Everything You Need to Know About Term Insurance Tax Benefits

Term Insurance Tax Benefits

Term insurance plans provide you with not only financial security but also certain tax benefits. These benefits are offered under the Income Tax Act and can help you maximize your savings. By understanding and utilizing the tax provisions related to term insurance, you can effectively reduce your tax liability while ensuring the well-being of your loved ones.

This article provides an overview of the tax benefits available for term insurance plans. It also highlights the relevant sections of the Income Tax Act and the potential tax savings they offer. By understanding all the tax benefits available to you, you can make informed decisions and optimize your financial planning.


What is Term Insurance?

Term insurance is a pure protection plan that offers coverage for a specified period upon payment of a defined premium. In the event of the insured person’s death during the policy term, the nominee receives a death benefit in the form of a lump sum or installments. This ensures that your family can maintain their lifestyle and achieve their life goals even in your absence, protecting their wealth and savings from depletion. 

Although there are no maturity benefits if you survive the term, opting for a term insurance policy provides a financial shield for your loved ones. It is cost-effective and suitable for people from all income brackets. Additionally, it allows you to increase coverage during significant life stages without medical check-ups. 

Term insurance riders offer extra coverage for specific illnesses, disability, accidental death, or premium waiver at a nominal extra cost. Using a term insurance calculator, you can determine the required coverage to secure your family’s future.

Term Insurance Tax Benefits

Tax benefits on a term insurance plan are typically claimed under the following three sections of the Income Tax Act 1961:

1. Term Insurance Tax Benefits Under Section 80 C

By opting for a term insurance policy, you can maximize tax savings under Section 80C of the Income Tax Act. A deduction of up to ₹1.5 lakhs per year is allowed under this section for term insurance premiums. This limit includes other tax-saving investments like PPF and home loan installments.

To qualify for the tax benefits, the premium paid should not exceed 10% of the sum assured. If the policy was purchased before March 31, 2012, the deductible premium is 20% of the sum assured. 

Additionally, the policy must remain active for at least two years to retain the claimed deductions. If surrendered or terminated before two years of the policy term are complete, the tax benefit claimed for the premiums will be considered as income for the previous year.

2. Term Insurance Tax Benefits Under Section 80D

Term insurance plans provide additional coverage through riders, which require an extra premium. The premium paid for certain riders, such as the Critical Illness Rider, can be claimed as a deduction from taxable income. 

The Critical Illness Rider offers a lump sum payout if you are diagnosed with any of the specified critical illnesses. Under Section 80D, the premium paid for this rider is eligible for deduction. The deduction limit is ₹25,000 for individuals below 60 years old and ₹50,000 for senior citizens.

3. Term Insurance Tax Benefits Under Section 10(10D)

Under Section 10(10D) of the Income Tax Act, term insurance tax benefits apply to policy benefits such as maturity or death benefits received under an insurance plan. The death benefit is tax-exempt for the recipient, regardless of the conditions specified in Section 10(10D). 

However, for maturity benefits, if the policy fails to meet the conditions of Section 10 (10D), the gain from the policy will be subject to taxation for the recipient. Note that if the premium paid exceeds 10% of the sum assured, the maturity benefit will be taxed as income based on the recipient’s applicable slab rates.

Who Can Claim Term Insurance Tax Benefits?

To claim a term insurance tax benefit, the following eligibility criteria have to be met:

  • Premiums must have been paid in the relevant financial year
  • Premiums paid for yourself, your spouse, and your dependent children are eligible for deduction.
  • NRIs can also claim deductions under Sections 80C and 80D for term insurance premiums paid. 
  • The policy should be in force for a minimum of two policy years. Surrendering the policy before two years reverses 80C benefits.
  • To qualify for tax benefits under Section 10 (10D), the premiums paid should not exceed 10% of the sum assured for policies issued after 31st March 2012.

Conclusion

Term insurance not only provides financial protection but also offers significant tax benefits under Sections 80C, 80D and 10(10D). By leveraging these provisions and meeting the eligibility criteria, individuals can optimize their tax savings while securing their loved one’s future. It is essential to explore and understand these benefits to make informed decisions and maximize the value of term insurance for financial protection and tax planning.