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Term Life Insurance Tax Benefits: The Complete Guide


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Oct 20, 2022

By : Bajaj Allianz Life

Life is unpredictable. While everything can be fine one day, the other day might bring in unspeakable losses. You cannot predict what challenges life will bring. You can, however, make provisions to meet unforeseen situations. A term insurance plan is one such provision which takes care of your family financially in your absence.

 

What is a term insurance plan?

 

A term insurance plan is a protection-specific life insurance plan. It pays a guaranteed benefit if the insured passes away during the policy tenure. With this benefit, a term plan grants financial security against the face of premature death. It ensures that if you are not around, your family’s financial needs will be taken care of. Thus, with a term insurance plan, you can buy financial security for your family.

Besides financial security, a term insurance plan also offers tax benefits. Let’s have a look at what these benefits are.

 

What are the tax benefits of term insurance?

 

A term insurance plan allows multiple tax benefits. These tax benefits are outlined below –

● Term insurance tax deductions under Section 80C

Section 80C of the Income Tax Act, 1961, allows a deduction for the premium paid for the policy. The premium paid is allowed as a tax-free deduction from your taxable income. The maximum limit of deduction is Rs.1.5 lakhs. However, premiums up to 10% of the total death sum assured are allowed as a deduction under Section 80C, subject to Rs.1.5 lakhs, if policy is issued after 31 March 2012. For policies issued o or prior to 31 March 2012, such limit is 20% of death sum assured.

● Term insurance tax exemption under Section 10(10D)

In the case of return of premium plans, the refunded premiums that you get as maturity benefit is also exempted from tax under Section 10(10D). However, the premium should be up to 10% of the death sum assured to claim an exemption under this section if policy is issued after 31 March 2012. For policies issued o or prior to 31 March 2012, such limit is 20% of death sum assured.

● Term insurance tax deduction under Section 80D

Deduction under Section 80D is allowed for the premium paid for a critical illness or surgical care rider. These riders provide health insurance coverage, and their premium is allowed as a deduction under Section 80D. The limit of deduction is Rs.25,000 if you are below 60 years of age. However, if you are 60 years and above, the limit of deduction is Rs.50,000.

 

Is there an eligibility criterion to receive tax benefits of term insurance?

 

Tax benefits of term insurance plans have the following eligibility criteria –

  • Individual taxpayers and Hindu Undivided Families (HUFs) are eligible for the deduction
  • Non-Resident Indians can also claim tax deductions and exemptions
  • The premium can be paid for self, spouse and dependent children
  • The deduction or exemption is allowed only in the financial year when you pay the due premium or when you receive the policy benefits

 

Does the nominee have to pay taxes under any circumstance?

 

The nominee collects the policy benefits only after the insured dies during the policy tenure. The death benefit is tax-free subject to provisions stated therein in Income Tax Act, 1961. So, the nominee does not have to pay any tax on the benefit that he receives.

 

Tax benefits on term insurance riders

 

Term insurance plans offer multiple optional riders. Some riders also offer tax benefits. These riders are as follows –

  • Critical illness rider
  • Surgical care rider
  • Term rider

The premium that you pay for the first two riders is allowed as a deduction under Section 80D up to Rs.25,000 if you are below 60 and up to Rs.50,000 if you are a senior citizen.

The premium paid for the term rider is allowed as an income tax deduction up to Rs.1.5 lakhs u/s 80C of the Income Tax Act, 1961. This deduction is allowed since the rider offers additional insurance coverage under the plan.

 

Tax refund in terms of insurance

 

If the premium paid for the policy exceeds 10% of the sum assured, the maturity benefit becomes taxable. Moreover, if the maturity benefit is more than Rs.1 lakh, a TDS of 5% is also deducted by the insurance company if PAN is provided to Company. In the absence of PAN, TDS rate will be 20%. Note that TDS is deducted on gain from policy only.

However, if your taxable income is below the taxable limit (For eg. Rs.2.5 lakhs), you can claim a refund of the TDS that has been deducted from the maturity proceeds.

For instance, if the maturity benefit is Rs.5 lakhs and premium paid is Rs.3 lakhs, a TDS of 5% of Rs. 10,000 will be deducted on gain from policy (Rs. 2 lakhs) , would be deducted. However, if the maturity benefit is your only income during the financial year, you are not liable to pay tax since the amount is below the threshold limit of Rs.2.5 lakhs. In such cases, you can file for a tax refund on the TDS deducted from the maturity benefit.

 

Conclusion

 

A term insurance plan is a financial protection tool that doubles up to save your tax liability. You can claim tax benefits on the premiums paid as well as the benefits earned from the plan. So, understand these tax benefits and maximise them to reduce your taxable income and increase your disposable income.

 

FAQs

 

1. How can I maximise the tax benefits available on term insurance plans?

To maximise the tax benefits available on term insurance plans, here are a few tips –

  • Ensure that the premium is within 10% of the death sum assured
  • Opt for riders to enhance the scope of coverage, on payment of extra nominal premium and also to enjoy the additional tax benefits subject to provisions stated in the Income Tax Act, 1961

2. Is it prudent to buy term insurance only for its tax benefits?

A term insurance plan is meant for the protection that it provides. It provides financial safety to you and your family and may be bought for its coverage. The tax benefit only adds icing to the cake and makes the plan more beneficial.

3. If I discontinue premium payments, would the tax benefit still apply?

Suppose you discontinue the premiums and the policy lapses. A lapsed term plan does not pay any benefits. So, you would not be able to avail any tax benefit on the benefits. Moreover, since you have stopped the premium payment, Section 80C benefits would also cease to apply in future.

Moreover, if you have discontinued the premium within two years of buying the policy, the benefit that you claimed under Section 80C would be reversed. The premiums that you paid earlier would be added back to your taxable income and taxed at your income tax slab rates.

4. What happens if I miss the premium payment?

If you miss the premium payment, you get a grace period of 30 days for other than monthly mode to pay the outstanding premium. In the case of monthly mode, the grace period is 15 days. You can pay the premium and continue the policy unaffected. You also get the tax benefit on the premium that you pay.

If, however, you don’t pay the premium even during the grace period, the policy lapses and the tax benefit stops. If you did not pay the premium for two full years from the date of commencement of policy and stopped paying, the earlier deductions that you claimed would be disallowed. The premium would be added to your taxable income and taxed at your slab rates.

5. Is GST payable on term insurance premiums?

Yes, a GST of 18% is payable on the term insurance premium.

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2Above illustration is considering Male aged 25 years | Non-Smoker | Life Cover Variant | Policy term (PT)– 30 years | Premium Payment Term (PPT) – 30 years | Sum Assured opted is Rs. 1,00,00,000 | Online Channel | medical rates | Annual Premium Payment Mode | Premium shown above is exclusive of Goods & Service Tax/any other applicable tax levied, subject to changes in tax laws, and any extra premium and is for illustrative purpose only.

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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. 

The views stated in this article is not to be construed as investment advice and readers are suggested to seek independent financial advice before making any investment decisions. For more details on risk factors, terms and conditions please read sales brochure & policy document (available on www.bajajallianzlife.com) carefully before concluding a sale.