The term insurance tax benefit makes it not only one of the simplest and most affordable forms of life insurance but also a smart choice for financial and tax planning. It provides financial protection to your loved ones in case of your untimely demise. While its primary purpose is to offer security, it also comes with significant tax benefits under the Indian Income Tax Act 1961.
In this detailed guide, we will explore how term insurance provides tax benefits under Sections 80C, 80D, and 10(10D) of the Income Tax Act, who is eligible to claim these benefits, and how you can maximize them.
Term insurance is a pure life insurance policy designed to provide financial support to your family in your absence. The policyholder pays a fixed premium for a specific term, such as 10, 20, or 30 years. In case the policyholder passes away during this term, the insurer pays the sum assured (insured amount) to the nominee.
Unlike other types of life insurance, term insurance does not have an investment or savings component, which makes it more affordable. However, to make it even more appealing, the government offers term insurance tax benefits on premiums paid and payouts received.
Section 80C of the Income Tax Act allows deductions on the premiums paid for term insurance policies. You can claim a deduction of up to ₹1.5 lakh in a financial year under this section.
Important Points About Section 80C:
Maximum Deduction Limit: The deduction limit under Section 80C is ₹1.5 lakh, which includes other eligible investments like the Public Provident Fund (PPF), Employee Provident Fund (EPF), and National Savings Certificate (NSC).
Premium-to-Sum Assured Ratio: The premium paid should not exceed 10% of the sum assured. If it does, the deduction is capped at 10% of the sum assured.
Policy Termination: If the policyholder voluntarily surrenders the policy or the policy is terminated within two years from its commencement, no tax benefit can be claimed on the premiums paid.
Example:
If your annual premium is ₹50,000 and your sum assured is ₹10 lakh, you can claim a deduction of ₹50,000 under Section 80C. However, if your premium exceeds ₹1 lakh (10% of the sum assured), the deduction will be limited to ₹1 lakh.
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Section 80D provides additional term insurance tax benefits for health-related riders attached to policies, such as:
Critical Illness Rider
Hospital Care Rider
Surgical Care Rider
Key Benefits Under Section 80D:
Individual Policyholders: You can claim a deduction of up to ₹25,000 annually for premiums paid towards health-related riders.
For Parents: If you pay premiums for your parents’ health riders, you can claim an additional deduction of ₹25,000. If your parents are senior citizens, this deduction increases to ₹50,000.
Example:
If you add a Critical Illness Rider costing ₹10,000 and a Hospital Care Rider costing ₹15,000 to your term insurance, you can claim a total deduction of ₹25,000 under Section 80D.
Section 10(10D) ensures that the payouts from term insurance policies are exempt from taxation, provided certain conditions are met.
What Is Covered Under Section 10(10D)?
Death Benefit: In case of the policyholder's demise, the sum assured paid to the nominee is completely tax-free.
Surrender Value and Bonuses: If the policy offers any surrender value or bonuses (in the case of riders), these are also exempted, provided the premium-to-sum assured ratio is maintained.
Example:
If the nominee receives ₹50 lakh as the death benefit, this entire amount is tax-free under Section 10(10D).
To avail of term insurance tax benefits under Sections 80C, 80D, and 10(10D), certain conditions must be met:
Residency: The policyholder must be an Indian resident or a Hindu Undivided Family (HUF).
Policy Ownership: The term insurance policy must be in the name of the taxpayer, their spouse, or children.
Income Tax Slab: The taxpayer must fall within the income tax slab to claim deductions.
Senior Citizens: Individuals aged 60 and above are eligible for additional benefits under Section 80D.
These criteria ensure that the benefits are accessible to a broad spectrum of taxpayers.
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Riders are add-ons to your term insurance policy that provide additional coverage for specific situations.
Popular riders include:
Critical Illness Rider
Accidental Death Benefit Rider
Waiver of Premium Rider
Tax benefits on rider premiums are primarily covered under Section 80D, offering deductions of ₹25,000 (₹50,000 for senior citizens). Adding riders enhances your coverage and maximizes tax benefits.
To gain maximum term insurance tax benefits and comprehensive coverage, consider these factors:
Premium Flexibility: Look for plans that offer premium payment options suitable for your budget.
Adequate Coverage: Ensure the sum assured is sufficient to cover your family’s financial needs and liabilities.
Policy Tenure: Opt for longer policy durations for extended financial security.
Riders: Choose relevant riders to enhance your policy’s coverage.
Claiming tax benefits on term insurance is straightforward:
Keep Documentation Ready: Maintain receipts of premium payments and the policy document.
File Deductions: While filing your Income Tax Return (ITR), include these deductions under Sections 80C, 80D, and 10(10D).
Consult an Expert: If unsure, consult a tax advisor for accurate filing.
Term insurance is more than just a life insurance policy—it’s a comprehensive financial tool that offers security and helps reduce your tax liability. By understanding term insurance tax benefits under Sections 80C, 80D, and 10(10D), you can maximize your savings while ensuring your family’s financial stability.
Choose a term insurance plan that aligns with your financial goals, and don’t forget to consider riders for enhanced coverage. Start planning today to secure your future and save on taxes!
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