Term Insurance Tax Benefits: Deductions under 80C, 80D and 10(10D)

A term insurance policy is a protection-oriented life insurance policy that can help in creating a secured financial corpus for the family in the case of life insured’s untimely demise. It helps in financial preparation of the life insured’s family for unplanned emergencies after the breadwinner passes away.

While term insurance plans offer the benefits of financial security and peace of mind, they also help in saving taxes. When you invest in a term insurance plan, you can get multiple types of tax benefits. Let’s have a look at the term plan tax benefits–

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 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 limit of deduction allowed under Section 80C of the Act is up to Rs.1.5 lakhs¹. You can use the term insurance calculator to calculate your premium and invest accordingly.

The deduction is allowed as minimum of following:

a. Actual premium paid or

b. 10% of the death sum assured for term policies issued on or after 1st April 2012¹.

Consider the following illustrations of term insurance premiums and the deduction that you can claim in each case –

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.

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 benefit, if any, received under insurance plan. Death benefit is exempt in the hands of recipient irrespective of satisfaction of Section 10(10D) conditions. However, in case of maturity, gain from policy will be taxable in the hands of recipient if policy is not satisfying 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.

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. Premium paid for some riders like the Critical Illness Rider can be claimed as a deduction from your taxable income. A critical illness rider pays out a lump sum amount in case 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 citizen¹.

Eligibility Criteria for Claiming Term Insurance Tax Benefits:

To claim term insurance tax benefits under Section 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.
• 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, premium payable should not exceed 10% of death sum assured for policies issued after 31 March 2012.

Conclusion:

A term insurance plan, thus, is a multifaceted plan which not only provides insurance coverage for the financial security but it also helps in saving 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 of conditions mentioned therein. So, understand the tax benefits of term insurance plans and use these benefits to your advantage when filing your returns.

FAQs

1. Can Hindu Undivided Families claim 80C benefit on life insurance premiums?

Yes, Hindu Undivided Families can claim 80C benefits on life insurance premiums paid for the members of the HUF¹.

2. Is TDS applicable on the maturity benefit?

If the policy does not satisfy conditions mentioned under Section 10(10D), then TDS will be applicable on gain amount if the policy payout exceeds Rs. 1 Lakh. The rate of TDS is 5%².

Ref:

1. https://incometaxindia.gov.in/tutorials/20.%20tax%20benefits%20due%20to%20health%20insurance.pdf

2. 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.

BJAZ-WEB-EC-02492/23