Are you aware of the fact that term insurance comes with a lot of tax saving options? Let us find out more about the term insurance tax benefits you can avail of while purchasing term life insurance.

Every person finds a way to save money. But when it comes to saving taxes an individual looks for every possible way to reduce the burden of paying taxes. Term Insurance serves the purpose of saving taxes, which makes it the best life insurance plan available in the market. It provides both term life insurance along with term insurance tax benefits. So technically it fulfills your important goals by protecting your family financially and also acting as an excellent tax-saving tool.

Understanding Term Insurance:

Term insurance is the simplest type of life insurance wherein the insured person covers himself for a specific period by paying premiums regularly. If something happens to the insured person within that specific period and if the policy is still active then the sum assured or the death benefit will be passed on to the policy nominee. For example, if Mr X has insured himself for 30 years and if he dies in the 27th year, then his nominee will get the death benefit as specified in the policy terms. Unfortunate events like death cannot replace a person, but surely can replace his income and that is the sole need why term insurance is necessary for every bread earner in the family.

Are There Any Term Insurance Tax Benefit?

Yes, there is a term insurance tax benefit. The benefits are not just one, but many that can be benefitted when you buy term insurance. The term insurance tax benefit not only saves money on taxes but will also protect your loved ones financial status in the future.

Let us dig deeper and learn more about the term insurance tax benefit. The term insurance tax benefit consists of various sections of the Income Tax Act, 1961 such as;

  1. Section 80C: According to this section tax deduction up to 1.5 lakh can be deducted on premium paid in the term plan.
  2. Section 80D: Under this section, tax deductions up to 50,000  can be claimed by senior citizens and term insurance with critical illness allows a tax deduction of up to 25,000.

Term Insurance Tax Benefit Under Section 80C:

A big component of tax savings that is available to every taxpayer is under Section 80C. Let us take a look at what is Section 80C of the Income Tax Act, 1961? According to the Income-tax laws, you can claim a deduction of Rs. 1.5 lakh from your total income under Section 80C. You can reduce up to 1.5 lakh from your total taxable income by saving and investing money in products that are listed under Section 80C towards tax benefits. This benefit under 80C can be availed by individual taxpayers and Hindu Undivided Family (HUF).

  • The term insurance tax benefit can be availed by you or your spouse or your dependent children.
  • If the term insurance is bought on or after April 1, 2021, then the tax deduction claim can be done only if the annual premium does not exceed 10% of the sum assured.
  • This will vary slightly for people suffering from serious disabilities and ailments. If they have bought the policy on or after April 1, 2013, they can file for a tax deduction if the annual premium does not exceed 15% of the sum assured.
  • If the term insurance is bought on or before March 31, 2012, and if the premium paid is 20% of the sum assured then the policyholder is eligible to file a tax deduction of up to 20% of the sum assured for the premium paid in a year.
  • If the policyholder surrenders or terminates the policy within 2 years, then the insured will not get any term insurance tax benefits under Section 80C.

Term Insurance Tax Benefit Under Section 80D:

Section 80D primarily serves as an income tax benefit for premium paid for health insurance. But it also serves as a term insurance tax benefit through other means. Some term insurance policies offer an add-on cover such as Critical Illness Rider, Hospital Care Rider, Surgical Care Rider and so on for which tax benefits can be availed.

Technically, you are maximising your benefits by saving tax with term insurance that has a Critical Illness rider and on the other hand, you also get a health insurance cover. By choosing a term Insurance with a rider benefit you are eligible for a term insurance tax benefit under 80D.

  • This term insurance tax benefit can be availed by yourself, your spouse, your dependant children and your parents.
  • You are eligible for this tax deduction of up to 25,000.
  • In case you have term insurance for your parents who are senior citizens over 60 years of age, then you are eligible for a tax benefit of Rs. 50,000.

Term Insurance Tax Benefit Under Section 10(10D):

According to Section 10(10D) of the Income Tax Act, 1961 the amount of sum assured obtained by the beneficiary as death benefits are completely tax-free. And the sum assured received by the policy-holder after the maturity period is also tax-free. Any additional bonus obtained is also tax-free.

Term insurance tax benefit under Section 10(10D) comes with certain conditions such as;

  • The term insurance tax benefit is applicable only if the policy is taken on or after 1st April 2012 and the sum assured is not more than 10% of the premium paid.
  • Also, if the policyholder has given PAN details to the insurer and the insurance payout is more than 1 lakh then a tax deduction of 1% is applied.
  • The term insurance tax benefit is applicable only if the policy is taken on or before 1st April 2012 and the premium paid should not exceed 20% of the sum assured.

Various insurance companies offer term insurance tax benefit plans such as;

  • ICIC PRU i PROTECT SMART
  • MAX LIFE NEW TERM PLAN
  • CANARA HSBC OBC TERM PLAN
  • HDFC LIFE TERM INSURANCE
  • BAJAJ ALLIANZ LIFE TERM PLAN

Benefits of Buying Term Insurance:

Economical:

Term insurance is one of the most economical forms of insurance available in the market.

 You can purchase a term insurance plan on online platforms that gives you exciting offers with an extra discount on your term insurance premiums as compared to offline platforms. Avail of this special offer and lower your term insurance premiums.

High Coverage With Low Premium:

Term insurance plans give good life cover plans that other traditional plans available. In other traditional plans, the coverage is usually 10 times the premium you pay. The sum assured in term insurance plans is much higher with a low premium amount. Thus you are leaving your family or your loved ones enough money so they don’t go through financial hardships in your absence.

Easily understood:

Term insurance plans can be easily understood by a layman. The simplicity of the plan is the main reason for many people opting for term insurance plans. Term insurance plans provide 100% life cover. Just pay the premium on time and reap the benefits easily.

Offers Great Tax Benefits:

Term insurance plans offer great tax benefits. There are various Sections under the Income Tax Acts such as;

  1. Section 80C: Under Section 80C it allows a tax deduction of up to 1.5 lakh per annum for term life insurance premiums.
  2. Section 10(10D)D: Under this Section 10(10D) is the policyholder dies the beneficiary who gains the death benefit is completely tax-free. According to the tax laws Section 10(10D), the insurance benefits are fully exempt from taxes. This means your nominee will get the entire coverage amount after your demise and taxes will not be deducted for that amount.
  3. Section 80D: Under this Section, 80D the policyholder can avail tax benefit to the premium paid for health-related coverages. These include Critical Illness Rider, Hospital Care Rider, Surgical Care Rider and so on which acts as an add-on coverage in term insurance.

Low Premium for Young age:

The term insurance premiums are locked for the entire period of the policy. Many people are not aware of the fact that when term insurance is bought the premium is locked for every subsequent year until the term ends which is greatly beneficial. It would be wise to start purchasing a term insurance plan at a younger age as the premium is lower with age. A premium for a 30-year-old person would be much lesser than the premium for a 45-year-old person.

Term Insurance Tax Benefit on Death Benefit:

Death benefits are the sum assured paid to the registered beneficiary or nominee if the policyholder dies during the policy tenure. The registered beneficiary of a policy can file a claim, after which the death benefit or sum assured is paid. This amount will help the family compensate for the loss of income due to any unfortunate event.

The death benefit provided in the term insurance is tax-free. Surprisingly, most people are not aware that the term insurance offers tax benefits on the sum received as death benefits also.

Term Insurance Tax Benefit on Payout Received by Insured:

If the policyholder survives through the insurance policy term, then the return of premium paid on maturity is also tax-free under Section 10(10D).

To Summarize:

You can pretty much save and gain at the same time in term insurance. Let us summarize how much amount of tax you can save under Section 80C and 80D for a term insurance plan.

  • According to the Income Tax Act, 1961 Section 80C permits a tax deduction of up to 1,50,000,
  • According to the Income Tax Act, 1961  Section 80D permits a tax deduction of up to Rs. 25,000. If you are paying a premium for your parent’s policy and they are over 60 years of age, then you can claim a tax deduction of up to Rs. 50,000.

Get the Right Term Plan!

Though term insurance tax benefits are important, one must not be carried away for that reason. The core objective of purchasing term insurance is to protect your family’s financial future. The term insurance tax benefit should be considered as an added advantage of the plan. So you must choose the right cover that best suits you. Only after purchasing the right term insurance plan, one must think about the tax benefits that could be availed through it.

Conclusion:

The term insurance serves as an excellent tax-saving tool. It offers both a life cover and a term insurance tax benefit. It is essential to keep yourself updated about the amendments in the Income Tax Act, which will be useful while filing for tax returns. Before investing in term insurance know the benefits so that you can plan your taxes efficiently and reduce the tax to the maximum possible way.

Term insurance perfectly complements your goals and can be used in many ways to ensure you always live with good peace of mind knowing that important things like financial security have been taken care of for your loved ones even in your absence.

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Prateek Mahesh

Prateek has 17+ years of experience writing in Investment Strategy and Sales for Life Insurance. He has done MBA in Insurance and Investment.

Their aim is to educate people on various insurance topics so that they can make wise decisions.

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