Understand the Tax Benefits of Term Insurance

If you survive the term policy, you do not receive any maturity benefits but by opting for a term insurance policy, you have ensured that your near and dear ones have a ring of financial protection around them.

Term insurance also comes with other benefits. It is cost-effective for people from different income brackets. It also gives you the option to increase coverage when you enter a new life stage, for example, marriage or the birth of a child. Then there is the added benefit of term insurance riders, which can be availed on payment of nominal extra cost. These are add-on plans or features that you may opt, in case you need extra coverage for certain illnesses, disability, accidental death or waiver of premium. These benefits ensure your life goals are met and are financially protected in spite of the twists and turns there may be along the way.

You can make use of the term insurance calculator to calculate the insurance cover you need to help you meet the life goals of your family and to keep them secure financially.

 

Term Insurance Tax Benefits Under Section 80C and 10(10D) of Income Tax Act 1961

 

Choosing term insurance gives you tax benefits under Section 80C and 10(10D) of the Income Tax Act 1961 (the Act), subject to provisions stated therein. Under Section 80C, you can claim a deduction of up to Rs 1.5 lakh annually on the premiums you have paid. Under Section 10(10D), the death benefit of your term insurance policy is exempt from income tax, so long as the death sum assured is at least ten times of the premium paid annually.

Now that you know all about the term insurance tax benefit under Section 80C, let us see if you can claim a benefit under any other Section of the Act as well.

What Is Section 80D of The Act & What It Normally Covers⁴

Can benefits be claimed under 80D? The answer is yes, but under certain circumstances. Tax benefits are available under Section 80D for premiums in health insurance plans. However, insurers offer term insurance with critical illness riders or other health riders. If the term insurance policy offers a health rider and you have opted for the rider, then the premium on such a rider can be claimed under Section 80D. However, the premium amount of the term insurance would need to be claimed under the Section 80C of the Act.

You can claim these benefits when you file your income tax returns, under the category of deduction under Section 80D, after clicking on assessment year, only if you have opted for old tax regime. In addition, while claiming tax deductions when you have a health rider for your term insurance under Section 80D, here are some things you need to remember:

• In a scenario where you have a critical illness term policy for yourself, spouse and children and all of you are below 60, you are eligible for a tax deduction of up to Rs 25,000.
• If you provided cover for your parents under a separate but similar policy and they are over 60, the deduction eligibility is up to Rs 50,000.

Deductions and tax benefits under section 80C

Section 80C of the Income Tax Act allows deductions for different types of investments and expenses. Premium paid for the term life insurance plan is one such eligible expense for which you can claim the deduction under Section 80C.

The rules for Section 80C deduction are as follows¹ –

• The maximum deduction available is Rs. 1.5 lakhs.
• You can buy the plan for yourself, your spouse or your children to claim the deduction.
• If you bought the policy on or after 1st April 2012, premiums up to 10% of the death sum assured would qualify for a deduction under Section 80C, subject to the maximum limit.
• If you have bought the policy on or before 31st March 2012, premiums up to 20% of the death sum assured will qualify for a deduction under Section 80C, subject to the maximum limit.
• If you have bought the policy on or after 1st April 2013 and you suffer from any disease or disability specified under Section 80U or 80DDB, premiums up to 15% of the death sum assured would qualify for a deduction under Section 80C subject to the maximum limit.
• You should hold the term insurance policy for a minimum of 2 years

 

Note that the tax benefit on term insurance premium is available only under the old tax regime.

Tax benefits under section 10(10D)

Section 10(10D) of the ITA allows tax exemption on the benefits received from a life insurance policy, including term insurance. The benefits of Section 10(10D) are as follows² –

• The death benefit received from a term insurance policy is allowed as a tax-free income. No tax would apply to the benefit, irrespective of the premium paid.
• Under the return of premium plans, the refund of premiums received on maturity would be treated as a tax-free income under the section. However, to claim the tax exemption, the premium should qualify on the below-mentioned parameters –
  • It should be up to 10% of the death sum assured (for policies issued on or after 1st April 2012)
  • It should be up to 15% of the death sum assured (for policies issued on or after 1st April 2013 where the policyholder suffers from a disease or a disablement defined under Section 80U or 80DDB)
  • It should be up to 20% of the death sum assured for all life insurance plans issued on or before 31st March 2012. If the premium is more than 10%, 15% or 20% of the sum assured, as the case may be, the maturity benefit would be taxed in your hands at your income tax slab rates.
• For policies issued on or after 1st April 2023, if the aggregate annual premium payable for life insurance policies (except Unit Linked Insurance Plans) exceeds an amount of Rs.5 lakhs in a financial year, exemption under Section 10(10D) would not be available on the maturity benefit. However, if you have multiple life insurance plans, you can claim an exemption on the plans whose aggregate annual premium does not exceed the total limit of Rs.5 lakhs. So, if your term insurance premium is below Rs.5 lakhs and you don’t have other insurance plans, you can claim an exemption on any maturity benefit received from the policy.

 

Conclusion

 

Term insurance is a pure protection plan that is aimed at securing the financial future of your loved ones and ensuring that the family’s life goals are met. An added benefit is that you can claim tax deductions on term insurance premiums, and your nominee/family can claim exemptions on the death pay out under Section 80C and Section 10 (10D) of the Act respectively. Further, Section 80D of the Act lets you claim tax benefits for certain riders you buy to cover medical expenses pertaining to critical illnesses or disabilities. Getting a term insurance policy can be the valuable gift you can give to your loved ones, so consider going for it.

 

FAQs

 

1. How to define the tenure of your term insurance?

The tenure of a term insurance plan is the period for which coverage is allowed against premature demise. Term insurance plans usually offer long-term coverage tenures for maximum protection. Some plans might also allow the whole life option wherein you can enjoy coverage till 99 or 100 years of age.

You can choose a coverage tenure depending on your protection needs. It is better to opt for the longer possible tenure for optimum financial protection.

2. Can I have 2 term insurance policies?

You can have two or more than two term insurance policies for maximum coverage. There’s no restriction on the number of policies that you can have.

3. Is term plan sum assured taxable?

The term plan sum assured paid on death is not taxable.

4. Is an income tax return (ITR) required for term insurance?

An income Tax Return (ITR) might be needed for term insurance if you opt for very high sum assured levels where the premium is also higher. The insurance company needs the ITR to check your premium paying capacity when choosing high coverage levels³.

Reference

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

2. https://www.taxmann.com/post/blog/taxation-of-life-insurance-policies-section-10-10d/

3. https://www.financialexpress.com/money/income-tax/income-tax-return-2019-how-itr-filing-benefits-while-buying-life-insurance-applying-visa-or-establishing-compensation/1691457/

4. https://cleartax.in/s/medical-insurance#:~:text=What%20is%20the%2080D%20deduction,the%20deduction%20varies%20with%20age.

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