Tax Benefits of Term Insurance 

Term insurance is the most affordable and popular insurance product in the market. These insurance policies provide coverage for a specified "term" of years. A payout in the form of the Death benefit is given to the policyholder’s nominee in the event of the policyholder’s demise during the time period mentioned in the policy. Purchasing life insurance is advisable, especially if it has dependents, like, children, parents, and spouse that depend on one’s income for survival.

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Many life insurance companies in India offer myriad term insurance plans for various age groups. While choosing a term insurance plan, one needs to consider the term insurance tax benefits of taking a life cover.

The Income Tax Act provides a variety of exemptions and deductions under its various sections. Individuals can invest in these instruments and avail of deductions and exemptions lawfully. 

What are Term Insurance Tax Benefits?

Income tax benefit available on a term insurance policy is a significant additional advantage of life insurance. It is beneficial to understand all aspects of claiming term insurance tax benefits prior to purchasing a policy. The tax benefits are provided on the payments made towards the premiums of life insurance policies and the payout of the death benefit under the policy.

Let us examine the taxation aspects in detail as per the prevailing income tax laws.

Income Tax Section

Tax Benefit for Term Insurance

Section 80 C

Up to Rs. 1.5 Lakh tax deductions on premiums paid towards the term plan.

Section 80 D

  • Additional claim deduction of up to Rs. 25,000 for Term Insurance cover with Critical Illness cover 
  • Up to Rs. 50,000 deductions for senior citizens 

Section 10(10D)

Tax exemption on the policy payout or benefits received from the policy under this section.

Term Insurance Section 80C Benefits

Section 80C of the Income Tax Act, 1961 is one of the most followed sections and is popular among the taxpayers of the country. This is because it allows one to invest in tax-saving instruments or by incurring such expenses that are eligible to reduce taxable income. It allows a maximum deduction of Rs.1.50 lakh every year from a taxpayer’s total income as computed under the Income Tax Act, 1961.

Individuals and Hindu Undivided Families can avail of the benefits of this deduction. A taxpayer can claim term insurance tax benefit u/s 80C on any life insurance policy in his name or in the name of his spouse or children. In the case of a Hindu Undivided Family, any of the members can have a policy in their name to avail of the tax benefits.

Term Insurance tax benefit under Section 80C of the Income Tax Act, 1961 is very commonly availed by most taxpayers. The premium amount paid in a year towards a term insurance policy qualifies as an eligible expense under this section. This means that the term insurance premium amount forms part of the Rs.1.50 lakh deduction that a taxpayer is eligible to claim every year from the taxable income. 

Section 80C provides many ways to claim deductions, like, EPF, PPF, ELSS, ULIPs, and payments towards children’s tuition fees, home loan repayment, life insurance premium, etc., which one can effectively utilize to avail of these deductions.

Some points to note:

  • Premiums paid for life insurance policies are eligible and can be used to claim for deductions up to Rs 1.5 Lakh. This is the total deduction allowed for all payments and investments under this Section.
  • To claim deductions, the annual premiums paid should be less than or equal to 10% of the policy Sum Assured. In cases where the premiums exceed 10%, proportionate deductions are applied.
  • Any policy issued before 31.03.2012 will have deductions applied to it only if the annual premium is less than 20% of the Policy Sum Assured.
  • Also, an exception where 80C deduction would not apply in the case of an insurance policy is the surrender or termination before two years from the policy end. In this case, as per the provisions of Section 80C (5), the policyholder would not be able to claim tax benefits on premium payments under Section 80C.

Tax Benefits of Single Premium Insurance Policy

There are life insurance policies where one does not need to pay a premium on a yearly basis. Insurance companies sell customized products like SPLI or Single Premium Life Insurance policies. They provide life cover for longer tenure with regular benefits like standard life insurance policies. In SPLIs, the insured has a pre-mature exit option, which can be exercised after completing five years of the term. 

However, SPLIs have different types of term insurance tax benefits than regular life insurance policies. SPLI policies provide tax benefits under Section 80C and Section 10(10D) of the Income Tax Act, 1961. A host of particular conditions that are needed to be met to acquire term insurance tax benefits.

  • Any SPLI policy issued after 01.04.2012 will have tax-free maturity proceeds under Section 10(10D) in the situation that the minimum amount assured remains ten times the single premium paid at last. This essentially implies that if an individual makes a payment of INR 15000 as a single premium, then their life coverage must be more than INR 1.5 lakh to avail of tax-free maturity proceeds. When purchasing an SPLI policy, one must, therefore, always make sure that the life cover is ten times the premium at the least.  
  • The whole maturity amount is taxable for the year they are received if the above condition is not met. However, suppose the maturity proceeds are paid owing to the nominee(s) upon the death of the insured. In that case, the maturity sum shall be exempt from income tax, notwithstanding the extent of the premium paid.
  • However, if the premium paid by the insured under the SPLI policy is more than 10% of the Sum Assured, then the Section 80C deduction under the Income Tax Act shall be 10% of the Sum Assured. 
  • Any premium paid more than this amount cannot be claimed as a deduction under the 80C as per the provisions.

Term Insurance Sec. 10 (10D) Benefits

Both Section 80C and Section 10(10D) of the Income Tax Act of 1961 work towards tax benefits for a taxpayer. Anyone who buys term insurance can either claim the tax advantage for oneself or any of their family members, like a spouse or one's kids. 

As per this section, any amount of policy proceeds in the form of Sum Assured, including any bonus paid on:

(a) Maturity or Policy Surrender, or 

(b) On the death of the insured,

are completely exempt from income tax for the receiver under specific conditions. 

In the first instance, it is the insured who shall receive the proceeds. 

In the second instance, it is the nominee who shall receive proceeds of the surrender value. There shall be no tax liability on the recipient in both these situations, subject to certain conditions.

Term Insurance Section 80 D Benefits

As most people already know, Section 80D provides tax benefits for any payment made towards the premium for health insurance. It has mostly been linked to health insurance premium benefits rather than term insurance. However, taxpayers can also take advantage of the terms mentioned in Section 80D to claim tax benefits on term insurance. 

This may sound surprising, but a policyholder can easily demand taxdeductions under Section 80D in the following ways: 

  • Money spent on premiums for health insurance policies
  • Money spent on healthcare of family members, including parents

One can also claim Section 80D deductions if one has opted for additional cover when buying Term Insurance along with riders. The purchase of riders for critical illness, hospital care, or surgical care adds the relevant health element to the insured person’s Term insurance plan. 

For individual term insurance plans, the insured can avail of tax benefits under Section 80D for himself, spouse, dependent children, and even parents.

Few Points to Note

  • One can avail of tax deductions only if the amount, whether single or for total premiums made towards different policies, is not more than Rs. 25,000.
  • If one purchases life insurance plans for parents, one can get additional tax deductions under this section for :
  • 25,000, if parents are less than 60 years old 
  • 50 000, if parents are above 60 years of age(senior citizens)
  • The maximum amount of deduction that can be claimed under Section 80D is Rs. 50,000.
  • For claiming Section 80D tax benefits, one needs to have a Critical Illness Cover along with their basic term insurance plan.
  • As a particular case, if both the insured and his parents are above 60 years of age and have purchased term insurance, the maximum deduction that may be claimed under this section is Rs. 1 lakh.
  • Tax benefits for term insurance policies under Section 80D increase with the increase in age of the insured person.
  • One can increase their possibility of claiming tax deductions by opting for Riders related to Critical Illness, Surgical care, etc.

Coverage 

Deductions for Self, Spouse, and Children (dependents) in Rs.

Parents

Total Deductions

All are covered and less than 60 years of age

 25,000

25,000

50,000

Individual less than 60 years & Parents more than 60 years

25,000

50,000

75,000

Individual above 60 years, parents above 60 years

50,000

50,000

100,000

Tax Benefits on Term Insurance Riders

Nowadays, several insurance companies offer term insurance riders to provide additional coverage with the term insurance plans. These rider benefits strengthen the core features of a term insurance policy. One can get extra tax benefits for their term insurance based on the rider option selected by them with their term plan.

The following ways suggest how an individual can avail of additional benefits, and tax deductions under Section 80D by term plan riders added to life insurance policies:

  • The addition of a Critical Illness rider to one’s term plan makes one have the advantage to claim tax deduction under Section 80D.
  • If one opts for a Return of Premium Rider along with the basic term plan at the time of buying a term plan, it increases the policy premiums. This provides you with a chance to claim benefits as per Section 80C. 

Exclusions under the Income Tax Act, 1961

Tax benefits for term insurance are not available under the Income Tax Act, 1961 if a policy is a Keyman insurance policy, and then it does not have tax-free proceeds as per Section 10(10D) of the Income Tax Act, 1961. A `keyman’ would be any person employed by an organization who has a favourable unique skill set and makes a significant contribution to the organization’s financial performance. Keyman insurance is actually an insurance policy where the employer is the proposer as well as the premium payer, and he ensures the life of his employees, such that the claims benefit goes to the employer. 

TDS or Tax deduction at source on Life Insurance

The insurance company shall deduct 2% tax prior to making payment as per the Section 194DA of the Income Tax Act, 1961 in the situation that the sum received from a life insurance plan is greater than INR 100000 on plans not covered as per the exemption under Section 10(10D) of the Income Tax Act.

Tax deducted at source, more commonly referred to as TDS, shall be deducted on the bonus payments made. However, in case the sum received is lesser than INR 100000, no amount shall be deducted as TDS, but the sum received would be wholly taxable for the insured. 

Under Section 194DA, the tax rate is 5% [3.75% with effect from May 14 2020 to March 31 2021. In the situation that the insured individual does not give their PAN details to the insurer, their TDS rate applicable would be 20%.

FAQ's

  • Q1. Does a life insurance policy purchased from Life Insurance Corporation alone qualify for income tax benefits?

    A1. No. Any life or term insurance policy from any public or private insurance company in India registered under IRDAI may help one get term insurance tax benefits. Whether one buys an insurance policy from the Life Insurance Corporation of India or any other IRDAI registered insurance company, one can avail of term insurance tax benefits.
  • Q2. Is there a ceiling on the number of children for whom a life insurance policy can be taken? 

    A2. Premiums paid on a life insurance policy – endowment policies, term insurance policies and Unit Linked Insurance Plans, etc. – quality for tax deduction under Section 80C. One may purchase such an insurance policy for any number of one’s own children irrespective of whether they are adopted, minor, major, unmarried, or unmarried for availing of term insurance tax benefits. 
  • Q3. Can term insurance premium be claimed as a deduction under Section 80C of only the financial year in which it is paid?

    A3. Section 80C(2) clarifies that if one claims the tax deduction for a particular year from gross total income, he should have paid or deposited any gross amount of premium in that particular financial year itself. For example, if one wants to claim an income tax deduction for FY 2020-21, then for FY 2020-21, the premium must be paid between 01.04.2020 and 31.03.2021 (both dates inclusive). Let’s further understand with the help of an illustration. If one’s policy premium due date was March 26, 2020, but the premium was paid late, say on April 02, 2020, but within the grace period allowed by the insurance company. The premium may be accepted by the insurance company, as generally 15 days grace period for payment of premium is allowed. However, the premium amount so paid will not qualify for term insurance tax benefits under Section 80C of the Income Tax Act, 1961 in FY 2020-21. However, one can claim the same amount for deduction in the next financial year in which the premium is actually paid.
  • Q4. When it comes to claiming deduction as per Section 80C of the Income Tax Act, 1961, what can be the maximum premium allowed? 

    A4. In the situation that the premium sum to be paid in any year goes above the approved percentage of 20%, 15 %, or 10% of the actual sum, assured, then the amount paid in excess would not get qualified for term insurance tax benefits under the Section 80C of the Income Tax Act, 1961. 
  • Q5. What is the minimum lock-in period of an insurance plan policy when it comes to retaining tax benefits as per Section 80C of the Income Tax Act, 1961?

    A5. The minimum time period for which the policyholder must hold the insurance policy in order to retain term insurance tax benefits on premium payment done are:
    • In the scenario of a single premium life insurance plan: 2 years from the date of commencement of insurance policy.
    • In case of term life insurance policy: at least two years, for which premium has been paid, from the start of the insurance policy.
  • Q6. Is there any particular way through which premium can be paid under Section 80C of the Income Tax Act, 1961 to claim tax benefit? 

    A6. For the purpose of claiming the term insurance tax benefit as per Section 80C, you can make your premium payments through several methods. Cheque, cash, bank transfers, and more are applicable for this process. However, it is imperative to understand that the life insurance plans purchases from any foreign insurance firm that IRDAI does not register can have certain extra conditions that may vary from one case to another. 
  • Q7. What are the things to remember with respect to TDS on term insurance?

    A7. Policyholders would be required to submit their PAN or Permanent Account Number to the insurer. In case they are unable to do so, then the rate of their TDS would increase to 20%, rather than the typical applicable rate.  It is also important to consider that insurance plans purchased from foreign insurance firms (i.e., those not registered with IRDAI in India) shall have certain added specifications and conditions that vary from one case to another.  
  • Q8. Who shall be responsible for deducting tax under Section 194DA?

    A8. Any person who has the responsibility to pay to a resident any sum. Any individual having the responsibility of making payment of any amount ( including the bonus offered under such plans ) to a resident under a life insurance plan other than the sum not coming under Section 10(10D) of the Income Tax Act, 1961, shall deduct tax at source (TDS) thereon. In other words, the insurance company shall be responsible for deducting tax at source under Section 194DA of the Income Tax Act, 1961. 
  • Q9. When does the TDS deduction take place under Section 194DA?

    A9. The tax would be deducted during the time of payment of all claims, such as the death benefits, maturity benefits, as well as bonuses made to the policyholder.
  • Q10. Who would have the responsibility to deduct tax under Section 194DA of the Income Tax Act, 1961?

    A10. Any Individual bearing the responsibility of making a payment of any sum to a resident under a life insurance plan should deduct income tax thereon. This sum would include any amount ascertained as a bonus under the plan, expecting the sum that is not included in the total income as per section 10(10D) of the act. 
  • Q11. Under Section 194DA, when can TDS be deducted?

    A11. TDS should be deducted at the time of all claims made to the policyholder. This includes the maturity benefit, bonuses, and death benefit. 
  • Q12. As per Section 194DA of the Income Tax Act, 1961, what would be the rate of TDS? 

    A12. 5% is the TDS rate (3.75% with effect from May 14, 2020, to March 31, 2021) on the income portion of the sum paid under the life insurance policy. The income portion is determined subsequent to making a deduction of the sum of the insurance premium payment made by the policyholder from the sum paid by the insurance firm. In the event, if the policyholder does not submit the Permanent Account Number (PAN) to the insurance company, the rate of TDS of 20% shall be applicable.
Written By: PolicyBazaar

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