What Tax Benefits Do Term Plans Offer Under Sections 80C and 80D?
Whenever you look at your salary slip, you will notice tax deductions. Products and services we purchase also attract various taxes. These taxes provide the government with the funds they need to run the country. Thankfully, the Income Tax Act provides a list of tax deductions and exclusions. We can use a combination of financial instruments to minimise our tax payments and maximise our savings.
Tax Benefits and Term Insurance
When it comes to planning taxes and savings, most people opt to purchase life insurance policies. The premiums that you pay can be deducted from your taxable income, allowing for significant tax savings. What’s more, the payout and maturity benefits you receive from your insurance plan are also tax-free!
Term insurance is currently the most popular tax-saving insurance instrument. These policies offer high cover at affordable rates. Should anything happen to the policyholder while the plan is active, the nominee will receive a payout of the sum assured amount. Term plans today are slightly more evolved. Some policies offer payouts after a critical illness diagnosis or if an accident leaves the insured permanently disabled.
Tax Benefits on the Life Insurance Payout
Life insurance policies like term plans provide the insured’s beneficiary with financial stability. The payout from the life insurance policy acts as a monetary safety net for the insured’s loved ones. If anything happens to the policyholder during the policy tenure, the beneficiary must file a claim. Once the claim is accepted and approved, they receive the payout. The good news is that the payout does not attract any tax.
Tax Benefits on the Policy Returns
Initially, term plans did not provide any maturity benefits. If the insured outlived the policy term, they would not receive a payout. Over time, that has changed. Today, several term plans provide a return of premium payout and small maturity benefits. If you happen to outlive your term plan policy, you can receive these returns. Similar to the life insurance payout, these maturity benefits do not attract any tax. Under Section 10(10D) of the Income Tax Act, 1961, the maturity payouts are fully exempt from taxes.
Tax Benefits Under Section 80C of the Income Tax Act
When it comes to tax planning, most people opt for deductions and exclusions under Section 80C of the Income Tax Act. Under this section, individuals can claim deductions up to a maximum of INR 1,50,000 per year for premiums paid towards insurance policies and other investment instruments. Apart from life insurance, taxpayers can also claim deductions against money paid towards their provident fund, the repayment of home loans, their children’s tuition fees and more. To avail of term insurance tax benefits under this section, you need to fulfil the following conditions:
- Your annual premium amount should be less than 10% of the total sum assured amount. In case the premium works out to more than 10%, the deduction is applied proportionately. For policies issued before 2012, the premium amount should be less than 20% of the sum assured.
- Your policy must be active for a minimum of two years. If you surrender or terminate the policy within two years, you cannot claim deductions under Section 80C of the Income Tax Act.
Tax Benefits Under Section 80D of the Income Tax Act
Section 80D predominantly deals with the premiums paid for the upkeep of a health insurance policy. Since term plans today also offer some health cover, you can also enjoy term plan tax benefits under this section. You can claim an additional amount of INR 25,000 under Section 80D of the Income Tax Act for premiums paid towards the upkeep of your term plan. If you pay the premiums for your parents’ term policies, you can claim an additional INR 25,000. The deduction amount increases to INR 50,000 for your parents if they are senior citizens.
Tax Exemptions Under Section 10(10D) of the Income Tax Act
All payouts and bonuses that you or your nominees receive are tax-free under Section 10(10D) of the Income Tax Act. But, there are certain conditions for this deduction. Firstly, the premiums paid should be less than 10% of the payout amount received. It’s important to note that 1% of the payout gets deducted as TDS by the insurer when the amount crosses INR 1,00,000.
Will the Beneficiary Ever Have to Pay Tax?
There is only one situation in which the beneficiary may have to pay tax. Sometimes, the beneficiary may defer the payment for a few years to accumulate interest on the payout amount. If that happens, the interest earned will attract regular taxes.
Who Can Claim Term Insurance Tax Benefits ?
Any individual or Hindu Undivided Family (HUF) can claim tax benefits against the premiums paid for the upkeep of a term plan.
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