Term Insurance, a pure protection coverage, is a great mechanism to safeguard the family and loved ones from upcoming unfortunate crises. Term life insurance is quite popular amongst people for its one feature which is Tax Saving. Term insurance plans are also devised to save taxes and utilize that money for the betterment of the lives of your family members. In fact, tax saving is the prime reason to buy a term insurance policy for a huge set of masses.
In this article, we will be discussing the Tax benefits of Term Insurance. Continue Reading to know more.
Similar to the Public Provident Fund(PPF), tax-saver Fixed Deposits (FDs), National Savings Certificate (NSC) and even repayment of home loan principal, term insurance also offers a tax saving option under Section 80C of the Income Tax department. The policyholder can avail of the deductions of up to INR 1.5 lakh under this section on annual premium payments.
Mr Sangar, 30 years old, has a term Insurance plan of INR 1 crore for which he pays INR 10,000 premium without GST annually. Through this, Mr Sangar can save the tax of INR 10,000 annually under the 80C section of the IT department.
However, there are certain conditions applied to avail of the benefit on the premium paid, such as:
Check and compare plans from 21 IRDAI-approved term insurance providers before purchasing a term plan.
There are different payouts done in a Term Insurance plan and this nature of the scheme has another crucial role to play in saving tax in all situations.
Firstly, the sum assured amount received as a death benefit is again exempted under Section 10(10D) of the Income Tax Act. This means that when a nominee or beneficiary of the term insurance plan gets the sum assured amount post the demise of the policyholder the person is entitled to get the entire amount promised in the plan without any tax deductions.
Nowadays, there is a huge demand for a Term Insurance Plan with a Return of Premium wherein the policyholder is entitled to get the maturity benefit of the plan in case he/she survives the term insurance plan. In this case, the term insurance payout is entirely tax-free under Section 10(10D) of the Income Tax Act.
Let's simplify this with an example-
Mr. Sharma has a Term Insurance plan for INR 50 Lakh sum insured. He passed away during the policy tenure and his family is entitled to receive the sum assured amount. So Mr. Sharmaâ€™s family will receive the entire amount of INR 50 Lakh without any tax deductions under Section 10(10D) of the Income Tax Act
However, there are some scenarios where the tax is applicable on Term Insurance payout received by the beneficiary, such as -
It is correct that the 80D section primarily permits health insurance and its related exemptions. But, it is still unknown that a policyholder can make effective use of this section in their Term Insurance Plans as well.
There are several health-related riders offered with Term Insurance Plans such as Critical Illness, Surgical Care, Hospital Care Rider, etc that provide the benefit of 80D. Important considerations to know about this tax benefit are:
Saving money that goes into the form of tax stands as one of the top-rated reasons when it comes to buying term life insurance and it should be used effectively along with the consideration of other factors such as claim settlement ratio, exclusions and inclusions in a plan, network hospitals and many more. It is equally important to understand the amount of tax one can save in the given premium.