When the tax filing season is around the corner, people tend to look for financial instruments that help them save money on tax. In India, many insurance and investment products offer a wide range of tax benefits. One such insurance product available in the market is the term insurance plan.
Typically, term insurance is the cheapest and the simplest of life insurance products. One can get a substantial life cover at relatively lower premiums. Although a term insurance plan does not have any investment component and ceases to exist at the end of the tenure, you can enjoy a host of term insurance benefits in addition to the income tax incentives.
Income Tax Section
Term Insurance Tax Benefit
Section 80C (Old Income Tax Regime)
Claim tax deductions of up to Rs. 1.5 Lakhs on premiums paid towards the term plan.
Term insurance with critical illness cover allows additional claim deduction of up to Rs. 25,000.
Senior citizens can claim deductions of up to Rs. 50,000 under this section.
The payout received from the policy is exempt from taxes under this section.
We have discussed these three primary term insurance tax benefits in detail below.
Tax benefits under Section 80C can be availed by individuals as well as Hindu Undivided Family. In the case of individual policyholders, the insured, their spouse and their children can claim tax deduction.
The tax benefits for HUFs have a wider scope as any member of a HUF can claim tax deduction under the section for investing in a term insurance plan.
While the absolute limit for tax deduction is Rs 1.5 lakh in a year, there are certain other limits. If the premium paid in a year is over 20% of the sum assured, the policyholder is eligible to claim a tax deduction of up to 20% of the sum assured for the premium paid in a year.
In case a term insurance policy has been bought on or after April 1, 2012, tax deduction can be claimed only if the annual premium doesn’t exceed 10% of the sum assured.
The limit is slightly higher for people with severe disabilities or specific ailments. If the policy has been bought on or after April 1, 2013, and the assessee suffers from severe disabilities, he/she can claim a tax deduction if the annual premium doesn’t exceed 15% of the actual sum assured.
The maximum amount that can be claimed under Section 80C is Rs 1.5 lakh in a year and the limit includes other eligible investments as well.
Under Section 80C(5), if the policy is voluntarily surrendered or terminated within 2 years, the insured will not receive any Section 80C tax benefits.
Ideally, tax benefits under Section 80D are availed for health insurance plans. But since many insurers offer term insurance with critical illness benefit, one can claim additional deductions under this Section. In the case of individual term insurance plans, the insured, their spouse, dependent children, and parents can avail this tax benefit.
Also, much like any other deductions, Section 80D has certain clauses –
Tax deductions can be availed only if the amount does not exceed Rs. 25,000.
When life insurance plans are taken on behalf of the parents, one can avail additional tax deductions of Rs. 25,000.
The maximum amount that can be claimed for deductions under Section 80D is Rs. 50,000.
Make a note that to avail Section 80D tax benefits, one needs to have critical illness cover bought along with their basic term insurance plan.
Section 10 (10D) offers term insurance tax exemption benefits. Under the section, any amount received as a death benefit through a term plan or a moneyback plan or maturity benefits from a moneyback plan is exempted from income tax.
However, there are certain conditions on availing term insurance tax exemptions. These tax benefits will not be available if:
If the amount is received under Section 80DDD (3) and 80DDDA (3)
Amount received through a keyman insurance policy is also not eligible for tax exemption. A keyman insurance policy is bought by companies or employers for employees that are actively employed with the company. The benefits from these policies go to the company as a protection against any kind of business disruption due to the death of the senior-most members of a company.
Any amount that is not a death benefit and is received through a policy issued between April 1, 2003, and March 31, 2012, will not qualify for exemptions. The exemption is also not applicable if the premium paid in any year is over 20% of the sum assured and the policy is issued between the period mentioned above.
If the policy is issued after April 1, 2012, the exemption is allowed only if the annual premium does not exceed 10% of the sum assured.
If the death benefit payout exceeds Rs. 1 Lakh and the insurer has access to your PAN information, then a TDS (Tax Deducted at Source) of 1% is applied on the amount.
The rate of GST applicable varies depending on the type of term plan bought. Ideally, the basic term insurance is charged with a GST rate of 18%. Moreover, the deductions claimed under Section 80C of the Income Tax Act comprises charges applied by the insurer and the taxes on total annuity paid. This means the GST paid on term insurance premiums every year can be claimed for deductions under Section 80C.
For instance, if Mr Mehra pays a premium amount of Rs. 15,000 every year towards term insurance coverage, the GST applicable will be Rs. 2700. Hence, the total amount that can be claimed for tax deductions under Section 80C of the old tax regime is Rs. 17,700.
The insurance sector in the country has evolved over the years with the introduction of a host of consumer-friendly steps. One of the provisions mandated by the insurance regulatory body for the convenience of the consumers is the free-look period of a policy.
Under the policy, you can return a term insurance plan within a specified time period and get a refund if you do not agree with any of the terms and conditions of the policy after buying it. The time allowed for return from the receipt of the policy is 15 days. For policies bought through distance marketing, the free look period extends to 30 days from the receipt of the policy.
It is very easy to return the policy within the free look period. One just has to send a letter to the insurance company informing about the cancellation and the reason for it, along with the original policy document. The insurance company will give a refund after deducting a proportionate risk premium for the period of cover, medical examination expenses and stamp duty.
There are extensive term insurance tax benefits, but saving taxes through term insurance should not be the priority. Term insurance is a necessity that helps secure your family’s financial future. With a term insurance plan, you can get substantial coverage at affordable rates.
Having adequate coverage leads to a stress-free life without any worry about the financial state of the family in your absence. You can also enhance your term insurance cover by opting for riders that cover accidental death, accidental disability, and critical illnesses available through our term insurance app.
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