Term Insurance Tax Benefits

With tax exemptions, term insurance plans in India come as the most valuable life insurance policy. Saving money and earning income from one’s assets are the topmost priorities on the minds of many Indians. As term insurance is meant mainly for a death benefit, people tend to think twice before buying one as a lump-sum amount is paid out to the nominee only in case of the death of the policyholder. But, increasingly many people are getting to know the importance of term insurance, including its tax benefits. It has an exceptional advantage wherein it’s capable of saving you your money in taxes that you could use to improve the well-being of your family. In this article, we will discuss term insurance tax benefits and how you can also benefit from buying term insurance under Section 80C, 80D, and Section 10(10D).

Term Insurance: Overview

Term insurance operates as a safety net for the family of the insured or policyholder. A predetermined amount (premium) is frequently paid by the insured to an insurance company, such as once a month or once a year. The insurer pays the policyholder's loved ones the sum assured (coverage money) if something unfortunate occurs to the insured within the policy term. After the demise of the insured, this money might be utilized for expenditures such as the mortgage or the kids' education. It gives a sense of financial security to the policyholder as well as his family, even if the insurance does not provide any of the funds back if nothing occurs to the insured during that period. It's similar to buying protection for an agreed-upon period of time, and it's typically affordable, especially when you are young and healthy.

What are Term Insurance Tax Benefits?

Term insurance has specific tax benefits in India which makes it more attractive for people to purchase this form of insurance and secure themselves, family, or loved ones. The premiums paid for term insurance help lower the overall income on which you need to pay taxes. It means you can reduce the amount of income tax you pay and give more financial stability to your family. The other good thing about the term life insurance is if unfortunately, an unforeseen event such as the death of the policyholder takes place, the sum assured (money) will directly be paid out into the family’s bank account. The money received by the family would also be tax exempted. The idea is to encourage term plans for the protection of the family’s finances in the event of anything unfortunate happening. Thus, to put it in plain words, term insurance provides both safety and additional tax advantages to ensure you secure the future of your dependents.

Tax Benefits on Term Insurance Premium Payment

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.

Here is an example for your better understanding

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:

Tax Benefits on Term Insurance Sum Assured Received

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. Sharma’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 -

• Any benefit received under Section 80 DD(3) or sub-section (3) of section 80DDA
• Any benefit received under Keyman Insurance policy. The keyman insurance policy is the one where the proposer, as well as the premium payer, is the employer, the life to be insured is that of the employee and the benefit in case of a claim, goes to the employer.

Tax Benefits Received Under the 80D Section of Income Tax

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:

Term Insurance Tax Benefit Under Section 10(10D)

Along with the tax advantages granted to term insurance policyholders, there are other tax breaks to be aware of. Section 10 (10D) term insurance tax benefits allow family members to save money through tax exemptions. Section 10(10D) protects death benefits and maturity benefits from taxes. The maturity benefits of all life insurance plans issued on or after April 1st, 2024 are eligible for tax deductions only if the annual premiums paid by an individual are up to INR 5 lakh. According to 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 insured amount.

It is essential to have knowledge of tax exemptions on life insurance plans to make better decisions for the financial safety of your loved ones. However, it is also essential to understand that Section 10(10D) is subject to further changes due to amendments made to the Income Tax Act. Below mentioned are the detailed explanations of how section 10(10D) aids in Term insurance tax exemption.

• Individuals can claim tax exemptions under 10 (10D) if policy premiums paid do not exceed 20% in a single policy year.
• In case of maturity returns the benefit amount should be the death payout.
• This tax exemption is valid for all the returns earned via a Unit linked insurance plan (ULIP) as well.

There are a few eligibility criteria to be met before you can claim tax deductions u/s 10(10D):

• Tax deductions under 10(10D) are applicable on all kinds of life insurance claim payouts that an individual may receive.
• Deductions will be applicable to both national and international insurance providers.
• Death Benefits, Maturity Benefits, and Accumulated bonuses are all eligible for tax deductions under sections 10 (10D).

Term Insurance Tax Benefits Under 80C

Term Insurance tax benefits come under 80 C and 80 D tax benefits and offer multiple tax savings advantages to the insurance holders. Under Section 80 D insurance holders receive up to INR 25,000 tax exemption and senior citizens can avail of tax exemptions up to INR 50,000. The term plan tax benefit under 80D includes Critical Illness, Surgical Care, Hospital Care Rider, etc. When an insurance holder purchases a term plan with additional riders they can avail of tax exemption benefits and save money.

What is GST on Term Insurance?

The Goods and Services Tax which is widely discussed amongst the citizens of India ever since it was launched has impacted all sectors of the economy. GST has had an essential impact on life insurance as well. Before the GST was introduced in India the life insurance premiums were taxed via service tax which was around 15% and comprises taxes like Swachh Bharat Cess and Krishi Kalyan Cess along with basic service tax. After the implementation of GST the life insurance premiums taxation increased from 15% to 18% and resulted in increased premium charges.

However, when the premium charges increased it supported the life insurance industry by increasing the competition amongst life insurance providers across the nation making them vigilant about other policy-related expenses and cutting them out for the benefit of the consumer. The standardization of the taxation amount throughout different insurance providers allowed consumers to look at various other aspects of a policy other than just the premium rates of a term insurance policy.

One of the important factors to keep in mind about GST on term insurance is that GST application is different for different insurance products and for term insurance plans GST applies at a standard rate of 18% on premiums. Whereas for unit-linked insurance plans, life insurance plans GST of 18% is applicable for premium payments and fund management charges.

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. There are multiple rider options attached to a base term insurance plan such as critical illness rider, return of premium, accidental death benefit riders, and more. To understand how they help with tax exemptions

• When you purchase a term insurance plan you can avail tax benefits for Term insurance under 80d on purchasing an additional critical illness rider with your base plan.
• Term insurance tax exemption is provided to insurance holders under section 80 c when opting for riders such as the return of premium at the time of policy purchase.

Conclusion

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.