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List Of Income Tax Sections Under Which You Can Get Term Insurance Tax Benefits

Income tax sections with term insurance tax benefits

List Of Income Tax Sections Under Which You Can Get Term Insurance Tax Benefits


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March 16, 2021

By : Bajaj Allianz Life

A term insurance policy is one of the most affordable ways to secure the financial future of your family and ensure that their life goals remain unaffected. When you purchase a term insurance plan, you are essentially buying a life cover for a specified period.

In exchange for this life cover, you are required to pay regular premiums to your insurer. Should the event of your unfortunate demise happen during the tenure of the policy, the insurer pays out death benefits to your nominee or beneficiary. Your family can then rely on those funds to meet major costs, maintain their standard of living, settle any debts in your name, and meet other major life goals.

Given these financial benefits, many individuals often wonder: Is term insurance tax-free? It turns out that there are several sections under the Income Tax Act, 1961 that allow you to get term insurance benefits in the context of tax saving.

 

Tax benefits on term insurance

 

So, is term insurance tax-free? The short answer is yes. Term insurance benefits include tax benefits under three different sections of the Income Tax Act, 1961. These are –

• Section 80C

• Section 10(10D)

• Section 80D

Let us look into the details of these term insurance tax benefits -

 

Tax benefits under 80C

 

Section 80C of the Income Tax Act, 1961 (the Act) is one of the most commonly used sections to claim tax benefits related to a term insurance policy. According to this section, you can claim the premiums paid out for your term plan during each financial year as a deduction from your total taxable income subject to conditions stated in the Act. The eligible deduction is capped at Rs. 1.5 lakh.

Here is an example to illustrate this benefit more clearly. Say you have purchased a term insurance plan offering a life cover of Rs. 1 crore for a period of 20 years. For this, you may be presumed to pay a premium of Rs. 50,000 annually. Therefore, as per the provisions of Section 80C of the Act, you can claim Rs. 50,000 as a deduction from your total income, thereby bringing down your tax liability.

Alternatively, in case the premium you pay for your life cover is, say Rs. 1,65,000 per year, then, your deductions will be limited to Rs. 1,50,000 alone.

 

Tax benefits under 10(10D)

 

As per Section 10(10D) of the Income Tax Act, 1961, any amount received upon the maturity or the surrender of the policy, or upon the death of the policyholder, is exempt from tax subject to the conditions stated therein. In the case of a term plan, since term insurance benefits only include death benefits, they are exempt from tax in the hands of the nominees or beneficiaries.

Here is another thing to note. The tax benefit under Section 10(10D) is applicable only if the premium paid is less than 10 percent of the sum assured. In other words, the sum assured should be at least 10 times the premium.

Let us look at an example to understand these benefits better. Say you buy a term insurance plan offering a life cover of Rs. 50 lakhs for a period of 25 years. The insurer charges you a premium of Rs. 1 lakh annually. Here, the sum assured is greater than 10 times the premium. So, the benefits under section 10(10D) of the Act are applicable.

In the case of your unfortunate demise at any time during the 25 years of coverage offered by the plan, your nominee shall receive the sum assured of Rs. 50 lakhs. Moreover, that amount is tax-free for them. Therefore, they need not pay any taxes on the death benefits received.

 

Tax benefits under 80D

 

Section 80D of the Income Tax Act, 1961, offers a deduction on the premiums paid for health insurance plans. This is applicable for policies taken for yourself, your spouse or children, or even your parents. Wondering how this is related to a term insurance policy? Well, the benefits under section 80D are also applicable for health-related riders that are offered with some term plans.

For instance, say you have purchased a term insurance plan for yourself at an annual premium of Rs. 50,000, along with a critical illness rider for an additional nominal premium of Rs. 10,000 per year. Now, since the rider is health-related, you can claim the annual premium paid for it - Rs. 10,000 - as a deduction from your total taxable income.

The limits for the deduction are as follows:

• Rs. 25,000 for premiums on health-related riders on plans taken for yourself, your spouse or your children.

• An additional Rs. 25,000 for premiums on health-related riders on plans taken for your parents, if they are aged below 60 years.

• An additional Rs. 50,000 for premiums on health-related riders on plans taken for your parents, if they are aged above 60 years.

 

Are there any situations where beneficiaries might still have to pay tax?

 

In case the beneficiaries earn any benefits other than the ones specified above, they may be liable to pay taxes on such additional income. For instance, if the benefits are held by the insurer and paid out later along with an interest component, the accumulated interest may be subject to tax as per the provisions specified therein. It is always safe to consult an expert or your tax advisor to know more.

 

Who can claim term insurance tax benefits?

 

The term insurance benefits in the context of tax saving can be claimed by individuals as well as Hindu Undivided Families (HUFs).

 

Conclusion

 

This should give you a clearer idea of the income tax sections under which you can enjoy tax benefits on your term insurance. With so many benefits available, coupled with the extremely cost-effective nature of term plans, it is one of the preferred solution for people looking to secure the future of their loved ones in an affordable manner so that they can achieve their life goals without any hindrance.

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The above information is for general understanding and is meant to educate the general public at large. The reader will have to verify the facts, law and content with the prevailing tax statutes and seek appropriate professional advice before acting on the basis of the above information.