Term Insurance Tax Benefits under Section 80D

What Are All The Tax Benefits In Term Insurance?  

The Government of India offers term insurance tax benefits as per the prevailing tax laws of the Income Tax Act of 1961. Here is a list of all the sections under which you can claim term life insurance tax benefits in India:

1. Section 80C

   You can reduce your taxable income by up to Rs. 1.5 Lacs by claiming a tax deduction under Section 80C of the Income Tax Act of 1961 for the premiums paid on life insurance policies for yourself, your children, or your spouse.

2. Section 80D

   This section lets you save on the premiums you pay for your health insurance plan. Tax benefits under Section 80D also apply to life insurance or term life insurance policies that include health benefit riders in the base plan.

3. Section 10(10D)

   Section 10(10D) of the Income Tax Act provides tax exemptions for the death or maturity benefits received by you or your family in accordance with the current tax regulations. These life and term insurance tax benefits make term insurance policies an excellent investment option in the long run.
   To sum it up, section 80C offers deductions up to Rs. 1.5 Lakhs/year. Section 80D offers deductions up to Rs. 75,000, and in case of senior citizens, the maximum benefit can be Rs. 1,00,000/year.

Let us see the importance and benefits of term insurance tax benefit 80D in detail. Also know what is term insurance first and then buy a term plan for your loved ones.

What is the Term Insurance Tax Benefit Under Section 80C? 

Under section 80C, you can get a tax deduction of up to Rs. 1.5 Lacs for the premium amounts you pay towards your term plan. This section offers tax deductions for all the mentioned investments, such as EPF, PPF, ELSS and ULIP, and payments like children’s tuition, repayment of home loans, premiums of life insurance, etc. 

Conditions To Avail of Term Insurance Tax Benefits Under Section 80C

• The premium paid on a yearly basis should not exceed 10 per cent of the sum assured amount. The deduction is applicable proportionately if it is above 10 per cent. 

• For policies issued prior to 31st March 2012, the deduction is applicable only if the annual premium is within 20% of the sum assured. 

• Under Section 80C(5), if a policy is voluntarily surrendered or terminated within 2 years of inception, the policyholder will not be eligible for tax benefits on premium payments. 

Can Term Insurance Be Claimed Under 80D?

You can avail of the term insurance tax benefit under Section 80D of the Income Tax Act by including important term insurance riders like critical illness riders to your base plan. Section 80D originally offers benefits in health insurance plans, but by including term insurance’s health riders into your base plan, you can receive tax benefits worth Rs. 75,000 on the total premiums you paid in a year. You can claim the remaining premium amount under other sections of the Income Tax Act. 

Moreover, certain term insurance plans come with riders, like the critical illness rider, that offer extra benefits if the policyholder is diagnosed with a critical illness. Premiums paid for these riders qualify for tax deductions under Section 80D of the Income Tax Act, with a maximum annual limit of Rs. 25,000 for the policyholder, their spouse, and dependent children.

Term Insurance Comes Under Which Section?

Term insurance comes under 80C and 80D of the Income Tax Act, of 1961. 

Let’s understand the term insurance tax benefit 80D with the help of an example: 

Rahul has purchased 2 term insurance plans and is paying a premium for these plans. One plan is for himself and the other one is for his spouse. Both of them are below 60 years of age and have added health riders like critical illness on their plan. Therefore, Rahul can claim term insurance tax benefits against the premiums paid u/s 80C of the ITA. 

If Rahul had bought term insurance for his parents, who are above 60, they would have added health riders in their base term plan. Then, he could also claim term life insurance tax benefits up to 75,000 on the premiums paid.  

In such cases, you can claim an extra Rs. 50,000 u/s 80D deduction. Overall, you can claim the benefit of Section 80D up to Rs. 75,000/year.

How to Claim Term Insurance Tax Benefit Under Section 80D of the Income Tax Act?

Since the tax benefits for term insurance under 80D can only be claimed for health insurance plans, you need to make sure you only file for a claim under this section if your term life insurance qualifies for this deduction. You can do that by going through your plan details and assessing if you have any health riders like term insurance’s critical illness riders included in your base plan. If you are not sure you can also reach out to any financial adviser or your insurance providers to gain better clarity on this. Always be completely sure if your plan qualifies for this deduction as a wrong claim may result in you losing all the term insurance tax benefits altogether.

You can claim term insurance tax benefit 80D when you file for returns for tax deductions at the end of each assessment year. You can only claim tax deductions for term insurance under 80D if you have opted for a health rider such as critical illness, hospital cash, or surgical care rider along with your base term plan.

Conditions To Avail of Term Insurance Tax Benefits Under Section 80D

Here are some of the term insurance comes under which section. Some of the conditions under which the policyholder can make term insurance tax benefit 80D claims are as follows.

• If the policyholder has chosen a critical illness term policy for him/her and his/her family (including his/her spouse and children). If the life insured along with his/her family member is below 60, then he/she has met the criteria for a tax deduction of up to Rs 25,000.

• If the policyholder has opted for a similar and separate term policy for his/her parents and the life insured's parents are above 60 years of age, then the individual is eligible for tax deduction up to Rs. 50,000.

The limit of deduction is illustrated in the below table.

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C applies. 

The individual must consider the below clauses related to the deductions to understand term insurance comes under which section.

• Suppose the individual's term insurance policy is issued on or after April 1, 2012. In that case, a tax deduction is applicable only for the total premium amount up to 10% of the maximum sum assured.

• Suppose the applicant's term insurance plan is issued on or before March 31, 2012. In that case, a tax deduction is applicable only for the total premium amounting to a maximum of 20% of the sum assured.

• Suppose the individual is suffering from any physical disabilities or critical illness. In that case, a tax deduction is applicable if the policyholder has paid premiums amounting to 15% or more of the total sum assured. The above clause is again applicable for an insurance plan that has been issued on or after April 1, 2013. Moreover, an individual of the Hindu Undivided Family (HUF) can also avail of the above tax benefits under this section.

What is the Term Insurance Tax Benefit Under Section 10(10D)? 

According to Section 10(10D) of the Income Tax Act, the sum assured upon maturity, surrender of a policy, or the death of the policyholder is exempt from taxation. Additionally, any bonuses received in conjunction with this amount are also eligible for exemption under Section 10(10D).

Conditions To Avail of Term Insurance Tax Benefits Under Section 10(10D)

The conditions for tax exemption on term insurance under this Section include: 

• The term plan qualifies for tax benefits if the premium is either less than 10 percent of the sum assured or the sum assured is a minimum of ten times the premium.

•  If the payout surpasses ₹1,00,000 and the policyholder's PAN is provided, a 1% Tax Deducted at Source (TDS) is levied.

What is the Eligibility Criteria to Claim Tax Benefits?

Deductions can only be claimed by persons and a HUF i.e., Hindu Undivided Family on the premium amount being paid for their best term insurance plans or on the benefits received by them. You can only claim tax benefits on insurance bought for

• Yourself

• Children

• Spouse

• Dependant Parents

• Dependant 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.

What are the 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

Is Term Insurance Tax-Free?

Yes, the death benefits received from a term insurance policy are entirely exempt from taxation. However, the maturity and survival benefits are subject to taxation in accordance with the current tax regulations.

According to the latest Union Budget, term insurance plans issued before April 1, 2023, will continue to enjoy tax-free maturity and survival benefits under the previous budget rules. However, policies issued after April 1, 2023, will only incur taxes on the maturity or survival amount if the annual premium for the term insurance exceeds Rs. 5 Lakhs. Therefore, to answer is term insurance tax free, for policies with annual premiums below Rs. 5 Lacs, the maturity amount will remain tax-exempt under the new rules.

What Is TDS On Term Life Insurance Policy?

TDS (Tax Deducted at Source) on Term Life Insurance Policies is structured as follows:

• Starting from October 2014, if you receive more than Rs 1 lakh from a life insurance policy that doesn't qualify for an exemption under Section 10(10D):

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

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

  • The received amount is subject to full taxation, and you can later claim a TDS credit when filing your Income Tax Return.

• The union budget for 2019 proposed:

  • Increasing the TDS rate on insurance policy proceeds to 5%.

  • This change applies 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?

Insurers offer various term riders to enhance coverage, and these riders can offer additional term insurance tax benefits beyond just strengthening the coverage. Depending on the term insurance rider you select and its associated terms, you may be eligible for extra tax advantages. Here's how term plan riders can contribute to additional tax benefits:

• Critical Illness Rider: When you add the Critical Illness rider to your term plan, you can qualify for tax deductions under Section 80D of the Income Tax Act.

• Return of Premium Rider: Opting for the Return of Premium rider when purchasing a term plan increases the premium amount. This can help you save more money on your tax liability under Section 80C. You can use an online term insurance calculator to understand how these riders affect the premium and your potential term life insurance tax benefits.

These riders not only enhance your financial protection but also provide an opportunity to optimize your tax planning.

What are the Exclusions under Section 80D of the Income Tax Act, 1961?

Here is a list of all the exclusions of the term insurance under 80D of the Income Tax Act, 1961.

• Premium payment: If the policyholder does not pay premium amounts on a regular basis, the tax savings benefit will not be valid in these scenarios. 

• Group Health Insurance: Section 80D will not be applicable to group health insurance premiums but if you make any additional payments to increase the sum assured, the term insurance tax benefit will be applicable on the extra amount paid.

• GST: There will be no tax benefits on the GST and CESS charges applied to the plan.

Apart from this, there are other exclusions also: 

• Also, it doesn’t apply to a premium amount paid on behalf of working/ employed children, or other relatives. 

• It doesn’t hold any importance if the premium amount is paid in cash. 

Summing Up

Term insurance plans can not only secure your family’s future, and help fulfill their goals, but also help you save on your yearly taxes. You can claim tax deductions of up to Rs. 75,000 under section 80D of the Income Tax Act. This section is only applicable to term insurance with health riders included in the plan. By understanding term insurance comes under which section you can not only secure financial security but also peace of mind from financial hardships.

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