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Term Insurance Tax Benefits

Term insurance offers tax benefits, allowing individuals to deduct premiums under Section 80C, and provides tax-free death benefits and riders proceeds under Section 10(10D) of the Income Tax Act.

  • 24,160 Views | Updated on: Mar 21, 2024

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 benefit.

, making it a wise financial choice for many individuals.

Key Takeaways

  • Premiums paid for term insurance, including riders, are eligible for deductions up to ₹1.5 lakh under Section 80C of the Income Tax Act.
  • The sum assured and additional benefits received by beneficiaries upon the policyholder’s demise are exempt from income tax under Section 10(10D).
  • Premiums paid for term insurance riders, such as critical illness or accidental death benefits, 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 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 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.

It is important to note that there is no maturity benefit in a term life insurance plan. This means that no benefits are paid if you outlive the policy tenure. Such a plan offers only coverage against death, which is known as a pure life cover.

The good news is that insurance providers charge a low premium amount for term plans. Premiums charged for this type of insurance are the lowest among all other life insurance plans. This is because the entire amount is used to cover risk and not for further investment.

Term Insurance Tax Benefits Under 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 benefits under specific sections. The following term plan tax benefits are available on term insurance under these sections:

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 benefit, the sum assured of the term insurance policy must be at least 10 times the annual premium paid.

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 tax benefit 80D. The maximum deduction available under this section is ₹25,000 for individuals and ₹50,000 for senior citizens.

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.

Eligibility Criteria to Claim Tax Benefit

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 tax benefits on premium payments if the policy is voluntarily relinquished or canceled before the two-year mark, according to Section 80C (5).

Term Insurance Under Section 10D

Besides saving tax through premiums, the insured may avail themselves of term insurance tax exemption on the death benefit amount. In case of the policyholder’s death, their family/nominee is entitled to receive the death benefit. Section 10D states that this death benefit amount is exempt from tax. The beneficiaries may therefore avail of this benefit to reduce tax liability. The good news is that there is no upper limit on the tax benefit.

This clause, however, is not applicable under the following circumstances:

  • If the amount is received under Section 80DD (3). This includes deposits made towards maintenance, which includes medical treatment of handicapped dependents.
  • If the amount is received under the Keyman Insurance Policy
  • If the amount is not a part of the death benefit for the policy issued on or after 1st April 2003 but on or after 31st March 2012. Besides, such a benefit is not applicable if the total premiums paid during the policy term are more than 20% of the sum assured amount received.
  • If the term plan is issued on or after 1st April 2012, you may avail of exemption benefit only if the total premium paid does not exceed 10% of the sum assured amount.

Limitations on Term Insurance Tax Benefits

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 benefits.

  • If the premium paid during a financial year is greater than 20% of the sum promised, the 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 benefits if you have a specific illness or severe disability.

Tax Benefits on Term Insurance Riders

Term insurance riders are additional features or benefits that can be attached to a basic term insurance policy to enhance its coverage. These riders can include critical illness cover, accidental death benefits, 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

Critical Illness Rider

  • Premiums for critical illness riders are eligible for tax deductions 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 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 benefits 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.

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 benefits 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).

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.

Exceptions on Tax Exemption Rule

The beneficiary may be required to pay taxes on the term insurance payout in one of two situations.

One instance is when the policyholder specifies in their application that the death benefit cannot be paid immediately after the decedent passes away. In these situations, the insurance provider retains the money and pays it once the interest-bearing term has passed. The beneficiary’s interest payment is considered taxable. Instead of the promised amount, the beneficiary must pay tax on the interest generated since the policyholder’s passing.

In another scenario, when the proceeds from the policy come in the form of an inheritance, the beneficiary is responsible for paying tax on the term insurance. When the policyholder omits the nominee’s information, the policy benefits occasionally go to the deceased’s estate.

Even though these situations are uncommon, when they occur, the insurance proceeds become a component of the decedent’s estate and are subject to inheritance tax. This rarely occurs as insurance firms require the policy buyers to include information regarding the primary and secondary beneficiaries. The secondary beneficiary is entitled to the payout if the primary beneficiary dies before the policyholder.

Wrapping Up

Investing in a term plan provides financial protection to your family and offers tax benefits. These tax benefits make term plans an attractive investment option for individuals who want to secure their family’s financial future while also optimizing their tax liability. It is important to note that while tax benefits should be a consideration, the primary reason to invest in a term plan should always be to provide financial protection to your loved ones in case of an unfortunate event.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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