Life Insurance Tax Benefits in India

Table of Content

1. What are the Tax Benefits of Life Insurance Policy?

2. How To Save Income Tax With Life Insurance Policies?

3. Life Insurance Tax Benefits Under Different Sections of the Income Tax Act (ITA), 1961?

4. Section 123 of the Income Tax Act, 2025

5. What are the Tax Benefits on Riders of Life Insurance?

6. What is TDS on a Life Insurance Policy?

7. What is GST on Life Insurance Policy?

8. Eligibility Criteria to Claim Life Insurance Tax Benefits

9. Conclusion

10. FAQs On Life Insurance Tax Benefits

You might know you can save tax by investing in life insurance policies. But what is life insurance? 

Life insurance is a vital element of financial planning, and it offers death and maturity benefits to the nominee or the policyholders. In the case of untimely death, life insurance offers financial support to the policyholder's family members.

What are the Tax Benefits of Life Insurance Policy?

Life insurance tax benefits allow you to save tax on premiums paid and enjoy tax-free payouts under specific sections of the Income Tax Act, 2025.

Premiums paid for life insurance policies, including term plans and ULIPs, qualify for deductions up to ₹1.5 lakh in a financial year under Section 123 read with Schedule XV (Section 80C), subject to conditions, directly reducing your taxable income while ensuring financial protection.

Maturity proceeds received from eligible policies are exempt under Section 11 read with Schedule II (Section 10(10D)), and death benefits remain completely tax-free, helping you meet long-term goals without tax liability.

Premiums paid for health riders may also offer additional benefits under Section 126 (Section 80D), supporting comprehensive and tax-efficient financial planning. To qualify for full deduction under Section 80C, the annual premium must not exceed 10% of the Sum Assured for policies issued after April 1, 2012, failing which the deduction is restricted to 10% of the sum assured.

How To Save Income Tax With Life Insurance Policies?

You can save income tax by buying a life insurance policy at various stages of the plan. Let’s discuss the same.

• Entry Advantage

In this stage, you are eligible for tax deductions under sections 80C, 80CCC and 80D of the Income Tax Act. Section 80C is for life insurance, 80CCC is for pension plans, and 80D is for health insurance.

• Earnings Advantage

Your investment in the life insurance policy will grow over time and is tax-free(subject to conditions).

• Exclusive Switching Advantage

Let's say you want to make a switch between different investments. These switches can be across equity, debt or other funds and are not currently taxable.

• Exit Advantage

  The payouts or proceeds from the policy are eligible for tax exemptions u/s 10(10D) of the Income Tax Act 1961. However, there are certain terms and conditions you must know and follow.

Life Insurance Tax Benefits Under Different Sections of the Income Tax Act (ITA), 1961?

Life insurance tax benefits are available under multiple sections of the Income Tax Act 1961, covering both premium deductions and tax-free payouts. Here is a roadmap to understand the taxability of life insurance policies: 

1. Section 123 of the Income Tax Act, 2025 (Section 80C of the Income Tax Act, 1961) -Premium Deductions

Under tax benefits on life insurance, premiums paid for term plans, endowment plans, ULIPs, and money-back policies qualify for deductions up to ₹1.5 lakh annually subject to conditions prescribed under Schedule XV of the Income Tax Act, 2025. This reduces taxable income while securing life cover.

2. Section 126 of the Income Tax Act, 2025 (Section 80D of the Income Tax Act, 1961)- Health Riders

Premiums paid for health-related riders attached to life insurance policies may be eligible for deductions under Section 126 of the Income Tax Act, 2025 subject to conditions prescribed therein. Deduction is available for health insurance premiums, contributions to notified schemes, and preventive health check-ups, up to ₹25,000 (₹50,000 for senior citizens), with an overall cap as specified. It offers additional life insurance tax saving opportunities beyond core premiums.

3. Section 123 of the Income Tax Act, 2025 (Section 80CCC of the Income Tax Act, 1961) - Pension Plans

Contributions to pension or annuity plans offered by insurers qualify for such deductions under Section 123 read with Schedule XV, including payments made to effect or keep in force annuity plans of LIC or other notified insurers and contributions to notified pension funds. However, such deduction is subject to the overall limit of ₹1.5 lakh, and the annuity contract should not provide an option for cash payment in lieu of annuity. Further, any amount received on surrender of the annuity plan or as pension, or withdrawn without being utilized for purchase of annuity, shall be taxable in the year of receipt. It supports retirement planning with the tax advantages of life insurance.

4. Section 124 of the Income Tax Act, 2025 (Section 80CCE of the Income Tax Act, 1961) - Overall Deduction Cap

This section sets the combined limit of ₹1.5 lakh in a financial year for deductions claimed under Section123 & Section 124 combined as per the Income Tax Act, 2025.

5. Section 11 read with Schedule II of the Income Tax Act, 2025 (Section 10(10D) of the Income Tax Act, 1961) - Payout Exemptions

Maturity proceeds and death benefits are tax-free under this section, making life insurance and tax benefits highly efficient for long-term goals. However, the exemption on maturity proceeds is available only where the premium payable in any year does not exceed 10% of the death sum assured and the total annual aggregate premium does not exceed ₹2.5 lakh for ULIP policies and ₹5 lakh for non-ULIP policies, while death benefits remain fully exempt. Meanwhile, the death benefits remain completely tax-free

6. Section 19 of the Income Tax Act, 2025 (Section 10(10A) of the Income Tax Act, 1961) – Commuted Pension

Lump-sum payouts from eligible pension plans may be exempt, subject to conditions, ensuring tax-efficient retirement income.As per Section 19(1(1) SI. No. 9 read with Schedule VII (Table: Sl. No. 3) of Income Tax Act, 2025, entire commuted pension is exempt where received under specified government schemes and from notified funds like life insurance companies' pension funds. In other cases, exemption is restricted to the commuted value of one-third (33.33%) of the pension where gratuity is received, and one-half (50%) where gratuity is not received, as determined on the prescribed basis.

Let us take a closer look at the tax implications under different tax implications on life insurance policies:

Section 123 of the Income Tax Act, 2025 

Section 123 offers significant life insurance tax benefits by allowing deductions on premiums paid for eligible policies. You can claim a maximum deduction of ₹1.5 lakh in a financial year, thereby reducing your overall taxable income.

Eligible policies include term insurance, endowment plans, ULIPs, and money-back policies purchased for self, spouse, or children. Premiums paid for parents are not eligible under this section.

For policies issued on or after April 1, 2012, the premium deduction is limited to 10% of the sum assured. This is not available in the New Tax Regime under Section 202 of the Income Tax Act, 2025 (Section 115BAC of the Income Tax Act, 1961. 

Example:

Suppose your income is ₹10 lakh. 

By paying ₹1.5 Lakh in premiums, you only pay tax on ₹8.5 Lakh. Depending on your tax bracket, this could save you roughly ₹30,000 to ₹45,000 in actual cash.

Section 126

Section 126 provides life insurance tax benefits on premiums paid for health-related riders attached to life insurance policies. Eligible riders include critical illness, surgical care, and hospitalisation benefits that function like health insurance coverage.

Unlike Section 123, which applies to core life insurance premiums, Section 126 focuses solely on health protection expenses. Policyholders can claim deductions up to ₹25,000 for self, spouse, and children, with higher limits of ₹50,000 for senior citizens. The overall deduction is subject to a maximum cap of ₹50,000 in aggregate for each category, including medical expenditure where applicable, with preventive health check-up allowed up to ₹5,000, and payments (other than check-ups) required to be made through non-cash modes.

Example:

Imagine Amit (age 35) buys a life insurance policy (Term Plan) to protect his family. He also adds a Critical Illness Rider and a Hospital Cash Rider to the plan for extra medical protection.

Since Amit's rider premiums of ₹12,000 are considered for taxation under Section 126, he has a higher limit under Section 123 for other investments like PPF or ELSS. Furthermore, he gets the high-life cover of his term plan and the medical backup of a health insurance policy, all in one premium payment. 

     If Amit also pays for a health rider on a policy for his senior citizen parents, he can claim an additional deduction of up to ₹50,000 under Section 126 of the Income Tax Act, 2025.

Section 11 read with Schedule II of the Income Tax Act, 2025 (Section 10(10D) of the Income Tax Act, 1961)

Section 10(10D) provides life insurance tax benefits by exempting certain payouts from income tax. Death benefits received by nominees are fully tax-free, regardless of policy amount. Maturity proceeds from eligible life insurance policies, including endowment plans and ULIPs, are also exempt, subject to conditions prescribed therein. 

However, conditions apply. For ULIP policies, the annual premium must not exceed 10% of the sum assured and the total annual aggregate premium does not exceed ₹2.5 lakh for ULIP policies and ₹5 lakh for non-ULIP policies; otherwise, the maturity proceeds become taxable.If this limit is breached, the payout becomes taxable under the head “Income from Capital Gains”. 

Example: 

For example, if a policy has a sum assured of ₹10 lakh, the annual premium should not exceed ₹1 lakh in a financial year.These tax benefits on life insurance apply only when policy conditions are satisfied as per the income tax.

Section 123 of the Income Tax Act, 2025 (Section 80CCCof the Income Tax Act, 1961)¹

Section 123 read with Schedule XV(1)  offers life insurance tax benefits on contributions made to pension or annuity plans offered by life insurance companies. These plans provide a regular income after retirement and focus on long-term financial security.

Under this section, individuals can claim deductions up to ₹1.5 lakh in a financial year. 

Example:

For example, if you invest ₹60,000 annually in a life insurer's pension plan, you can claim this amount under Section 123, helping reduce taxable income while building a steady retirement corpus.

Section 19 of the Income Tax Act, 2025 (Section 10(10A) of the Income Tax Act, 1961)

Section 19 read with Schedule VII of the Income Tax Act, 2025 (Section10(10A) of the Income Tax Act, 1961) provides life insurance tax benefits on payouts received from specific deferred pension or annuity plans offered by life insurance companies. This section primarily applies to commuted pension amounts, which eligible pension policies pay as lump-sum payments at vesting or retirement.

The exemption is subject to conditions defined under Section 19 of the Income Tax Act2025. Generally, you may receive a portion of the commuted value tax-free, while the remaining amount that you use to purchase an annuity may generate taxable pension income.

This section focuses only on retirement-oriented payouts, unlike maturity exemptions under other sections. This helps policyholders manage post-retirement income in a tax-efficient manner when policy conditions are fulfilled.

Example:

Ravi invests in a deferred pension plan from a life insurance company and retires at 60. Upon maturity, he receives ₹10 lakh as the total pension value. He chooses to withdraw 30% (₹3 lakh) as a lump sum and uses the remaining ₹7 lakh to buy an annuity.

Under this Section 1 the ₹3 lakh lump-sum amount can be tax-free, subject to conditions. The monthly pension he receives from the annuity is treated as income and taxed accordingly.

Section 124 of the Income Tax Act, 2025 (Section 80CCE of the Income Tax Act, 1961)

Section 124 defines the overall limit for claiming life insurance tax benefits and other related deductions under the Income Tax Act. It sets a combined maximum deduction of ₹1.5 lakh per financial year.

This limit applies collectively to deductions claimed under Section 123 (life insurance premiums and other investments, pension or annuity plans from insurers, and Section 124 (contributions to pension schemes). Even if you invest more across multiple eligible instruments, the total deduction cannot exceed ₹1.5 lakh in a financial year.

For first-time investors, this section acts as a cap, ensuring you plan investments and life insurance premiums wisely within the allowed tax-saving limit.

Example:

Neha pays ₹80,000 as a life insurance premium eligible under Section 123(80C of the Income Tax Act, 1961) and invests ₹70,000 in a pension plan covered under Section 124 (80CCD of the Income Tax Act, 2025)during the same financial year. Her total eligible deductions add up to ₹1.5 lakh.

Even if Neha invests an additional ₹20,000 in another tax-saving instrument under Section 123, she cannot claim extra benefits. Section 124 caps her total tax deduction at ₹1.5 lakh for the year.

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What are the Tax Benefits on Riders of Life Insurance?

Riders are add-ons to a policy that are chosen to enhance the coverage of any policy. But more offering enhanced protection, they also come with tax benefits.

A few benefits are mentioned below:

• Section 80D allows you to get a tax deduction on health insurance premium paid if you opt for a critical illness rider with your health insurance plans. The maximum deduction can be up to Rs 25,000 per year. It can rise to Rs 1,00,000 per year for senior citizens (taxpayer or his/her parents).
• If you choose the option of return of a premium rider along with your policy, your premium amount rises. This further allows you to avail more tax benefits under section 80C of the Income Tax Act.

Riders do not only enhance the policy’s coverage but also make you eligible for additional tax benefits. Hence, it offers the dual benefits of increased protection and tax savings. For exact information, you must read your policy document and carefully review the terms and conditions.

What is TDS on a Life Insurance Policy?

The insurer deducts TDS on a life insurance policy on cesrtain payouts when they do not qualify for exemption under the income tax rules.

Tax Deducted at Source (TDS) applies mainly to maturity proceeds or partial withdrawals from life insurance policies that are not exempt under Section 11 of the Income Tax Act, 2025. As per Section 393(1) Table Sl no. 8 of the Income Tax Act, 2025, TDS is applicable if the total payout in a financial year exceeds ₹1 lakh. The insurer deducts TDS at 2% only on the income portion of the payout, not on the entire amount received.

The company does not deduct TDS on death benefits or on policies that meet Section 11 read with Schedule II of the Income Tax Act, 2025  conditions, such as premium limits linked to sum assured. Exempt policies continue to enjoy full life insurance tax benefits without deduction.

Note: As of 2026, standard TDS on taxable life insurance profits is 2% with a valid PAN, but it jumps to 20% if your PAN is missing or inoperative. You can avoid this deduction entirely by submitting Form 121 as per Income Tax Act, 2025 (Form 15G or 15H as per Income  Tax Act, 1961) if your total annual income is below the taxable limit.

What is GST on a Life Insurance Policy?

Effective September 22, 2025, the Government of India significantly reduced the cost of financial protection by waiving GST (0% rate) on all individual life and health insurance premiums.

According to the Government of India, here are the new reforms made under the New Tax Regime:

This 0% GST reform applies to both new policies and renewals of existing individual plans. However, if your insurance is provided by your employer (Group Insurance), it is still considered a taxable service and remains subject to the standard 18% GST rate.

Suresh, who is renewing his ₹1 crore term insurance policy in January 2026. Under the old rules, his base premium of ₹20,000 would have attracted an 18% GST (₹3,600), bringing his total out-of-pocket cost to ₹23,600. However, with the new GST reforms effective from September 2025, Suresh now pays only the base premium of ₹20,000.

Eligibility Criteria to Claim Life Insurance Tax Benefits

Deductions and exemptions to save taxes legally can be opted by HUFs (Hindu Undivided Families) and individuals. These can be claimed on the premium amounts paid and on the receipt of maturity proceeds or any other income from the policy. These deductions and expenses help to reduce the overall tax liability of policyholders.

These benefits can be availed of for:

1. Self

2. Spouse

3. Parents

4. Children

Conclusion

The main idea behind this guide was to inform you of the tax benefits available for buying a life insurance policy for yourself and your loved ones.

However, you must note that you shouldn’t buy a certain policy just because it offers lucrative tax savings options. You must be clear with your goals, affordability, personal aspects, income, etc., before making a purchase.

It is advised to compare different policies, go through the terms and conditions, and ask as many questions as possible before making a decision.

FAQs On Life Insurance Tax Benefits

What are the tax benefits of life insurance?

The premiums for the policy are eligible for tax deduction from the total taxable income of the insured. The maximum income tax deduction that can be availed of is Rs 1.5 lakhs a year under Section 80C.

Will I get life insurance tax benefits when it matures?

It will depend. If the premium that you paid for a life insurance policy is less than 10% of the total sum assured and the policy was issued after 1st April 2012, then the amount received on maturity/ surrender or death is completely tax-exempt under Section 10(10D) of the Income Tax Act.

Moreover, for life insurance policies issued before 1st April 2012, if the premium that was paid does not exceed 20% of the total sum assured, then any amount received is completely tax-exempt.

How much should I invest to save tax on ULIP plans?

You can invest up to Rs 1.5 lakhs towards the ULIP premium payment a year to avail yourself of tax benefits under section 80C of the Income Tax Act.

Is ULIP a good tax-saving investment?

ULIP is an attractive investment because it allows you to save taxes in two ways. First, the premium payments are eligible for tax deduction u/s 80 C of the Income Tax Act, and then, proceeds or payouts are eligible for tax exemption under section 10(10D) if the policy satisfies the conditions laid down in Section 10(10D)

How do you see how effective your tax-free instruments are?

To evaluate how effective a tax-free instrument is, you must focus on its Liquidity, Safety, ROI (Return on Investment), Convertibility, Accessibility, Costs, etc., along with tax savings.

What is covered under 123 life insurance?

Under life insurance tax benefits, Section 123 covers premiums paid for life insurance policies, including term plans, endowment plans, ULIPs, and money-back policies. Premiums paid for self, spouse, and children qualify for deductions upto overall tax limit of ₹1.5 lakh in a financial year, subject to conditions. The deduction helps reduce taxable income while encouraging disciplined long-term savings and adequate financial protection for policyholders as per the income tax rules applicable annually.

What is the limit of 126 term insurance?

The tax benefits on life insurance under Section 126 apply specifically to health insurance, not term insurance premiums. Term insurance premiums qualify under Section 123 instead upto ₹1.5 lakh in a financial year. Under Section 126, the law allows deductions for health insurance premiums up to ₹25,000 for self, spouse, and dependent children, with an additional ₹25,000 for parents, and higher limits of ₹50,000 in case of senior citizens, subject to prescribed conditions, overall caps, and mode of payment requirements.

What are the sections under which you can avail tax benefits in Life Insurance?

The life insurance and tax benefits can be availed under multiple Income Tax Act sections. Section 123 allows deductions on premiums paid, Section 11 read with Schedule II offers tax exemption on maturity subject to conditions prescribed therein or death benefits which are completely exempt, and Section 123 also  applies to pension plans providing deductions upto ₹1.5 lakh in a financial year. Together, these provisions support tax-efficient savings, protection planning, and long-term financial security for individuals seeking structured insurance-based wealth creation solutions legally.

What does the Section 11 read with Schedule II  exemption mean?

The tax advantage of life insurance under Section 11 read with Schedule II of the Income Tax Act, 2025 (Section 10(10D) of the Income Tax Act, 1961)¹ means the maturity proceeds received from a life insurance policy are exempt from income tax. Death benefits are completely exempt. This exemption applies if policy conditions are met, including premium payable in any year does not exceed 10% of the death sum assured and the total annual aggregate premium does not exceed ₹2.5 lakh for ULIP policies and ₹5 lakh for non-ULIP policies.However, death benefits remain fully exempt in all cases. It ensures tax-free payouts, making life insurance an effective tool for long-term tax planning and disciplined wealth accumulation for families across financial goals.

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