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Term Insurance Tax Benefits

Different types of exemptions and deductions are available under the sections of Income Tax Act, 1961. Taxpayers have the opportunity to invest in various financial instruments to become eligible for these deductions and exemptions. Term insurance is one such tax-saving tool that provides death benefit to the policyholder’s nominees in case of his/her death. In this article, we will understand in detail the different term insurance tax benefits:

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What Are The Different Term Insurance Tax Benefits Under Different Sections of the Income Tax Act (ITA), 1961?

Term insurance plans offer tax benefits under specific sections of the Income Tax Act, 1961. Here is a list of all the sections, offered by the Government of India, under which you can claim term life insurance tax benefits:

  1. Term Life Insurance Tax Benefits Under Section 80C

    You can get a tax deduction of up to Rs. 1.5 Lacs u/s 80C for the premium amounts paid towards your term insurance plan. This 80C section provides a deduction for all the mentioned investments such as EPF, PPF, ELSS, and ULIP, and the payment of children’s fees, life insurance premiums, and repayment of home loans, etc.
    Below are certain conditions to opt for term life insurance tax benefits under section 80C are: 

    • If one has purchased a term insurance plan on or before 31st of March, 2012, then tax deductions will be only for the total premium amount up to a maximum of 20% of the Sum Assured.

    • If one has purchased their term insurance plan on or after the 1st of April, 2012, then tax benefit can be claimed only for the premium total which equals a maximum of 10% of the Sum Assured.

    • In case any individual is disabled or suffering from any sort of critical illness, and has purchased a term insurance plan on or after 1st of April, 2013, then tax can be claimed only if premiums are above or equal to 15% of the Total Sum Assured.

  2. Term Insurance Tax Benefit Under Section 80D

    Some term plans offer riders such as critical illness rider, which provide additional benefits in case the policyholder is diagnosed with a critical illness. Premiums paid toward these riders are eligible for tax deductions under section 80D of the Income Tax Act, up to a maximum limit of Rs. 25,000 per annum for self, spouse and dependent children. 

    Simply put, Section 80D allows a deduction of up to Rs. 25,000 on premium amount paid for term insurance plans with a coverage of critical illness. 

    Earlier, this section was for health insurance plans. This offers a deduction on health insurance plans purchased for children, spouses or parents with different limits of deductions under different conditions. 

    The term insurance tax benefits under section 80D will be as follows:

    Life stage  Premium amount paid  Upper limit to Term Insurance Tax benefits u/s 80D 
    For Self, spouse, and children  Parents and in-laws
    Individuals (covered) under 60 years Rs. 25000 Rs. 25000 Rs. 50000
    Your parents are >60 years  Rs. 25000 Rs 50000 Rs 75000
    When both you and your parents are >60 years  Rs 50000 Rs 50000 Rs 100000

    Certain conditions to avail term insurance tax benefits under section 80D are:

    • The maximum limit of tax deductions that can be availed under this section is Rs. 25, 000 for term plans covering the individuals, spouse, children, and anyone under the age of 60 years.

    • The maximum tax deduction for people over the age of 60 like dependent parents and in-laws can be Rs. 50, 000.

    Payments Eligible for Deductions Under Section 80D

    Below is a list of the payments that are eligible for tax deductions under Section 80D:

    • Cashless payments for health insurance premiums or term insurance with health riders

    • Preventive medical checkup expenses

    • Treatment costs for a senior (over the age of 60) with no health insurance plan

    • Payments made for government programs and Central Government’s Health Scheme

  3. Term Insurance Tax Benefit Under Section 10(10D)

    For life insurance plans issued on or after 1st of April 2023, the tax exemption on maturity benefits u/s 10(10D) will be applicable only if the average annual premium paid by a person is up to Rs.5 lakhs. In case of premium amount after this limit, the benefits will be added to the income and then taxed at the valid rates. As per the New Union Budget 2023, the maturity and death benefits, and accumulated bonus are free of taxes if the premium doesn’t exceed 10 percent of the sum assured amount for plans issued after April 1st 2012, and for plans which are issued between April 1, 2023, and March 31, 2012, the premium amount doesn’t exceed 20 percent of the sum assured.
    Certain conditions to avail term plan tax benefits under section 10(10D) are: 

    • The total premium paid in the term policy should not exceed 10% of the Total Sum Assured if the term policy is issued on or after the 1st of April,2012. 

    • If the benefit payout is more than 1,00,000, and the PAN card of the policyholder is available then a TDS of 1% will be applicable.

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What Is TDS On Term Life Insurance Policy?

TDS on Term Life Insurance Policy are as follows:

  1. Starting from October 2014, if you receive more than Rs 1 lakh from a life insurance policy not exempt under Section 10(10D):

    • The insurer deducts 1% as TDS before payment, including bonuses.

    • If you receive less than Rs 1,00,000, no TDS is deducted.

    • The received amount is fully taxable, and you can claim TDS credit in your Income Tax Return.

  2. The union budget for 2019 proposed:

    • Increasing TDS on insurance policy proceeds to 5%.

    • Applied to the income portion of proceeds paid or due on or after September 1, 2019.

What are the Tax Benefits on Riders of Term Insurance?

Various term riders are offered by insurers to provide increased coverage, but their benefits are not restricted to just strengthening a term insurance plan. Based on the term insurance rider you choose with a term insurance plan and its associated conditions, you can opt for additional term insurance tax benefits. 

Here's how term plan riders can contribute to extra tax advantages:

  • If you add the Critical Illness rider to your term plan, you can get tax deductions under Section 80D.

  • For riders like Return of Premium, which you choose when buying a term plan, the premium increases. This helps you save more money under Section 80C. You can use an online term insurance calculator to see how the premium changes with these riders.

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What is GST on Term Insurance?

As per the new Union Budget 2023, the GST (Goods and Service Tax) of 18% will be levied as usual on the term insurance policies. However, if you are an Indian living outside India, you can claim tax benefits in the form of a GST waiver on term insurance for NRIs of 18% on the premiums paid to keep the policy active. This allows you to save further on your term plan tax benefits under the Income Tax Act of 1961.

What Is The Eligibility Criteria To Claim Term Insurance Tax Benefits?

A deduction can be claimed only by individuals and Members of HUF (Hindu Undivided Families) on the premium amount being paid for their term insurance policies or on the payouts received by them. You can claim term insurance tax benefits only on the premiums paid only if the policyholder is:

  • Self

  • Spouse

  • Dependent Child

  • Dependent Parents or In-laws

Any other party other than the ones stated above cannot claim this deduction. For example, a firm or a company cannot file for term insurance under 80D tax deductions.

Is Term Insurance Tax-Free?

Yes, the death proceeds received from a term insurance policy are completely tax-free. Apart from that, the maturity and survival benefits are taxable as per the prevailing tax laws.

According to the New Union Budget, the term insurance plans issued before the 1st of April 2023 will receive maturity and survival benefits tax-free as per the previous budget rules. However, policies issued after 1st April 2023 will attract tax on the maturity or survival amount only if the annual premium of the term insurance is more than 5 Lacs. For policies with annual premiums of less than 5 Lacs, the maturity amount will remain tax-exempted under the new rules.

Wrapping It Up!

Term Insurance is one of the most efficient ways to secure your loved one’s financial needs but along with that, it also offers various tax benefits making it one of the top tax-saving tools. Every individual should be well aware of the term insurance tax benefits before purchasing a term plan to secure the financial future of themselves and their family. Understanding and having complete knowledge about term insurance tax benefits allow you to plan your finances better and helps you make the most of it.

FAQs

  • Q: Is Term Insurance Covered Under 80C of the IT Act?

    Ans: Yes, Term Insurance is covered under 80C of the Income Tax Act of 1961. You can claim a tax deduction of Rs. 1.5 Lacs on the total premiums paid for life insurance policies in one financial year.
  • Q: Term insurance comes under which section?

    Ans: Term insurance comes under sections 80C and 10(10D) of the Income Tax Act of 1961.
  • Q: Do we get tax benefit on term insurance?

    Ans: Yes, you can claim term insurance for tax benefits in India under Section 80C of the Income Tax Act.
  • Q: Can we claim term insurance for tax benefits in India?

    Ans: Yes, you can get tax benefits on term insurance premiums under Section 80C of the Income Tax Act.
  • Q: Is term insurance tax benefit?

    Ans: Yes, Term Insurance is covered under 80C of the Income Tax Act of 1961.
  • Q: Can I claim Term Insurance Tax Benefits even after discontinuing my policy?

    Ans: No, you cannot claim term insurance tax benefits under section 80C if you are not paying the premiums. The benefit is applicable only when premiums are paid.
  • Q: Is Term Insurance Death Benefit Taxable?

    Ans: No, the death benefit is tax-exempted under section 10(10D) of the Income Tax Act of 1961.
  • Q: What is the maximum limit for term insurance tax benefits under Section 80C?

    Ans: The maximum limit for term plan tax benefits under section 80C is Rs. 1.5 Lacs, subject to prevailing tax laws.
  • Q: How can I increase my term insurance tax benefits?

    Ans: You can increase term life insurance tax benefits by including health riders in the base term plan, eligible under section 80D.
  • Q: In what conditions would I have to pay term insurance tax benefits?

    Ans: You might have to pay term life insurance tax benefits if annual premiums exceed Rs. 5 Lacs; tax will be applicable on the difference between sum assured and total premiums paid.
  • Q: Who is eligible to claim term plan tax benefits?

    Ans: The policyholder and nominee can claim tax benefits on term insurance under 80C, 80D, and 10(10D) of the Income Tax Act, 1961.
  • Q: In any case, does the beneficiary have to pay taxes on term insurance?

    Ans: The beneficiary may have to pay taxes on the claim amount if the benefit amount is not paid immediately after the death of the policyholder.
  • Q: Should I Buy Term Insurance only because of its term insurance tax benefits?

    Ans: No, you should not buy term plan solely for tax-saving benefits; understand its other benefits like financial protection, critical illness benefits, etc., before purchasing.
  • Q: What are term insurance tax benefits?

    Ans: Term insurance tax benefits are deductions and exemptions offered by the Government of India on premiums and proceeds from term insurance, applicable under 80C, 80D, and 10(10D) of the Income Tax Act of 1961.
  • Q: What will happen if I do not pay my term premiums on time?

    Ans: If you fail to pay term insurance premiums during the grace period, your plan will lapse, and you will lose all plan benefits.
  • Q: What is the maximum limit of term insurance tax benefit under 80D for people over 60?

    Ans: The maximum limit of term insurance tax benefits under 80D for people over the age of 60 is 50,000.
  • Q: Which term insurance riders qualify for term insurance tax benefits?

    Ans: Various term insurance riders like hospicare, critical illness, terminal illness, and other medical riders offer term plan tax benefits under section 80D.
  • Q: Would I have to pay taxes on the term insurance claims amount?

    Ans: If the term insurance claim is made as a death benefit, then the claim amount is completely tax exempted. If claimed as a maturity amount, it's taxable if annual premiums exceed 5 Lacs.
  • Q: Can I claim term insurance tax benefits under sections 80C and 80D?

    Ans: Yes, you can claim term insurance tax benefits under sections 80C and 80D of the IT Act. Base premiums can be claimed under section 80C, while riders can be claimed under section 80D.
  • Q: Do I have to pay GST on term insurance plan u/s 80C?

    Ans: GST is levied according to applicable premium rates; GST and other cesses are separate from section 80C benefits.
  • Q: What is the impact of the Return of Premium rider on taxes?

    Ans: The Return of Premium rider increases the premium amount, allowing you to save more money under Section 80C of the Income Tax Act.
  • Q: How can I assess the premium changes due to riders?

    Ans: Use an online term insurance calculator to see how the premium amount changes when you include different riders in your term plan.
  • Q: What are term insurance tax benefits?

    Ans: Term insurance tax benefits refer to the advantages provided by the government that allow you to reduce your tax liability by deducting the premium amount paid for your term life insurance policy from your taxable income.
  • Q: Is there a minimum or maximum premium limit for claiming term insurance tax benefits on term insurance?

    Ans: There is no specific minimum premium limit to claim term insurance tax benefits. However, the premium should be reasonable and within the provisions of the policy. There is no maximum premium limit for claiming tax benefits.
  • Q: Are premiums paid for term insurance tax-deductible?

    Ans: Yes, premiums paid for term insurance are eligible for tax deductions under Section 80C of the Income Tax Act, subject to certain conditions. This is one of the term insurance tax benefits according to the ITA 1961.
  • Q: Is the death benefit from term insurance taxable as part of one of the term insurance tax benefits?

    Ans: No, the death benefit received from a term insurance policy is usually tax-free under Section 10(10D) of the Income Tax Act.
  • Q: Can I claim term insurance tax benefits for health riders on my term insurance policy?

    Ans: Yes, you can claim term insurance tax benefits if your term insurance policy includes health riders; you may be eligible for tax benefits under Section 80D.

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