What are the Tax Benefits of Buying Term Insurance in India?

Term insurance is a crucial financial planning tool to ensure the policyholder's family is financially secure if the policyholder dies. In India, term life insurance also has various tax benefits, making it an attractive investment option. This article examines the different tax benefits of buying term policies in India. It will be helpful for anyone who wishes to be well-informed when making decisions about their financial future.

What is Term Insurance?

Term insurance is a life insurance policy that covers a specific period. If the policyholder dies during this period, the beneficiaries are entirely given the death benefit. Term insurance is more economical because, unlike other life insurance policies, it does not have a saving or investment aspect. Its main aim is to protect the insured's family by replacing lost income and paying any debts owed if he or she dies. Term life insurance is usually cheaper than permanent forms of life insurance, thus attracting many purchasers who want a cheap cover-up until a specific period, such as when they retire from work or repay their mortgages.

Is Term Insurance Tax-Free?

The payouts received from term insurance policies, including the death benefit, are generally tax-free in India. In short, the amount due to the policyholder’s dependents in case of their demise cannot be taxed as income.  However, the premiums paid towards the policy can also provide tax benefits to the policyholder, reducing their overall taxable income.

Term Insurance Comes Under Which Section of the Income Tax Act?

Multiple sections of the Income Tax Act in India provide tax advantages for term policies. The major sections where these benefits are to be claimed include Section 80C, Section 80D, and Section 10(10D). All these parts contain specific benefits, which will be explained further.

Term Insurance Tax Benefits under Different Income Tax Sections

Each section has specific provisions and limits determining the extent of tax benefits. They are as follows:

Term Insurance Tax Benefits Under Sections 80C

One of the most used sections for tax planning purposes is section 80C of Income Tax Act. Premiums paid on a term insurance policy within this bracket qualify for an annual limit of ₹1.5 lakhs for claims. This benefit is available to individuals and Hindu Undivided Families (HUFs).  Therefore, to qualify as a deduction, the premium should not exceed 10% of the sum assured subject to the maximum limit specified in respect of policies issued on or after April 1, 2012, and 20%  in respect of other policies issued earlier than that date.

Term Insurance Tax Benefit under Section 80D

Section 80D mainly deals with paying health insurance premiums and provides benefits for riders paid towards health-related benefits in term insurance policies. For example, if one has a critical illness, accidental death or disability benefit rider on his policy, then he can get some deduction from section 80D.  The maximum possible deduction under section 80D is ₹25,000 p.a. for individuals and ₹50,000 for senior citizens. This extra advantage makes term plans with health riders helpful for a comprehensive financial plan.

Term Insurance Tax Benefit under Section 10(10D)

An important provision of the Indian Income Tax Act is section 10(10D), which exempts the maturity proceeds and death benefits received from a term insurance policy from tax. This implies that any amount paid to beneficiaries as a result of the death of an insured will be completely exempted from taxes; however, such exemptions are subject to various conditions.

The major condition is that up to 10% of the sum assured can be paid as a premium for the policy in any year. If this condition is satisfied, all death benefit proceeds are exempt from tax, which is a great relief to beneficiaries.

Tax Benefits on Term Insurance Riders

Apart from term insurance, there are other tax benefits you can choose based on the term insurance rider you choose and its terms.

For instance, a policyholder can purchase certain add-ons or riders in addition to the term insurance plan. In such cases, the insurer pays the insured sum fully or partly depending on a specified illness per the conditions provided by the insurance company.

Section 80D of the Income Tax Act, 1961 allows individuals to claim deductions up to ₹25,000 (₹50,000 for senior citizens) paid towards premiums for riders attached to term insurance policies.

Eligibility Criteria to Claim Term Insurance Tax Benefits

The eligibility to claim tax benefits on term insurance premiums extends to several categories of individuals. Here’s a detailed look at each:

Self

Individuals can claim tax deductions for premiums paid on term insurance policies where they are insured. This provides direct tax benefits while ensuring their life cover.

Spouse

Premiums paid for a term insurance policy covering the life of the policyholder’s spouse are also eligible for tax deductions. This allows for tax savings while securing the spouse's financial future.

Dependent Child

Premiums paid towards term insurance policies for dependent children, including minors and adults, qualify for tax deductions. This benefits parents looking to secure their children's future while enjoying tax benefits.

Dependent Parents or In-laws

Policyholders can also claim tax deductions for premiums paid on term insurance policies for their dependent parents or in-laws. This is particularly advantageous for those supporting elderly dependents, ensuring their financial security and tax savings.

Term insurance is a crucial component of financial planning for providing life coverage and offers significant tax benefits under various sections of the Income Tax Act in India. By understanding the tax advantages available under Sections 80C, 80D, and 10(10D), policyholders can make informed decisions that maximise their tax savings while ensuring comprehensive financial protection for their families.