How Term Insurance Can Help You Save Income Tax

Term Insurance plan is the simplest type of Life Insurance policy. The insured gets coverage for a specified period, as 'Term'. Term insurance plans are very beneficial in terms of being immensely flexible and financially economical as they offer low premiums with high levels of sum assured. It is essential to know term insurance comes under which section of the Income Tax Act for Tax benefits.

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The beneficiary or nominee receives the sum assured as a death benefit at the insured's untimely death under the policy term. If the insured outlives the policy term, there will be no death benefit. However, upon opting for the return of premium option and upon surviving till the end of the policy term, the insured would get all premium amount paid.     

How Term Insurance Helps to Save Taxes 

To provide tax benefits to people, the Indian Government and the Income Tax department have made tax deduction provisions on the policyholder’s term insurance premium payments. These deductions lower the policyholder’s taxable income, so he/she can save taxes each year till the term plan continues.  

Under the term plan, the policyholder can take tax advantages within two sections of the Indian Income Tax Act, 1961: 

  • Under section 80C, the customer would get tax exemptions on the premiums paid for the term plan.
  • Under section 10 (10D), the policyholder would receive tax exemptions for maturity advantage on availing of Term insurance with the Return Of Premium (TROP) option.

Tax Benefits Under Section 80C and 10D of Income Tax

As we all know by now that term insurance comes under which section, here is detailed information on tax benefits under these two sections of the Income Tax Act:

  1. Section 80C  

    Upon availing of a term insurance plan, the customer has to pay a monthly/ yearly/ half-yearly/ quarterly amount as a premium to the insurance company. The premium payments can be deducted from the customer's overall income for an amount of almost Rs. 1.5 lakh in a financial year, but this is applicable only for those who have availed of this policy before 31st March 2012. 

    People, who got the policy issued after 1st April 2012, will have 10% tax deduction benefits. It results in a reduction in overall taxable income, which is a huge benefit for the policyholder.

    Another aspect of tax benefit under section 80C is that it can be availed by both individual and Hindu Undivided families (HUFs). For individuals, the tax deduction can be claimed by the individual, his/her children, or his/her spouse. This is the most common tax deduction under Section 80C of the Income Tax Act, 1961.

  2. Section 10 (10D) 

    Term life insurance policies aim to provide financial support to the beneficiaries at difficult times or in case of an unfortunate incident. In case of the policyholder's demise, the entire amount is given to the beneficiary without any tax deductions under section 10 (10D).    

    At the end of the term plan with a return of premium, when the policyholder receives the entire amount, it is also exempted from the tax.

What is the Maximum Tax Saving One Can Avail Under a Term Insurance Plan?

The taxpayers can have tax savings under various sections and subsections of the Income Tax law, as- 80C, 80CCD (1B), 80D, and 24 (4). Within his/her Income band, the taxpayer can make maximum investment and save tax. The table below describes the maximum tax benefits one can take under these sections of income tax.

Deductions

Maximum Amount (Rs.)

Standard deduction

50,000

Section 80C*

150,000

Section 80D

25,000

Section 80CCD (1B) NPS

50,000

Section 24 (b) 

200,000

Total 

4,75,000

*The total deduction amount under sections 80C, 80CCC and 80CCD (1) in aggregate cannot exceed Rs. 1.5 lakh.

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FAQ's

  • Q. What is the maximum limit of investment under Section 80C?

    Ans. The maximum limit of investment that will bring tax benefits under Section 80C is Rs.1.5 lakh.   
  • Q. How many tax-exempt investment instruments can one have?

    Ans. There is no limit on the number of tax-exempt investment instruments. Still, one needs to see how useful these instruments are for tax-saving purposes, as the amount of deduction that can be claimed is capped at a maximum value for each instrument.
  • Q. How is tax calculated?

    Ans. First, all applicable exemptions/deductions are deducted from one’s gross total income for calculating tax. The amount left is one's net income on which the tax is calculated based on the IT (Income Tax) slabs. The IT slabs are announced every year under the union budget.

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