What is Term Insurance Tax Benefit?

You can save on taxes and protect your family’s future with term insurance. With a regular term insurance plan, you not only safeguard your loved ones but also enjoy tax benefits of up to ₹1.5 lakh under Section 80C of the Income Tax Act, 1961. It’s a smart way to get your life covered and reduce your tax burden.

Types of Tax Benefits Available Under Term Insurance: An Overview

What are the Different Types of Tax Benefits Available under Term Insurance?

Term insurance offers various tax benefits on different features, such as premium payment and sum assured.

Here are the different tax benefits available under term insurance:

1. On Premium Payment

   Similar to Public Provident Fund (PPF), tax-saver Fixed Deposits (FDs), National Savings Certificates (NSC), and even repayment of home loan principal, term insurance also offers a tax-saving option under Section 80C of the Income Tax Act. Policyholders can avail deductions of up to ₹1.5 lakh under this section on annual premium payments.

   Example: Mr. Sangar, 30 years old, has a term insurance plan of ₹1 crore for which he pays an annual premium of ₹10,000 (excluding GST). Through this, Mr. Sangar can save ₹10,000 annually under Section 80C of the Income Tax Act.

   However, certain conditions apply to avail of this benefit on the premium paid:

   • The annual premiums paid must not exceed 10% of the sum assured. If premiums exceed 10%, deductions will be applied proportionately.
   • For policies issued before March 31, the deduction is applicable only if the yearly premium does not exceed 20% of the sum assured.
   • As per Section 80C(5), if a policy is voluntarily surrendered or terminated within two years from the policy inception, the policyholder is not eligible for Section 80C tax benefits on premium payments.

2. On Sum Assured

   Term insurance plans offer different payouts, which play a crucial role in tax savings.

   Firstly, the sum assured received as a death benefit is exempted under Section 10(10D) of the Income Tax Act. This means that when a nominee or beneficiary receives the sum assured after the policyholder's demise, the entire amount promised in the plan is tax-free.

   Additionally, for a Term Insurance Plan with Return of Premium, if the policyholder survives the term, the maturity benefit received is also entirely tax-free under Section 10(10D) of the Income Tax Act.

   Example: Mr. Sharma has a term insurance plan with a sum assured of ₹50 lakh. He passed away during the policy tenure, and his family is entitled to receive the sum assured. Mr. Sharma's family will receive the entire amount of ₹50 lakh without any tax deductions under Section 10(10D) of the Income Tax Act.

   However, there are some scenarios where tax is applicable on the term insurance payout received by the beneficiary:

   • Any benefit received under Section 80DD(3) or sub-section (3) of Section 80DDA.
   • Any benefit received under a Keyman insurance policy. A Keyman insurance policy is one where the employer is both the proposer and premium payer, the employee's life is insured, and the benefit in case of a claim goes to the employer.

3. Under Section 80D

   While Section 80D primarily covers health insurance exemptions, policyholders can also utilize it for certain riders in their term insurance plans.

   Several health-related riders offered with term insurance plans, such as Critical Illness, Surgical Care, and Hospital Care riders, provide benefits under Section 80D. Key considerations for this tax benefit include:

   • Deductions under Section 80D are available for an amount of ₹25,000.
   • This tax benefit can also be claimed for insurance policies taken for your parents, up to an additional deduction of ₹25,000.
   • For senior citizen policies, the deduction limit increases to ₹50,000.

4. Under Section 10(10D)

   Section 10(10D) offers significant tax benefits for term insurance, allowing family members to save money through tax exemptions on death and maturity benefits.

   For life insurance plans issued on or after April 1, 2024, maturity benefits are eligible for tax deductions only if the annual premiums paid by an individual are up to ₹5 lakh. As per the Union Budget proposed by the Government of India, maturity benefits, death benefits, and any cumulative bonus are tax-free if the premiums do not exceed 10% of the sum assured amount.

   Understanding tax exemptions on life insurance plans is crucial for making informed decisions about your loved ones' financial safety. It's also important to note that Section 10(10D) is subject to changes due to amendments in the Income Tax Act. Here's how Section 10(10D) aids in term insurance tax exemption:

   • Individuals can claim tax exemptions under Section 10(10D) if policy premiums paid do not exceed 20% of the sum assured in a single policy year.
   • This tax exemption is also valid for all returns earned via a Unit-Linked Insurance Plan (ULIP).

Tax Benefits on Term Insurance Riders

Term insurance plans offer rider benefits to policyholders. These riders provide supplementary coverage in addition to the basic term insurance plan and also offer term insurance tax benefits. Here's how they help with tax exemptions:

• When you purchase a term insurance plan, you can avail tax benefits under Section 80D by purchasing an additional critical illness rider with your base plan.
• Term insurance tax exemption is provided to policyholders under Section 80C when opting for riders such as the Return of Premium at the time of policy purchase.

Still Confused About Term Plan Deduction in Income Tax?

If you are still confused about term plan deductions in income tax, you can reach out to us at PolicyX through the channels below. We are IRDAI-certified insurance advisors and will help you understand everything about tax savings.

• Talk to our experts for assistance.
• You can also contact us on 1800-4200-269 (Toll-free).

Conclusion

Saving money through tax benefits is a significant reason to buy term life insurance. These benefits should be utilized effectively, alongside considering other factors such as claim settlement ratio, plan exclusions and inclusions, network hospitals, and more. It is equally important to understand the amount of tax one can save based on the premium paid.