While it is common knowledge that a term life insurance plan acts as a financial cushion for your family during an adverse event, not many are aware of the various term insurance tax benefits that come along with it. Surprised? Yes, term insurance plans offer several tax benefits to you. That is not all. Even the riders that term plans offer provide you with an avenue to reduce your overall tax liability. Wish to find out more? Then continue reading.
What is term insurance?
A term insurance is a type of a life insurance plan. It offers you a life cover for a specified period in exchange for regular and periodic payments known as premiums.
In the event of your death, the insurance service provider would disburse a predetermined sum of money to your beneficiaries/nominees, known as the death benefit. This sum of money that they receive can then be used to meet their needs and requirements, ensuring that their lifestyle does not take a hit even when you are no longer around.
Term insurance tax benefits
The Income Tax Act, 1961 (the Act) offers a couple of tax benefits to term insurance plans under sections 80C and 10(10D), subject to provisions stated therein. Here is some more information -
1. Section 80C
According to section 80C of the Act, the premiums that you pay during a financial year for a term insurance plan can be deducted from your annual total income up to the tune of Rs. 1.5 lakh. This effectively reduces your total taxable income and in turn decreases your overall tax liability. Let us look at an example –
Assume that you pay around Rs. 8,000 a month for a term insurance plan with a death benefit sum assured amount of Rs. 25 lakhs. The yearly premium that you would have to part with comes up to Rs. 96,000. Now, you can deduct this amount from your total yearly income, which would end up reducing the amount that you would have to pay as tax.
2. Section 10(10D)
Section 10(10D) of the Income Tax Act, 1961, on the other hand, offers a tax exemption on the death benefit paid out to your beneficiaries/ nominees. This effectively means that the sum of money that your beneficiaries/nominees receive from the insurance service provider because of your demise would not amount to income and therefore would not be taxable in their hands.
Thanks to the provisions of section 10(10D), your beneficiaries/ nominees can make full use of the amount that they receive without having to pay any tax on it. That said, in order for the death benefit to be fully exempt from tax, the sum assured amount should be at least ten times more than that of the yearly premium that you pay. Here is a small example that can help you understand the concept better –
Let us say that you opt for a term insurance plan with a death benefit sum assured amount of Rs. 15 lakhs. The yearly term insurance premium that you are required to pay for the plan may be assumed to be Rs. 1,50,000. Since the total sum assured amount is ten times that of the annual premium paid, the death benefit of Rs. 15 lakhs would be totally exempted from tax in the hands of your beneficiaries/ nominees. The entire amount that your beneficiaries/nominees receive can then be used by them to meet their goals and requirements without worrying about tax impact on such receipts.