Key Tax Provisions for Term Insurance Policies

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Term insurance policies are a great way to secure your family’s financial future and take care of their long-term financial goals. The purest form of life insurance, term insurance, besides offering life coverage, also offers tax benefits. Let us understand more about term insurance policies and how they help reduce your income tax burden. 

What is term insurance?

Term insurance is an investment option that provides financial protection to the family of the insured person. In case of the insured person’s demise within the policy term, the beneficiary or nominee receives the death benefit in the form of the total sum assured. It helps the family remain financially stable. Term insurance is among the most cost-effective life insurance products in the market that lets the insurance buyer get sufficient life coverage at an affordable premium.

And as a taxpayer, one is eligible to avail tax benefits on his/her term insurance plan. Here is an overview of term insurance tax benefits that a policyholder gets: –

1) On Premium Payment 

To start with, you can claim a deduction of up to INR 1,50,000 under Section 80C against the premium paid during a fiscal year towards your term insurance. However, some points to be noted are as follows:

  • If the policy is issued on or before March 31, 2012, the annual premium should be up to 20% of the sum insured to be tax deductible.
  • For policies issued on & after April 1st, 2012, annual premium up to a maximum of 10% of sum assured is tax deductible.
  • For people with disability or severe health conditions as specified under section 80U or 80DDB, additional relaxation of 5% on the annual premium (i.e., 15% of sum assured) is available.

Additionally, if your policy happens to have health insurance riders like waiver of premium benefit, terminal illness benefit, accidental death benefit etc., then you can also avail tax deduction under Section 80D up to a permissible limit of INR 25,000* and INR 50,000**, respectively. 

*For individuals below 60 years of age

**For individuals or parents above 60 years of age

2) On Death Benefit

The payout received on the death benefit is exempt from tax according to section 10(10D) of the Income Tax Act, 1961. This is applicable when the amount paid out as death benefit is ten times the annual premium on the plan. The Income Tax Act, 1961 has specified sections that provide details about this term insurance tax benefit. The major condition of this section is the death payouts received are always tax-free, with no limit to the amount received. 

Some points to remember are:

  • Term insurance bought on and after April 1st, 2012, is taxable but exemptions can be availed under section 10(10D) if the annual premium paid for any year did not exceed more than 10% of the sum assured.
  • If the annual premium of your term insurance is less than 10%, the payout on death is tax-free (exempted).
  • For the disabled, the payout is not taxed if the premiums are not more than 15% of the total sum assured. 

There are several term insurance providers in the market. Identify the one that fits the best into your budget and also factors in your long-term financial goals. Always take th/e advice of a financial planner and fill out your tax forms correctly to receive term insurance tax benefits without any hassle whatsoever.

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