Tax Benefits on Child Insurance Plans in India

Table of Content

1. Tax Benefits Available Under Child Insurance Plans

2. How Child Insurance Plans Help in Saving Taxes & Building Wealth?

3. Factors to Keep in Mind While Claiming Tax Benefits

4. Why Choose HDFC Life Child Insurance Plans for Tax Benefits?

5. Summary

6. FAQ's on Tax Benefits on Child Insurance Plans

 

Parents have a significant responsibility to not only protect their children’s present, but also their future. To ensure their children obtain good-quality education and healthy lifestyles, a sense of financial security is vital.  

Tax benefits on child insurance plans are designed to offer that sense of financial security in the following manner:

1. Tax Deduction on Premium Payments

According to Section 80C of the Income Tax Act 1961¹, premiums paid for a child's insurance plan are eligible for tax deductions up to ₹1.5 Lakh per financial year. The policy may be bought by the parent as a policyholder/proposer on the life of his child. That way, a considerable amount of tax liability gets reduced.

Furthermore, it is necessary to ensure that for policy issued on or after 01^st April 2012, the premium paid deduction is restricted to 10% of actual capital sum assured.

Please note: It is essential to note that the total deduction available under section 80C of the Income Tax Act, 1961¹, considering all the prescribed investments allowed including NPS, PPF, ELSS, Tution fee, etc under this section should not exceed Rs.1,50,000 per year and is available under the Old Tax Regime only.   

2. Tax-Free Maturity and Survival Benefits

Section 10(10D) of the Income Tax Act 1961¹ states that the maturity benefit, including the bonuses earned from a life insurance and child insurance plan, is tax exempt subject to conditions prescribed.

In the case of ULIPs issued on or after February 1, 2021, if annual premium does not exceed Rs.2.5 lakh then the maturity proceeds are tax-free subject to other conditions prescribed. However, if the policy does not satisfy the conditions then at the time of maturity, long term Capital gain (LTCG) will be taxable @ 12.5%, under the head "Income from Capital Gains”, an exemption of LTCG upto Rs 1.25 lac shall also be available annually.

In case of non-ULIP issued on or after April 1, 2023, if annual premium does not exceed Rs. 5 lakhs then the maturity proceeds are tax-free subject to other conditions prescribed. However, if the policy does not satisfy the conditions prescribed then, at the time of maturity, net income (Payouts less premium paid) under such policy would be chargeable to tax as 'Income from Other Sources' under section 56(2)(xiii) of the Act.

3. Tax-Free Death Benefit for the Family

In case the life assured passes away during the policy term, the sum assured amount, along with the bonuses, is paid to the beneficiaries. The death benefit is completely exempt from tax as per Section 10(10D) of the Income Tax Act, 1961¹.

That way, a child insurance plan secures the future of the policyholder’s children even in their absence.

4. Additional Tax Benefits Through Riders

Riders such as waiver of premiums, critical illness or accidental death cover assist in extending policy coverage and tax deductions. Under Section 80C, these riders help you reduce your taxable income so you get more financial flexibility while enhancing your policy coverage.

However, if such rider is related to health then you can claim deductions under Section 80D¹ which is widely associated with health insurance. The deduction under this section is applicable for insurance premiums paid on the health rider for self, spouse, and children. The maximum deduction available for the family shall be ₹25,000.

5. Dual Advantage – Tax Saving + Child’s Future Security

Tax benefits on child insurance plans provide the best of both tax savings and future financial security for your child. So, you can build a solid financial cushion for them. On the one hand, these plans are dedicated to meeting your child’s requirements, whether it is higher education or marriage.

On the other hand, the old tax regime enables you to get the benefit of tax deductions and exemptions for these plans.  

Tax Benefits Available Under Child Insurance Plans

The most attractive tax advantages under the child investment plan include:

1. Section 80C – Deduction on Premiums Paid

As per Section 80C¹, the parents can avail tax deductions up to ₹1.5 Lakh annually on premiums paid towards these plans. Moreover, riders such as a waiver of premiums allow you to qualify for tax deductions.

For example, if you have an annual taxable income of ₹9,00,000 and you pay ₹40,000 towards a child insurance plan annually. As per the tax deduction claim, your taxable income after paying the premium will be ₹8,60,000.

Hence, based on your income slab and tax liability of 20%, you will be able to save approximately ₹8,000.

2. Section 10(10D) – Tax-Free Payouts

As per Section 10(10D) ¹, payouts from life insurance policies are tax-exempt at the time of maturity , subject to conditions prescribed and death benefits is completely exempt for tax

For example, a policyholder has invested towards a child insurance plan with a sum assured amount of ₹15,00,000, and before the policy term ends, the policyholder passes away. In such circumstances, his family will receive the sum assured amount along with the bonuses if the insurer declares it. Moreover, according to Section 10(10D)¹, this whole payout amount will be tax-free.

3. Section 80DDB and 80DD

To claim tax benefits under Section 80DDB¹, which covers medical expenses of dependent children for Specified illnesses such as chronic kidney diseases, neurological disorders, and malignant cancers, policyholders must submit the doctor's prescriptions.

Whereas, under Section 80DD, policyholders can claim a flat deduction of Rs 75,000 for medical expenditure and maintenance of handicapped dependent child with normal disability. In case of severe disability deduction can be availed of Rs 1,25,000.

4. Section 80E

This section allows policyholders to claim tax deductions on the interest paid on their children’s education loans in India or abroad. The deduction applies to the annual interest amount payable for a period of 8 consecutive year starting from the year in which assesses starts paying interest.

How Child Insurance Plans Help in Saving Taxes & Building Wealth?

The best thing about tax benefits on child insurance plans is that these plans enable parents to get access to the dual benefits of insurance coverage and tax burden reduction. So, they can systematically build a long-term savings plan to help their children meet future goals efficiently.

1. Wealth Creation Over Time

Depending on the type of investment plan, premiums paid for an extended period help to build a sizeable corpus through guaranteed returns and market-linked growth. Even in cases of unforeseen circumstances, such as the policyholder’s demise, the financial support children receive from the death benefits helps them in fulfilling their goals.  

2. Tax Savings

As per the old tax regime, Section 80C and Section 10(10D) of the Income Tax Act 1961¹ enable policyholders to reduce their tax burdens to a great extent. Even for the Children Education Allowance (CEA), the tax deductions on tuition fees are applicable. Whether it is premium payment, maturity or death benefits, policyholders can claim tax deductions or tax exemptions as conditions prescribed.

For example, suppose a 30-year-old Mr. Seth chooses a Dream Achiever Early Income Plan from HDFC Life. With an annual premium of ₹1,00,000 paid towards the plan, he will be able to claim tax deductions on the amount.  

Factors to Keep in Mind While Claiming Tax Benefits

Policyholders have the right to customise child insurance plans as per their financial requirements, such as the sum assured amount, frequency of the premium payments and the type of payouts. However, they need to consider the following factors when it comes to claiming tax benefits:

1. Premium-to-Sum Assured Ratio

As per regulations, policies issued after April 2012, the premiums paid towards a child insurance plan should not exceed 10% of the total sum assured amount.

2. Minimum Policy Holding Period

Since child insurance plans are mostly long-term investments, it is crucial to ensure the policy is not surrendered early. The minimum policy holding period must be at least 2 years to claim tax benefits for a single premium policy. If it is a regular premium policy, the policy holding period should be at least 5 years.

3. Maximum Deduction Limit Under Section 80C

You have to keep in mind that the maximum deduction limit you can claim under Section 80C¹ is ₹1.5 Lakh for the annual premium paid towards all your eligible investment plans, such as EPF, PPF, ELSS and so on. If the annual premium amount crosses this threshold, the tax deduction will not apply.  

For example, if a policyholder claims ₹1.2 Lakh tax deduction through his EPF account, for a child education plan, they can only claim a tax deduction of ₹30,000.

4. Impact of Policy Discontinuation

If you decide to discontinue a child's insurance policy before the end of the policy term, there is a chance that you may not be able to claim tax benefits. Not only that, but early discontinuation will result in loss of policy benefits. Although after discontinuing, you will receive the surrender value, it will be lower than the paid premiums.  

5. Documentation Required for Tax Claims

While claiming tax benefits, you need to submit the annual policy premium payment receipts, policy documents, PAN details, bank account statements, rider details (if any), prescriptions (for claiming 80DDB and 80D) and employer details (if you are a salaried individual).

Why Choose HDFC Life Child Insurance Plans for Tax Benefits?

If you are looking for investment opportunities combined with insurance coverage, there is no better alternative to child insurance plans. To ensure 100% guaranteed returns, flexibility of payouts and tax savings up to ₹46,800, check plans offered by HDFC Life Insurance now. They offer:

1. Digital calculators contribute greatly to child education planners through accurate return calculation.

2. Financial security for your child in the long run.

3. A waiver of premium rider ensures that insurance coverage continues even when the policyholder is unable to pay the premium due to unforeseen circumstances.

4. Access to the advisor's team 24/7.

5. Flexibility to pay the premiums as per the investor’s personal preference.

6. Tax benefits on premiums as well as on the maturity as per the Income Tax Act.

7. Loans against the child insurance plans are available at a lower interest rate.

Summary

Tax benefits on child insurance plans allow policyholders to have additional financial relief. It is a strategic move that optimises your tax management too. The tax deductions under Section 80C enable you to save a certain percentage of your taxable income, and the maturity benefits allow you to claim maximum returns that are exempted.

Talk to your insurer about what kind of child insurance plan is most suitable for you based on your income, premium payability, and preferred policy tenure before investing. A trustworthy insurer such as HDFC Life helps you explore different child insurance plans, their coverage and tax benefits options easily. Get in touch with our advisors today!

FAQ's on Tax Benefits on Child Insurance Plans

1. What are the tax benefits of a child plan?

The primary benefits of a child insurance plan are tax deduction under Section 80C¹. Under this section, as per the old tax regime, premiums paid towards these plans are eligible for tax deductions up to ₹1.5 Lakh from taxable income as a parent. Furthermore, under Section 10(10D)¹, the maturity benefit incurred from a child plan is tax-free subject to the conditions prescribed.   

2. How much tax deduction can I claim on a child insurance plan under Section 80C?

You can claim up to ₹1.5 Lakh of your taxable income as part of the tax deduction under Section 80C if you invest in a child insurance plan.  

3. Is the death benefit from a child insurance plan taxable for the nominee?

No, under Section 10(10D) of the Income Tax Act 1961¹, the death benefit from a child insurance plan is always tax-free for the nominee.

4. Are rider benefits in child insurance plans also eligible for tax deductions?

The premium amount paid towards a child insurance plan with rider benefits is eligible for tax deductions up to ₹1.5 Lakh. However, if such rider is related to Health then parent can claim deduction under Section 80D of the Income Tax Act, 1961, upto Rs 25,000

5. Do child insurance plans qualify for tax benefits under the new tax regime?

As per the new tax regime under Section 115BAC of the Finance Act (2020), child insurance plans do not qualify for tax benefits.