How to Leverage Term Insurance for Your Tax Savings Needs

Individuals can save taxes by investing in specific financial instruments that make them qualify for various deductions and exemptions provided by different Sections of the Income Tax Act, 1961. Term insurance is one such instrument that serves to save on taxes. This type of insurance plan primarily focuses on providing financial protection by offering the beneficiaries a life cover and death benefit upon the policyholder's untimely demise. In addition to the life cover and other advantages it provides, purchasing a term plan also grants the policyholder tax benefits.

Before discussing how to take advantage of the tax benefits offered by term insurance plans, let's first understand what a Term Plan is:

Term Insurance is a basic form of life insurance that provides financial protection to your loved ones at an affordable premium. It offers coverage for a specified period, known as the 'term' of the policy. If the policyholder passes away during this term, the insurance provides financial security to the family. To keep the policy active, the policyholder must pay the premium on time. The premium amount is determined based on factors such as the policyholder's age, sum assured, policy term, health, and medical history. In the unfortunate event of the policyholder's demise within the term, the nominee receives the sum assured as a death benefit.

The policyholder is not a beneficiary of this type of insurance. If the policyholder survives the term, they have the option to renew the policy with a new term, but the premium is recalculated based on their age and health conditions at that time. While traditional term insurance does not provide survival benefits, some insurance companies now offer additional benefits like riders and add-ons that can be purchased to enhance coverage at a slightly higher premium. It is advisable to consider term life insurance for financial protection and invest in other investment avenues for generating higher returns.

In terms of tax benefits, the Indian government and the Income Tax Department have established various provisions to enable deductions on premium payments for term insurance. These deductions, whether utilised individually or collectively, effectively reduce your taxable income, allowing you to save on taxes for each year that your term plan remains active. Whether you obtain a term plan for yourself or your loved ones, the premium payments you make will qualify for the mentioned tax deductions.

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Tax Benefits of Term Insurance

Now that we have a grasp of how term insurance can help reduce tax liabilities let's explore the specific details regarding tax-saving benefits. Here are some popular tax deductions that can effectively lower your taxable income if you have a term insurance policy:

Section 80C:

One of the commonly used deductions by term insurance policyholders in India is provided under Section 80C of the Income Tax Act, 1961. To avail of a term insurance plan, the policyholder is required to pay premiums, which are monthly amounts paid to the insurer.

Under Section 80C, these premium payments for life insurance can be deducted from your total income, up to a maximum amount of Rs 1.5 lakh in a financial year. Consequently, this reduces your overall taxable income and serves as a significant benefit for term plan policyholders. Both individuals and Hindu Undivided Families (HUFs) can claim this deduction. Regarding individual policies, the policyholder, their spouse, and their children can all avail of tax deductions.

To be eligible for tax benefits on term life insurance under Section 80C, you are required to meet conditions:

• If an individual purchased a term insurance plan on or before March 31st, 2012, tax deductions would only apply to the total premium amount up to a maximum of 20% of the sum assured.

• If an individual purchased their term insurance plan on or after April 1st, 2012, tax benefits can be claimed for the premium total, which is capped at a maximum of 10% of the Sum Assured.

• If an individual is disabled or suffering from a critical illness and purchased a term insurance plan on or after April 1st, 2013, tax benefits can be claimed only if the premiums are equal to or exceed 15% of the Total Sum Assured.

Section 10 (10D):

While there are multiple tax benefits associated with term insurance, the primary purpose of a term insurance policy is to provide financial security to your beneficiaries. In the unfortunate event of your demise, this financial security is provided to your loved ones in the form of a predetermined amount called the death benefit.

The tax advantage associated with this amount is that, under Section 10 (10D), the entire sum is completely exempt from taxation. This exemption also applies to the maturity amount received at the end of a term plan with a money-back feature.

To qualify for tax benefits on term insurance under Section 10(10D), you are required to meet certain conditions:

• If the term insurance policy is issued on or after April 1st, 2012, the total premium paid should not exceed 10% of the Total Sum Assured.

• If the maturity benefits from the term insurance policy exceed Rs 1,00,000 and the policyholder's PAN card information is available, a TDS (Tax Deducted at Source) of 1% will be applicable.

• If an individual has multiple life insurance policies issued after April 01, 2023, and the combined premium amount exceeds Rs 5 lakh, then the maturity proceeds will be subject to taxation.

Section 80D:

While Section 80D primarily pertains to health insurance plans, certain term insurance plans can also provide benefits under this section. Policyholders can avail of deductions if they have opted for Hospital Care, Surgical Care, and Critical Illness riders. The specific conditions to qualify for tax benefits under this section are outlined below:

• If the policyholder's parents are above the age of 60, they can avail of tax benefits of up to Rs 50,000

• If the policy is purchased under the name of the policyholder's parents, they can avail of tax benefits of up to Rs 25,000

• Tax benefits can be claimed as long as the amount does not exceed Rs 25,000

Conclusion:

By taking advantage of these deductions, individuals who hold term insurance can significantly minimise their tax obligations. The availability of tax benefits for term insurance plans, coupled with the convenience and accessibility they offer, is driving their increasing popularity among those seeking insurance coverage.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

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Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.