Tax Saving with Term Insurance
  • Tax Benefits on Term Insurance
  • Explore 80C & 10(10D)
  • Protection with Tax Savings
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Tax Saving with Term Insurance

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.

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:

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

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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:

  • Deductions under Section 80D are available for an amount of Rs. 25,000 and not more than this.
  • This tax benefit can also be taken for the insurance policy taken for your parents, up to additional deductions of Rs. 25,000.
  • For senior citizens' policies, the deduction limit goes up to Rs. 50,000.

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.

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Naval Goel

Reviewed By: Naval Goel

Naval Goel is the CEO & founder of PolicyX.com. Naval has an expertise in the insurance sector and has professional experience of more than a decade in the Industry and has worked in companies like AIG, New York doing valuation of insurance subsidiaries. He is also an Associate Member of the Indian Institute of Insurance, Pune. He has been authorized by IRDAI to act as a Principal Officer of PolicyX.com Insurance Web Aggregator.