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Term Insurance Tax Benefits

Term Insurance Tax Benefits

To save on tax, a variety of deductions and exemptions are available under the numerous sections of the ITA (Income Tax Act). Taxpayers can invest in a wide variety of instruments that qualify for these deductions and exemptions. The deadline to invest in tax-saving instruments is March 31st, 2020.

One such tax-saving instrument is term insurance. Apart from availing the term insurance tax benefit, policyholders also get a secure life cover for their family and can remain stress-free in the long run.

What is Term insurance? A term insurance plan, as the name goes, is an insurance plan for a specified term. It offers you a large sum assured at a relatively low premium rate. If the policyholder passes away during the policy term, the sum assured is payable to their nominee.

Term Insurance Tax Benefits Under Different Income Tax Sections

Deduction under Section 80C

You can get tax deduction of up to ₹ 1.5 lakh under Section 80C for the premiums you pay towards your term insurance plan.

Tax Benefit under Section 10 (10D)

Death benefit offered to the nominee is also eligible for tax benefits.

Deduction under Section 80D

Section 80D ensures a deduction up to ₹ 25,000 on premiums paid for term plans with a critical illness cover.

Let’s explore each of these sections in detail.

Tax Benefits on Life Insurance Payout

The single, most important role of a life insurance policy is to provide a death benefit to the policy holder’s nominees. The death benefit is the sum assured under a policy and paid to the registered beneficiaries in case the unfortunate happens during the policy tenure. The death benefit is mostly paid out after the claim is registered, helping them carry out their day to day expenses.

Apart from providing financial security to your loved ones, the other great benefit of a life insurance policy is the deduction from the Total income of the premiums paid. However, most people are not aware that a term plan offers tax benefits on the death benefits received too.

Tax Benefit on the Benefit Payout Received

The sum received as death benefit under an insurance policy is fully exempt from tax under Section 10(10D) of the Income Tax Act. In other words, the proceeds from the insurance policy are tax-free.

While normal term insurance plans pay the death benefit during the policy tenure, there is a return of premium term plan that refunds the premium paid after maturity, when the insured survives through the policy term. Even this premium refund is treated as tax-free under Section 10(10D).

The death benefit received under the following circumstances would not qualify for an exemption –

  • Any benefit received under Section 80 DD(3) or sub-section (3) of section 80DDA
  • Any sum received under a Keyman insurance policy

Term Insurance Income Tax Benefit under Section 80C

Section 80C of the Income Tax Act is the most popular tool used for tax-saving by individuals. This Section offers a maximum deduction of Rs.1.5 lakh for all the listed investments and instruments put together. It includes a number of instruments like PPF, EPF, ULIP, ELSS, and payments like repayment of home loan, children’s tuition fees, life insurance premium, etc.

Under this Section, the premium paid for a term life insurance is also eligible for deduction up to Rs.1.5 lakhs (total of all investments and payments under this Section). The conditions to avail term insurance tax benefit under Section 80C include:

  • The yearly premiums paid should not exceed 10% of the sum assured. If the premiums do exceed 10%, deductions will be applied proportionately.
  • For policies issued before 31st March 2012, the deduction will be applicable only if the yearly premium does not exceed 20% of the sum assured.
  • As per Section 80C(5), in the case of a policy that is voluntarily surrendered or terminated before two years from the beginning of the policy, the policyholder won’t receive Section 80C tax benefits on premium payments.

Term Insurance Tax Benefit under Section 80D

Traditionally, Section is reserved only for health insurance policies. If offers a deduction on health insurance policies taken for self, spouse, children, or parents with different deduction limits under different conditions.

However, certain term plans can also avail the tax benefits under Section 80D. Policyholders who have opted for a health-related rider (such as Critical Illness, Surgical Care, Hospital Care Rider) with their term insurance policy, can also avail deductions. Conditions for term insurance benefit 80D include:

  • Deductions under Section 80D can be availed for an amount that doesn’t exceed Rs. 25,000.
  • If you have taken an insurance policy for your parents, you can avail additional deductions of Rs. 25,000.
  • If your parents are senior citizens, the deduction limit goes up to Rs. 50,000.

Term Insurance Tax Exemption under Section 10(10D)

As per Section 10(10D) of the Income Tax Act, the sum assured received on maturity or surrender of a policy or upon the policyholder’s death is completely tax-free. Bonuses received with such amount are also exempt under Section 10(10D).

Conditions for term insurance tax exemption under Section 10(10D):

  • Term plan tax benefit under Section 10(10D) is applicable if the premium is less than 10 percent of the sum assured or the sum assured is at least 10 times the premium.
  • If the payout exceeds Rs.1,00,000, and the policyholder’s PAN is available to the insurer, a TDS (Tax Deducted at Source) of 1% is applied.

In order to avail all the tax benefits that come with a term plan, Canara HSBC Life Insurance’s iSelect Smart360 Term Plan proves to be a lucrative option. Policyholders can take their pick of the various riders available - Accidental Death Benefit, Accidental Total and Permanent Disability Benefit or even the Child Support Benefit.

They can also customize their payout options and choose to receive their payout in the form of a lump sum, a monthly income or a part lump sum-part monthly income. They choose from 3 plan variants, which, each, offer unique benefits like return of premiums, spousal cover and more. Thus, in addition to tax benefits, policyholders can benefit from a whole bunch of advantages by opting for a term plan.

Are there any situations when the beneficiary might still have to pay tax?

One such situation where the benefit amount may attract tax is when the policyholder chooses not to have the benefit paid out immediately. In this case, the amount is held by the insurance company until paid out, and the amount is paid out after a period of interest accumulation. This accumulated portion of interest is usually liable to taxes.

Who is eligible to claim Term insurance premium tax benefit?

Tax benefits on term insurance can be claimed by individuals and Hindu Undivided Family (HUFs) by claiming deduction on the premiums paid for a term insurance policy.

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