Term Insurance Tax Benefits

With the change in lifestyle and the environment around us, incidents of untimely deaths are on the rise. For instance, over 1.5 lakh people die in road accidents every year in India, which is around 11% of the total road accident deaths in the world. The impact of an unfortunate death on the family of the deceased can be mitigated with a term insurance plan. Term insurance is the cheapest and the simplest of life insurance products. One can get a substantial life cover at relatively lower premiums. A term insurance plan doesn’t have any investment component and simply ceases to exist at the end of the tenure. Along with a life cover, you can enjoy a host of term insurance benefits such as income tax incentives. 

Income Tax section for term insurance tax benefits

Term plan tax benefits encompass various sections of the Income Tax Act, 1961. At a broad level, term insurance investors can claim a tax deduction of up to Rs 1.5 lakhs in a year for the premiums paid under Section 80C of the Income Tax Act. Additionally, any payout from the policy is exempt from taxes under Section 10 (10D) of the tax laws.

There are two primary term insurance tax benefit sections. Let us take a detailed look at the sections and the term insurance tax benefits.

Tax deductions under Section 80C

Tax benefits under Section 80C can be availed by individuals as well as Hindu Undivided Family. In the case of individual policyholders, tax deduction can be claimed by the individual, his/her spouse and the policyholder’s children.

  • 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 also includes other eligible investments.

Tax benefits available under Section 10 (10D)

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.

Free Look Period

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.

Conclusion

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. A term insurance cover can also be enhanced by opting for riders that cover accidental death, accidental disability, and critical illnesses. You can buy Bajaj Allianz Smart Protect Goal Term Plan on Finserv MARKETS in five easy steps and avail of enhanced coverage with the help of multiple riders. Term insurance plan, available on Finserv MARKETS, can help you get a life cover of up to Rs 1 crore at affordable rates. Make the most of your term insurance plan with tax benefits and several other perks available on Finserv MARKETS.  

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