the policy loses money?
If you redeem less than you paid in premiums there is no investment income and no tax, and the calculator shows zero. But that loss is not deductible or offsettable against other income either, because category E taxes income rather than balances. It is an important asymmetry to understand before buying a product with capital at risk, such as a unit-linked plan.

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Author: Thorben Rasmus Idel · Reviewed by: Nahar Geva · Last reviewed: