We have different term insurance tax benefits that can be availed under the different sections of Income Tax Act, 1961. Taxpayers have the option to buy varied financial instruments to get eligibility in terms of deductions and exemptions. Before understanding the tax benefits of term insurance, it is important to understand what is term insurance and what are the tax benefits of buying one?
Term Insurance is a tax savings tool which provides the death benefit to the nominees of the policyholder’s nominees in the event of an unfortunate death of the policyholder.
It provides financial security to the nominees of the policyholders by receiving the death benefits. In addition to life cover and many other benefits, the policyholder also gets tax benefits on the term insurance plan.
How to Choose the Right Tax Saving Term Insurance Plan?
Provided below are the key factors that should be considered while choosing the right term insurance plan:
- Assess the Coverage Needs
To assess the insurance cover amount, one should first analyse the family income, liabilities in terms of expenses, and any other financial needs of the family.
- Compare Plans
Compare all the plans available in the market by different insurance companies to choose the best one at an affordable premium.
- Check the Claim Settlement Ratio
To ensure reliability, you should select an insurer that provides a high claim settlement ratio.
- Consider Riders
To get more comprehensive coverage, evaluate if any additional riders are required. - Use Term Insurance Calculator
Use a term insurance calculator online to check and calculate your annual or monthly term insurance premium. You can check term insurance calculators online easily by just providing essential details like name, date of birth, gender, smoker/non-smoker, annual income range, etc. This will help you check the best term insurance plan for you as per your convenience.
- Review Policy Terms
Understand the policy terms and conditions, which include the premium payment period, policy tenure, and exclusions, if any.
| Section | Essentials | Exemption Limit (INR) |
|---|---|---|
| 80C | Term Insurance, Investments in PPF, PF, Insurance, NPS, ELSS etc. | 1,50,000 |
| 80D | Critical Illness Rider, Investment in medical insurance for self or parents. | 25,000/ 50,000 |
| 10(10D) | Term Insurance Death benefit/ maturity amount | Full Amount |
Tax Benefits on Term Insurance Plan
- Section 80C
Get a tax deduction of a maximum of INR 1,50,000 for the premium paid towards the term insurance plan. The deduction can be availed in case investments are made in guaranteed investment plans, EPF, PPF, ELSS, ULIP, and payment of school fees, life insurance premiums, repayment of home loans, etc. The conditions to be met are:
- In case of term insurance being bought on or before 21st March 2012, the tax deductions will be restricted to the premium amount maximum up to 20% of the sum assured.
- In case of term insurance being bought on or after 1st April 2012, the tax deductions will be restricted to the premium amount maximum up to 10% of the sum assured.
- In case of severe disability or critical illness, and the term plan has been purchased on or after 1st April 2013, the tax deductions will be restricted to the premium amount maximum up to or above 15% of the sum assured.
- Section 80D
Premium paid towards the critical illness riders, i.e. health insurance plans, are eligible to get tax deductions u/s 80D of the Income Tax Act, 1961, up to a maximum of INR 25,000 per annum for self, spouse, and dependent children. In the case of senior citizens, this amount gets increased to INR 50,000.
Eligible Payments u/s 80D
- Get a deduction of up to INR 25,000 on the premium amount paid towards health insurance policy for self, spouse, and dependent children.
- Get an additional deduction in case of the premium amount paid towards parent’s insurance, maximum up to INR 25,000, if less than 60 years of age. It will be INR 50,000 for senior citizens.
- In case the individual, spouse or parents are above 60 years old and have medical coverage, avail a deduction maximum of up to INR 1,00,000.
- The deduction in the case of HUF will be INR 25,000 if the insured is below the age of 60 years and INR 50,000 if the insured is a senior citizen.
Exclusions u/s 80D of Income Tax Act, 1961
- Irregular premium payments
- In the case of premiums paid by an employer towards group health insurance
- In case the premium is paid on behalf of working children or any relatives,
- Paid in cash
- Section 10(10D)
- The tax exemption can be availed on the maturity benefits u/s 10(10D) in case the annual premium is a maximum of up to INR 5 lakhs. In case the premium amount exceeds the above limit, the benefits will be added to the total income and taxed accordingly. The income can be calculated using the Income Tax Calculator to get an estimate of the taxable income and tax payable thereon. As per Union Budget 2023, in case of term insurance being bought after 1st April 2012 and the premium amount does not exceed 10% of the sum assured, and for the plans issued after 1st April 2013, the premium amount does not exceed 20% of the sum assured, the maturity benefits gets tax exemption.
The conditions to be met are:
- The total premium amount paid in the term insurance should not exceed 10% of the sum assured in case the policy is issued on or after 1st Apr 2012.
- In case the maturity benefit is above INR 1,00,000 and a PAN Card is available, a TDS of 1% will be applicable.
Limitations of Term Insurance Plan
Provided below are some of the limitations a term insurance plan might have:
- In a financial year, if the premium amount paid is above 20% of the sum assured, then the tax benefit on the term plan can be availed only up to 20% of the sum assured.
- After April 1, 2012, if the premium amount is not more than 10% of the sum assured, then you may become eligible for an income tax credit under the Income Tax Act, 1961.
- After April 1, 2012, if the premium amount is less than 10% of the sum assured, then you may become eligible to avail of tax benefits on a term insurance plan in case of severe disability or any specific illness.
Conclusion
Term insurance is a protection plan that aims to secure the financial future of the loved ones and ensure all family goals are met. Also, tax deductions on making payments towards the term insurance premium along with the deductions to be claimed by the nominees on the death benefits received u/s 80C and 10(10D) of the Income Tax Act. Furthermore, Sec 80D of the Income Tax Act, 1961, allows to claim tax benefits covering medical expenses related to critical illness or disabilities.
