Term Insurance Tax Benefits: Save Taxes and Secure Your Future

What are the Term Insurance Tax Benefits Under Different Sections of the Income Tax Act?

Let us take a look term insurance comes under which section of the Income Tax Act, 1961:

Tax Benefits Under Section 80C:

• This is the most common term insurance tax benefit that every Indian taxpayer can avail of under section 80C of the Income Tax Act, 1961.

• The premium amount paid towards a term insurance plan is eligible for a tax deduction according to Section 80C of the Income Tax Act, 1961. You can claim a deduction up to Rs. 1.5 Lakh per annum.

• One of the important aspects you should know about is the tax deductions. The upper limit available in these sections includes investment tax benefits in fixed deposits, PPF, and various other tax-saving tools.
  Important Facts Related to Term Insurance Tax Benefits u/s 80C

• The premium amount must be less than 10% of the sum assured to qualify for deductions under Section 80C.

To understand term insurance comes under which section, Terms plans issued before 31st March 2012, the benefits in term insurance in tax are valid if the yearly premium is below 20% of the life cover.

Tax Benefits Under Section 10(10D):

The death benefit received by your nominee is completely tax-free under Section 10(10D) of the Income Tax Act. These tax benefits on term insurance have no upper limit. This ensures your loved ones receive the full amount without any tax deductions. As a policyholder, you should also know that term insurance tax benefits u/s 10(10D) are subject to certain T&Cs. The death or maturity benefits under a term insurance plan are non-taxable if the premium amount paid during the policy term doesn't exceed 20% of the pre-specified life cover.

Tax Benefits Under Section 80D:

Section 80D of term insurance allows tax deductions on the premium amount paid for health insurance plans. You have the option to avail of the term insurance tax benefit u/s 80D if you already have health-related riders, such as surgical care cover, critical illness cover, and others. In simple words, you can increase your tax savings on your term plan premiums by buying these riders while getting health insurance plan coverage.
While primarily associated with health insurance, term insurance tax benefits can also be claimed with health-related riders (such as critical illness cover) as they are also eligible for deductions under Section 80D.

• Individuals below 60 years: Deduction of up to ₹25,000 for self, spouse, and dependent children.

• Senior Citizens: Additional deduction of ₹50,000 if premiums are paid for parents aged 60 and above.

• Maximum Deduction: Up to ₹75,000 annually, combining benefits for self, dependents, and senior citizen parents.

Take a look at the table below for a complete understanding of the term insurance tax benefits under section 80D will be as follows:

What are the Exclusions Under Section 80D of the Income Tax Act?

Section 80D does not offer term insurance tax benefits in the following conditions. To avoid losing your deduction, it is important to understand what does not qualify.

• Premiums Applicable for 80D:
  For term insurance, most of the tax benefit is available under Section 80C, because the base premium is treated as life insurance. Only the portion of your premium that goes toward health-focused riders, such as critical illness or cancer care, is eligible under Section 80D.

• Riders That Do Not Qualify:
  Not all riders offer Section 80D benefits. A personal accident rider, for example, does not qualify under Section 80C or 80D. Similarly, medical treatment expenses cannot be claimed under Section 80D and instead may be claimed under Sections 80DD or 80U, depending on the situation.

• Employer paid premiums for Group Health Insurance:
  You cannot claim a deduction for the premiums paid by your employer towards a group health insurance policy. Section 80D benefits apply only when you pay the premium.

• Premiums Paid in Cash:
  Premiums must be paid via cheque, card, bank transfer, or any other digital mode. Cash payments are not eligible for Section 80D deductions.

• Missed Premium Payments:
  A deduction can be claimed only in the financial year in which the premium is actually paid. If no premium is paid during the year, no 80D benefit can be availed.

• Premiums Paid for Non-Eligible Family Members:
  Section 80D applies only to premiums paid for self, spouse, dependent children, and parents. Payments made for working or earning children, siblings, grandparents, uncles, aunts, or other relatives do not qualify for the deduction.

Term Insurance Tax Benefits: Old vs. New Tax Regime

The Union Budget 2023 introduced a new tax regime. You can assess the tax benefits of term insurance differ under each tax regime and choose the one you wish to be taxed under:

Is Term Insurance Tax-Free?

Yes, the death benefit from a term insurance policy is tax-free for your family under Section 10(10D) of the Income Tax Act, 1961, as per the prevailing tax laws. This means that in the unfortunate event of your passing, the amount your nominee receives is not treated as taxable income, allowing them to use the full payout without any deductions.

This tax exemption ensures that your family gets complete financial support when they need it the most, whether it is managing household expenses, paying off loans, or maintaining long-term stability in your absence.

Tax Benefits on Term Insurance Riders

Term insurance riders strengthen your policy coverage and offer extra tax benefits. Choosing specific riders under certain conditions can help increase your term life insurance tax advantages. Let us take a look at the riders in term insurance comes under which section:

• Critical Illness Rider: Adding this rider in term insurance provides you with additional tax benefits under Section 80D.

• Return of Premium (ROP) Rider: Opting for this rider increases your premium, enabling higher tax savings under Section 80C.

How to Claim Tax Benefits For Term Insurance?

Here is how salaried or self-employed individuals can claim their tax benefits on term insurance premiums.

For Salaried Individuals

Salaried individuals can claim tax deductions under Section 80C and Section 80D (for applicable riders like Critical Illness) by following these steps:

• Submit Form 12BB:

  • Form 12BB is an investment declaration form used to inform your employer about your planned tax-saving investments, including term insurance.

  • You need to fill and submit this form at the start of the financial year to make sure your premiums are shown in your Form 16.

• Keep Documents Handy:

  • You should keep your track of your premium payment receipts as might be needed as proof.

  • These documents are not compulsory but may come in handy if the tax department asks for verification.

For Self-Employed Individuals

Self-employed individuals can claim tax benefits by declaring their term insurance for self-employed premiums while filing their Income Tax Return (ITR):

• Declare Premiums in ITR Form:
  Include the premium payments under the relevant sections (80C and 80D) when filing your ITR to claim deductions.

• Understand Deduction Limits:
  For Section 80D, you can claim up to ₹25,000 per year for premiums paid on riders like Accidental Benefit or Critical Illness.
  With this, you can only claim the actual premium paid. For example, if your annual premium is ₹12,000, you can claim that amount, not the full ₹25,000 limit.

Eligibility Criteria to Claim Term Insurance Tax Benefits

You can claim term insurance tax benefits on premiums paid for policies only if the policyholder is:

• Self

• Spouse

• Dependent Child

• Dependent Parents or In-laws

Common Customer Queries Answered

Frequent Mistakes and How to Avoid Losing Tax Benefits

Claiming tax benefits on term insurance can lower your overall tax load, but a few small mistakes often lead people to miss deductions. It’s also worth remembering that these tax benefits apply only if you’ve chosen the old tax regime.

Not claiming the taxes paid on premiums

Term plan premiums in India include GST, and this amount can also be claimed as part of your tax deduction. Many people forget this and end up paying more tax than needed.

Missing documentation

Keep your old premium receipts and certificates safely. When you file taxes, these small papers make a difference and help you claim the correct deduction.

Not including riders

Riders like critical illness or a disability rider may offer additional tax benefits under Section 80D, apart from what you already get under Section 80C for the base plan. Many skip adding them and lose out on extra savings.

Understanding the Tax Implications of Term Life Insurance

GST on Term Insurance: As per the latest updates in the GST rules, now 0% GST on term insurance will be applicable on premiums. NRIs too, can claim a GST waiver on term insurance for NRI premiums paid via NRE (Non-residential External) bank accounts that support freely convertible currency.

Wrapping It Up!

Term Life Insurance is one of the most efficient ways to secure your loved one's financial needs, but it also offers various tax benefits, making it one of the tax-saving tools. Everyone should be well aware of the term insurance tax benefits before purchasing a term plan to secure their financial future and that of their family. Understanding and knowing about term insurance tax benefits allows you to plan your finances better and helps you make the most of them.

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