Tax Benefits of Term Insurance

Tax-saving with term insurance

While the overt benefits of term insurance are obvious, there are several latent benefits to it as well. The most crucial among these is the term insurance tax benefits.

And yes, it indeed is benefits, in the plural, that means there is more than just one. Let us start with the most popular section for insurance-based tax savings under Income Tax Act, 1961:

Section 80C

It will not be a stretch to say that chartered accountants use section 80C of the Income Tax Act, 1961, religiously regarding tax savings. The section offers an annual deduction of up to ₹1.5 lakh in premiums paid for term insurance.

However, the taxpayer must consider the following to ensure maximum benefit:

Breakdown of Deductions offered U/S 80C

Section 80C is an inclusive section. It considers several investments besides term insurance, such as public provident funds (PPF) and fixed deposits. The ₹1.5 lakh limit includes all such investments. Let us break it down with the help of an example:

So, will investing any amount in any insurance plan fetch you a deduction of up to ₹1.5 lakhs under Section 80C? The answer is no. There is a catch of proportional limit based on the ‘sum assured’ under your insurance policy that you need to take care of.

Proportional limit as per ‘sum assured’ of your policy

Section 80C also has a proportional limit on the annual premium paid. In case of policies issued on or after April 1, 2012, the annual premium should not exceed 10% of the assured sum. And if it does, the deduction will be allowed proportionately.

Let us put this into a table for better understanding:

Note: If the insurance was issued before March 31, 2012, the proportional limit under section 80C is set at 20% of the assured sum instead of 10%.

Section 80D and Term Life Insurance Deduction

Prima facie, section 80D allows tax deductions for health insurance. However, term insurance premiums are also eligible under section 80D for health-related riders, such as critical illness riders, surgical care cover, etc. The best thing is that eligibility extends to the premium paid for dependents, i.e., spouses, children, and parents.

The only thing to consider for deduction is your and your parent's age:

Let us now move towards the ‘maturity benefits’. You might wonder if the ‘sum assured’ paid to the nominees would be taxable or tax-free. Typically, deductions are available under section 10 of the Income Tax Act on lump sum or partial payments. They are as follows:

Section 10(10D)

As a term policyholder, you can also enjoy tax benefits under section 10; however, they differ slightly from tax benefits under sections 80C and 80D. Unlike the previous two sections that provide a deduction for premium paid, section 10 provides death or maturity benefit.

However, the exemption under this section is a double-edged sword. This is because while there is no limit on the eligible benefit for exemption, there is a proportional limit on the premium paid and the assured amount.

The limit is decided depending on the policy purchase period:

Policies Purchased Between April 1, 2003, and March 31, 2012:

To qualify for tax exemptions, the premium paid in any given year during the policy term must not exceed 20% of the sum insured.

Example:

Policy Date: March 15, 2005

Sum Assured: ₹10 Lakh

Premium Paid: ₹1.8 Lakh

20% Limit: ₹10 Lakh × 20% = ₹2 Lakh

Since the premium paid (₹1.8 Lakh) is below the 20% limit (₹2 Lakh), the policy qualifies for tax exemption under Section 10.

Policies Purchased On or After April 1, 2012:

To qualify for tax exemptions, the premium paid in any given year during the policy term must not exceed 10% of the sum insured.

Example:

Policy Date: June 10, 2015

Sum Assured: ₹10 Lakh

Premium Paid: ₹1.1 Lakh

10% Limit: ₹10 Lakh × 10% = ₹1 Lakh

Since the premium paid (₹1.1 Lakh) exceeds the 10% limit (₹1 Lakh), the policy does not qualify for tax exemption under Section 10.

Policies Purchased On or Before April 1, 2013, for Severely Ill or Disabled Individuals:

For individuals who are severely ill or disabled, the premium paid must not exceed 15% of the sum insured to qualify for tax exemptions.

Example:

Policy Date: January 5, 2010

Sum Assured: ₹10 Lakh

Premium Paid: ₹1.5 Lakh

15% Limit: ₹10 Lakh × 15% = ₹1.5 Lakh

Since the premium paid (₹1.5 Lakh) equals the 15% limit (₹1.5 Lakh), the policy qualifies for tax exemption under Section 10.

Summing Up

Whether premium deductions under section 80C or 80D or the maturity benefits under section 10, term insurance is like a gift that keeps giving. And, now that it is unarguable that term insurance has several tax benefits, not usingthem to the fullest will be a financial catastrophe. With smart tax planning and before-hand calculations, you can easily maximize your term insurance benefits through tax savings.

FAQs

Is term insurance eligible for tax benefits under Section 80C or 80D?

Term insurance premiums qualify for tax deductions under Section 80C of the Income Tax Act, up to ₹1.5 lakh per annum. Additionally, premiums paid for health-related riders on term insurance can be claimed under Section 80D.

Are term insurance payouts taxable?

The death benefit received from a term insurance policy is tax-exempt under Section 10(10D) of the Income Tax Act, provided certain conditions are met.

Can I claim tax deductions for term insurance premiums paid for my spouse and children?

Yes, you can claim tax deductions under Section 80C for premiums paid towards term insurance policies for yourself, your spouse, and your children, subject to the overall limit of ₹1.5 lakh.

What is the maximum tax deduction under Section 80D for term insurance with health riders?

Under Section 80D, you can claim a deduction of up to ₹25,000 for premiums paid towards health riders in term insurance policies for yourself, spouse, and children. If you also pay premiums for your parents' health coverage, an additional deduction of up to ₹25,000 is available, which increases to ₹50,000 if your parents are senior citizens.