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Term Insurance Tax Benefits
Term insurance safeguards the policyholders’ families against financial instability in their absence. If the policyholder outlives the term, the policy terminates, and the life cover ceases. This variant focuses only on life coverage and does not provide any benefits on survival.
The cost incurred in a financial year to keep the policy active qualifies for an income tax deduction for term life insurance under Section 80C of the Income Tax Act 1961. This benefit contributes to the reduction of your overall tax burden. For more about the tax benefits of term insurance and other tax free payouts from term insurance, browse through the article.
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Term Insurance Tax Benefits U/S 80C, 80D & 10(10D)
Table of Content
1. What is Term Insurance and How Can It Help You Save on Taxes?
2. Term Insurance - Tax Benefits Under Sections 80C, 80D and 10(10D)
3. How to qualify for term insurance tax benefits under Section 10(10D)?
4. Who Can Claim Tax Benefits Under Section 80D?
5. What Payments Can Be Claimed for Tax Deductions Under Section 80D?
6. What Is Not Covered Under Section 80D of the Income Tax Act?
7. Steps to Claim Tax Benefits for Term Insurance
8. Summary
What is Term Insurance and How Can It Help You Save on Taxes?
Term insurance is a form of life insurance that focuses mainly on life coverage for a fixed period. During the policy term, if the policyholder dies, the insurance company supports the family financially. The beneficiaries get a lump sum in the form of a death benefit, which they can utilise for their financial needs.
The tax deductions under Section 80C apply to the annual insurance premium paid. The coverage cost for a financial year is eligible for tax deductions under Section 80C of the Income Tax Act 1961. This benefit applies to both Hindu Undivided Families and individuals.
In the case of individuals, a policy registered in the individual’s name or the spouse's or Children qualifies for the benefit.
The payout received as a death benefit is completely tax-exempt under Section 10 (10D) tax benefits for nominee in case of policy taken by individual policy holder .
If the policyholder has opted for health-related riders such as critical illness riders, the additional premium incurred towards the coverage is eligible for tax deduction under Section 80D up to Rs. 25000 and Rs. 50000 (for senior citizens).
Term Insurance - Tax Benefits Under Sections 80C, 80D and 10(10D)
Investing in term insurance keeps your family financially safe in your absence and helps minimise tax liability. The tax saving options under term plans are:
Term Insurance - Tax Benefits under Section 80C
The policy premium incurred in a financial year are eligible for Section 80C tax benefits in the same financial year up to Rs. 1.50 lakhs. Term insurance plans held by individuals or HUF on the life of himself, their spouses or or their children or members of HUF as the case may be qualify for the tax benefit under this Section.
You must comply with certain conditions to avail of the term plan tax benefit under Section 80C.
A tax deduction of up to 20% of the coverage to the extent of actual premium paid applies to plans bought before March 31, 2012.
Investments in term plans after April 1, 2012, qualify for a tax deduction under 80C to the extent of 10% of the sum assured to the extent of actual premium paid. However, , if the policy purchased by an individual–
- With disability or grievous impairment as indicated under Section 80U or
- With ailments referred to under Section 80DDB.
15% of the sum assured to the extent of actual premium paid is eligible for deduction in these cases.
It is essential to note that the total deduction available under section 80C of the Income Tax Act, 1961, considering all the above investments allowed including NPS, PPF, ELSS, Tution fee, etc under this section should not exceed Rs.1,50,000 per year.
As per Section 80C(5), the term plan should be active for a minimum period of 2 years to be eligible for deduction under Section 80C. Wherever the policy is forfeited within the completion of 2 years, the deductions claimed will be treated as income, and the tax collected as per the income tax slab.
Term insurance tax benefits for health-elated riders, such as critical illness riders, under Section 80D are explained in the table below:
Age |
Maximum deduction for Premiums paid for |
Maximum Term Life Insurance Benefits Under Section 80D of Income Tax Act,1961 |
|
Self, spouse, and dependent children |
Parents |
||
When all the insured members are below 60 years |
Rs. 25000 |
Rs 25000 |
Rs. 50000 |
Where parents are 60 years or above |
Rs. 25000 |
Rs. 50000 |
Rs. 75000 |
When both you and your parents are 60 years or more |
Rs. 50000 |
Rs. 50000 |
Rs. 100000 |
How to qualify for term insurance tax benefits under Section 10(10D)?
The pay-outs made under a term plan to the beneficiaries on the policyholder’s demise qualify for exemption under Section 10(10D).
However, the payout received under the following circumstances does not qualify for tax exemption.
- If the death benefit is related to the Keyman Insurance Policy or.
- If premiums paid under Section 80DD(3) pertain to the expenses incurred for the treatment costs and maintenance of a differently-abled person.
Tax Benefits on Term Insurance Riders
Term insurance riders or add-ons to the base policy enhance the coverage. Besides making the policy stronger, certain riders contribute to a reduction in overall tax liability.
You can encash the tax benefits of riders in the ways mentioned below:
The additional premium paid towards critical illness insurance is eligible for tax deductions under Section 80D.
By adding the return of the premium rider, the coverage price for the base plan increases and enhances the tax deduction eligibility under Section 80C.
Who Can Claim Tax Benefits Under Section 80D?
The premiums paid towards medical or health insurance policies are eligible for tax deduction under Section 80D. Besides this, the benefit applies to premiums paid towards health-related term insurance riders, such as critical illness or terminal illness riders.
The following are eligible to claim the tax benefits for premium payments under this Section.
- Individuals and Hindu Undivided Families.
- Under the family floater plan, the deduction can be claimed for the wellness-related riders covering self, spouse, children, or parents.
The maximum deduction permitted is Rs. 25000/- for individuals below 60 years and Rs. 50000/- for senior citizens.
What Payments Can Be Claimed for Tax Deductions Under Section 80D?
Premium payments towards health insurance plans and health-related riders under term insurance plans can be claimed for tax deductions under Section 80D.
The deduction under this section is applicable for insurance premiums paid on the health of self, spouse, and children. The maximum deduction available for the family shall be ₹25,000. In case the insurance premium paid on the health of a senior citizen in the family then an additional deduction of ₹25,000 shall be available. Additionally, they can claim up to ₹25,000 for premiums paid for their parents. which increases to ₹50,000 if the parents are senior citizens. However, in totality the maximum deduction available can be ₹1,00,000 if both self/family and parents are senior citizens.
In addition to above, amounts paid on account of preventive check-up for the family, deduction for a maximum ₹5000 can be claimed in a year.
What Is Not Covered Under Section 80D of the Income Tax Act?
You can claim a deduction under Section 80D for the premiums paid towards health insurance plans and health-related riders included in a basic term insurance plan. The major tax benefit for the policy premium towards term insurance plans can be claimed under Section 80C. Only the premium portion allocated for riders covering specific critical or terminal illnesses is eligible for tax deduction under Section 80D.
Not all riders are eligible for deduction under Section 80D. Though an accidental death benefit rider enhances the coverage to a significant level, the premiums paid for this rider do not qualify for deduction under Section 80D.
The treatment costs incurred also do not qualify for tax deduction under Section 80D.
Also, premiums paid in cash are not considered for tax deductions.
Steps to Claim Tax Benefits for Term Insurance
The process to claim tax benefits for term insurance depends on whether you are a salaried individual or self-employed. The procedure is explained below:
Salaried Individuals
Salaried individuals can claim tax deductions for term insurance premiums payments and critical illness rides under Section 80C and Section 80D, respectively. They have to make an investment and tax-expenses declaration by filling out Form 12BB. The submission of this form entitles salaried individuals to the tax deduction and reduces the overall tax burden. This form has to be submitted at the beginning of the financial year for the eligible deductions to be included in Form 16.
You have to preserve the premium paid receipts and certificates. Although the submission of Form 12BB is adequate to claim the benefit, the receipts have to be saved for future reference or to be produced if the IT department demands proof of investment.
Self-Employed Individuals
For tax relief with term life insurance, self-employed individuals should file Income Tax Returns. They can declare their term insurance and health insurance premium payments for a financial year in the column provided in the ITR returns under Section 80C and Section 80D, respectively.
They can also claim deductions for premium payments of critical illness riders included in their term plans up to Rs. 25000. However, the claims should be only for the actual premiums paid and not the maximum amount. If you have paid Rs. 5000/- as a premium for a critical illness rider, you can claim only Rs. 5000/- and not Rs. 25000/-. Even the GST paid on the premium can be claimed separately if not included in the premium.
Summary
Term insurance tax benefits are an advantage apart from financial protection for your family. The benefits are categorised under Sections 80C, 80D, and 10(10D) subject to the fulfillment of conditions . You can claim a deduction for the coverage cost under Section 80C. For the premiums allocated for health-related riders included in the base plan to strengthen the coverage, the deduction can be claimed under Section 80D. The death benefit payout to beneficiaries in case of the untimely death of the policyholder is tax-exempt under Section 10(10D).
All these perks make term insurance an economic tool for both risk coverage and life insurance tax planning. Investing smartly can secure your family’s financial future and reduce your tax burden.
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Francis Rodrigues
Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.
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1. Provided all due premiums have been paid and the policy is in force.
15. Save 46,800 on taxes if the insurance premium amount is Rs.1.5 lakh per annum and you are a Regular Individual, Fall under 30% income tax slab having taxable income less than Rs. 50 lakh and Opt for Old tax regime.
NOTE: Tax benefits & exemptions are subject to the conditions of the Income Tax Act, 1961 and its provisions. Tax Laws are subject to change from time to time. Customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.
ARN - ED/05/25/23684