Available tax benefits under different Sections of the Income Tax Act 1961
As mentioned earlier, a term insurance plan offers multiple tax benefits. These benefits under the provisions of the Income Tax Act, 1961 (the Act) are as follows –
1. Tax benefit under Section 80C:
Under this section, the premium that you pay for the term plan is allowed as a deduction from your taxable income. The deduction limit allowed under Section 80C of the Act is up to Rs.1.5 lakhs. However, the benefit of Section 80C is available only under the old tax regime. Individuals opting for the new tax regime cannot claim this deduction3. Use the term insurance calculator to calculate your premium and invest accordingly.
The deduction is allowed as a minimum of the following:
a. Actual premium paid or
b. 10% of the death sum assured for term policies issued on or after 1st April 2012.
c. 20% of the death sum assured for term policies issued before 1st April 20121
Further, if the life insured has any sort of disability as specified under Section 80U of the Act or suffers from any of the diseases as specified under Section 80DDB of the Act, and the policy was issued on or after April 1, 2013, then you can avail an Income Tax deduction upto 15% of the death sum assured1.
Consider the following illustrations of term insurance premiums and the deduction that you can claim in each case (assuming Customer is opting for old tax regime) –
Premium amount |
Sum assured
|
Deduction available
|
Reason
|
Rs. 114,093
|
Rs.50 lakhs
|
Rs. 1,14,093
|
Premium is less than 10% of the sum assured and within the deduction limit of Rs.1.5 lakhs, so deduction is allowed on Rs. 1,14,093 (Assuming the term policy has been issued after 1st April 2012).
|
Rs.2,07,489
|
Rs.1.5 crore
|
Rs.1.5 lakhs
|
Though the premium is less than 10% of the sum assured, it exceeds the deduction limit of Rs.1.5 lakhs. Thus, the deduction is allowed up to the maximum limit of Rs. 1.5 lakhs only
|
In cases where the premium is within the deduction limit of Rs.1.5 lakhs and is more than 10% of the sum assured, the deduction is allowed only on the amount which is 10% of the sum assured for term policies issued on or after 1st April 2012 and 20% of the sum assured for term policies issued before 1st April 20121.
Note: The above figures are for illustration purposes only, calculated for different
premium payment terms for a male aged 35 years, non-smoker, earning between 15-20lakhs/year. These figures will vary from person to person. Please use the relevant calculator to calculate the premium for your chosen plan type.
2. Tax benefit under Section 10(10D):
Section 10(10D) is applicable for policy benefits, including maturity or death benefits, if any, received under the insurance plan. The death benefit is exempt in the hands of the recipient irrespective of satisfaction of Section 10(10D) conditions. However, in case of maturity, gain from a policy will be taxable in the hands of the recipient if the policy does not satisfy Section 10(10D) conditions.
In the earlier example, Section 10(10D) exemption will be allowed in the first two instances because the premium is within 10% of the sum assured. However, if the premium exceeds 10% of the sum assured, the maturity benefit paid under this instance will be taxed in your hands as income at your slab rates.
Furthermore, under Section 10(10D) of the Act, death benefits are completely tax-free in the hands of the nominee5 for pure term policies.
3. Tax Benefit Under Section 80D:
Term insurance plans offer different riders with the policy. These riders give additional coverage and come at an additional premium. Premiums paid for some riders, like the Critical Illness Rider, can be deducted from your taxable income. A critical illness rider pays out a lump sum if you are diagnosed with any of the critical illnesses listed under the plan. The premium paid for the rider is allowed as a deduction under Section 80D. The deduction limit is Rs. 25,000 if you are below 60 years old and Rs. 50,000 if you are a senior citizen.
Eligibility Criteria for Claiming Term Insurance Tax Benefits:
To claim term insurance tax benefits under Sections 80C and 80D, some eligibility parameters should be met. These are as follows –
- The deduction is allowed in the financial year when the premium is paid1 and only under old tax regime.
- You can claim a deduction under Section 80C for premiums paid for yourself, your spouse and dependent children1.
- For deduction under Section 80D, you can pay premiums for yourself, your spouse and dependent children1 for health rider.
- NRIs can also claim a deduction under term insurance comes under 80C or 80D for the insurance premiums paid1.
- After buying the plan, you should hold on to the policy for a minimum of 2 years. Surrendering or terminating the policy before 2 years will reverse the benefit availed under Section 80C of the Income Tax Act, 19611.
- To claim benefit under Section 10(10D) on maturity, the premium payable should not exceed 10% of the death sum assured for policies issued after 31 March 2012.
Conclusion:
A term insurance plan, thus, is a multifaceted plan that not only provides insurance coverage for financial security but also helps save tax. The death benefit paid under the plan is tax-free, subject to provisions of the Act. Maturity benefit, i.e., return of premiums upon maturity, if opted under the plan, is tax-free under Section 10(10D), subject to satisfaction with the conditions mentioned therein. So, understand the tax benefits of term insurance plans and use these benefits to your advantage when filing your returns.
Reference
- https://incometaxindia.gov.in/tutorials/20.%20tax%20benefits%20due%20to%20health%20insurance.pdf
- https://cleartax.in/s/life-insurance-taxability#:~:text=The%20insurance%20company%20is%20liable%20to%20deduct%20tax%20at%205,65%2C000%20amounting%20to%20Rs%203%2C250
- https://economictimes.indiatimes.com/wealth/personal-finance-news/section-80c-deduction-in-budget-2024-will-the-government-increase-section-80c-limit-under-the-old-income-tax-regime-in-budget/articleshow/111250865.cms?from=mdr
- https://economictimes.indiatimes.com/wealth/tax/now-life-insurance-maturity-money-will-not-be-fully-tax-exempt-cbdt-issues-new-tax-rules/articleshow/102797642.cms?from=mdr
- https://www.livemint.com/money/personal-finance/how-life-insurance-policies-are-taxed-11665145664260.html
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