Term insurance is a popular and straightforward form of life insurance that provides financial protection to the policyholder’s beneficiaries in the event of their demise during the policy term. Beyond the inherent security it offers, term insurance also comes with attractive term plan tax benefits.
Key Takeaways
- Premiums paid for term insurance, including riders, are eligible for deductions up to ₹1.5 lakh.
- The sum assured and additional term plan tax benefit received by beneficiaries upon the policyholder’s demise are exempt from income tax under Section 10(10D).
- Premiums paid for term insurance riders contribute to the overall limit of Section 80C.
- Premiums for critical illness riders fall under Section 80D, providing additional deductions for specified diseases.
- Premiums paid for accidental death term plan tax benefit riders are eligible for deductions under Section 80C, with the sum assured being tax-free under Section 10(10D).
What is Term Insurance?
Term insurance is an insurance policy that offers life cover for a certain period and does not have a maturity benefit. In case of the policyholder’s death during the term, the insured’s loved ones will be paid the death term plan tax benefit. This amount may be used to cover income loss if the policyholder is the family’s breadwinner. Besides, it may be used to cover unpaid debt and meet other financial obligations.
Term Insurance Tax Benefits under Different Sections of the Income Tax Act, 1961
Along with providing financial protection, term insurance comes with various term plan tax benefits. The Income Tax Act of 1961 provides term life insurance tax term plan tax benefit under specific sections. The following term plan tax benefit is available on term insurance under these sections:
Term Insurance Term Plan Tax Benefit under Section 80C
Section 80C of the Income Tax Act provides a deduction of up to ₹1.5 lakh for the premiums paid towards life insurance policies, including term insurance plans. This deduction can be claimed by an individual or a Hindu Undivided Family (HUF). However, to avail of this term plan tax benefit, the sum assured of the term insurance policy must be at least 10 times the annual premium paid.
Term Insurance Tax Benefit under Section 80D
If you have purchased a term insurance plan with an inbuilt critical illness rider or any other health-related rider, then the premium paid for these riders can be claimed as a deduction under term insurance premium term plan term plan tax benefit 80D. The maximum deduction available under this section is ₹25,000 for individuals and ₹50,000 for senior citizens.
Term Insurance Term Plan Tax Benefit under Section 10 (10D)
Section 10(10D) exempts the maturity proceeds of a life insurance policy. If the sum assured is at least 10 times the annual premium paid, then the entire maturity amount the policyholder receives is tax-free. This provision applies to both individual and HUF taxpayers.
Limitations on Term Insurance Term Plan Tax Benefit
Term insurance policies offer tax advantages that can help individuals optimize their financial planning. However, it is crucial to be aware of the limitations that exist on term insurance tax benefit section.
- If the premium paid during a financial year is greater than 20% of the sum promised, the term plan tax benefit is available for up to 20% of the total assured.
- If the premium amount for a policy issued after April 1, 2012, does not exceed 10% of the actual sum guaranteed, you may be eligible for an income tax credit under the IT Act.
- Suppose the policy is issued after April 1, 2012, and your premium amount is less than 10% of the actual sum assured. In that case, you may be eligible for term plan tax benefit if you have a specific illness or severe disability.
Tax Benefits on Term Insurance Riders
Term insurance riders are additional features or term plan tax benefits that can be attached to a basic term insurance policy to enhance its coverage. These riders can include critical illness cover, accidental death term plan tax benefit, waiver of premium, and more. Beyond the comprehensive protection they offer, these riders also present an opportunity for policyholders to enjoy tax advantages.
Tax Benefits on Premiums
One of the primary term plan tax benefit riders lies in the premiums paid. The premiums for the base term insurance policy and its riders are eligible for deductions under Section 80C of the Income Tax Act, 1961.
Additionally, Section 10(10D) of the Income Tax Act exempts the death benefit or maturity amount received under the term insurance policy, including the riders, from income tax. This means that the sum assured, along with any additional benefits provided by the riders, is tax-free for the beneficiary.
Specific Riders and their Tax Implications
Insurance riders are additional features or term plan tax benefit that policyholders can add to their base insurance policies to customize coverage according to their specific needs. While riders offer enhanced protection, it is essential to understand their tax implications to make informed decisions.
Critical Illness Rider
Premiums for critical illness riders are eligible for term plan tax benefits under Section 80D. The lump-sum amount received upon diagnosis of a critical illness is tax-free under Section 10(10D).
Accidental Death Benefit Rider
Premiums paid for accidental death term plan tax benefit riders are also eligible for deductions under Section 80C. The sum assured, paid in the event of accidental death, is exempt from income tax under Section 10(10D).
Waiver of Premium Rider
Premiums for the waiver of premium rider are deductible under Section 80C. In case of total and permanent disability of the policyholder, future premiums may be waived off, providing financial relief without tax implications.
How to Claim Term Insurance Tax Benefits?
Beyond the security it provides, term insurance also comes with the added advantage of tax benefits. However, understanding and successfully claiming these term plan tax benefit requires a clear understanding of the process.
Keep Track of Premium Payments
The first step in claiming tax benefits on term insurance is to maintain a record of all premium payments. Premiums paid for the base policy, as well as any riders attached, are eligible for tax deductions under Section 80C of the Income Tax Act.
Ensure Policy Compliance
To claim term insurance tax benefits smoothly, ensure compliance with the following requirements:
- Premium Payment: Premiums must be paid from the policyholder’s income to qualify for tax deductions. Ensure timely payment of premiums throughout the policy term.
- Policy Duration: The term insurance policy must have a minimum duration of five years to be eligible for tax benefits. Maintain the policy for the specified duration to claim deductions.
- Minimum Sum Assured: The sum assured (death benefit) should be at least ten times the annual premium paid to avail tax term plan tax benefit. Ensure that the sum assured meets this criterion to maximize tax savings.
Collect Relevant Documents
When filing your income tax return, gather all relevant documents related to your term insurance policy. This includes premium payment receipts, policy documents, and any communication from the insurance company detailing the term plan tax benefit and riders associated with the policy.
Claiming Rider-Specific Benefits
If your term insurance policy includes riders such as critical illness cover or accidental death benefit, be aware of the specific sections of the Income Tax Act that apply to them. For instance, critical illness riders fall under Section 80D, while accidental death benefit riders are covered under Section 10(10D).
File Tax Returns Correctly
When filing income tax returns, ensure accurate disclosure of term insurance premium payments and claim deductions under the appropriate section. Double-check all entries to avoid errors or discrepancies.
Seek Professional Guidance
If you’re unsure about the tax implications or eligibility criteria, consider seeking advice from a financial advisor or tax consultant. They can provide personalized guidance based on your financial situation and help optimize your tax planning strategies.
Timely Filing of Tax Returns
Ensure that you file your income tax returns on time, including all necessary details related to your term insurance policy. Timely filing not only avoids penalties but also facilitates a smooth and hassle-free process.
Eligibility Criteria To Claim Term Insurance Tax Benefits
The most widely used method for individuals to reduce their tax burden is Section 80C of the Income Tax Act. It consists of various investment alternatives like PPF, EPF, ULIP, and ELSS, as well as payments for things like home loan repayment, child’s tuition, life insurance premiums, etc.
Section 80C’s eligibility requirements for the tax advantage for term insurance include
- The annual premium should be less than 10% of the assured amount. If the premiums do go beyond 10%, deductions will be made in a commensurate manner.
- For insurance issued before March 31, 2012, the discount is applicable only when the annual premium does not exceed 20% of the sum guaranteed.
- The policyholder won’t be eligible for Section 80C term plan tax benefit on premium payments if the policy is voluntarily relinquished or canceled before the two-year mark, according to Section 80C (5).
Final Thoughts
Term insurance not only provides crucial financial protection to individuals and their families but also offers significant term plan tax benefits. By leveraging these tax benefits effectively, individuals can secure their loved ones’ future while optimizing their tax planning strategies. It’s essential to understand the provisions of the Income Tax Act related to the term insurance premium tax benefit section and incorporate them into your financial planning for a secure and tax-efficient future.
Consulting with a financial advisor can provide personalized guidance based on individual financial goals and circumstances, ensuring comprehensive protection and tax optimization.
FAQs on Term Insurance Tax Benefits
1
What are term insurance tax benefits?
Term insurance tax benefits refer to deductions available on premiums paid towards term insurance policies and tax-free proceeds received by beneficiaries upon the policyholder’s demise.
2
Who is eligible to claim term plan tax benefits?
Any individual who pays premiums towards a term insurance policy, whether for themselves, their spouse, or their children, is eligible to claim term plan tax benefits.
3
Are there any instances where beneficiaries might have to face tax implications with a term plan?
No, the death benefit received by beneficiaries under a term insurance policy is typically tax-free. However, certain exceptions may apply, such as if the policy has been assigned for consideration.
4
Is it advisable to purchase a term plan primarily for its tax benefits based on term insurance?
While tax benefits are a significant advantage of term insurance, it is advisable to purchase a term plan primarily for its financial protection benefits rather than solely for tax-saving purposes.
5
Do I need to pay taxes on the claim amount from term insurance?
No, the claim amount received from a term insurance policy is generally tax-free for the beneficiaries under Section 10(10D) of the Income Tax Act.
6
How can I maximize term insurance tax benefits?
You can maximize term insurance premium tax benefits by ensuring that your premiums do not exceed the specified limits, availing deductions under Section 80C, and selecting the appropriate coverage based on your financial needs.
7
Will I continue to receive tax benefits if I cancel the term insurance policy?
No, once you cancel a term insurance policy, you will no longer be eligible for tax benefits on the premiums paid.
8
Can I still avail tax benefits on term insurance after terminating the policy?
No, term life insurance tax benefits on premiums are available only for active policies. Once the policy is terminated, the tax benefits cease to apply.
9
Can I claim both 80C and 80D?
Yes, you can claim deductions under both Section 80C (for term insurance premiums) and Section 80D (for health insurance premiums) simultaneously, provided you meet the eligibility criteria for both deductions.
