Term Insurance Tax Deductions & Exemptions – Section 80C & 10D

A range of term insurance tax benefits are available under the various parts of the ITA to help you save money (Income Tax Act). Taxpayers may invest in a wide range of instruments that are eligible for these deductions and exemptions. The tax benefits mentioned in the article may not apply if you opt for the new tax regime since many tax exemptions and deductions have been scrapped within the new regime. These are also subject to change with any changes in laws.

• Tax Breaks for Life Insurance Payouts

A life insurance policy’s single most significant function is to pay a death benefit to the policyholder’s nominees. The death benefit is the amount assured under a policy and paid to the registered beneficiaries in the event of an untimely demise within the policy’s term. The death benefit is typically paid out after the claim is filed, assisting them with day-to-day needs. A term insurance calculator will be vital to help you calculate benefits.

Aside from giving financial protection to your loved ones, another significant benefit of a life insurance policy is the deduction of the premiums paid from your total income. However, most consumers are unaware that term insurance plans provide tax savings on death benefits as well.

2. Tax Break on Benefit Payments Received

Section 10(10D) of the Indian Income Tax Act provides that a sum received as a death benefit from an insurance policy is completely tax-free. In other words, the insurance policy proceeds are tax-free.

While traditional term insurance policies pay the death benefit throughout the policy term, the return of premium term plans recovers the premium paid after maturity if the insured survives the policy term. Section 10 treats even this premium refund as tax-free (10D).

3. Section 80C Income Tax Benefit for Term Insurance

Section 80C of the Income Tax Act is the most commonly employed tool for tax savings by individuals. This Section provides a maximum deduction of Rs.1.5 lakh for all of the mentioned investments and instruments combined. It encompasses a variety of vehicles such as PPF, EPF, ULIP, ELSS, and payments such as home loan repayment, children’s tuition expenses, life insurance premiums, and so on.

A premium paid for a term life insurance is also deductible under this Section up to Rs.1.5 lakhs (total of all investments and payments under this Section). The following conditions must be met in order to receive the Section 80C tax credit for term insurance:

1. The yearly premiums should not be more than 10% of the sum assured. Deductions will be applied proportionally if premiums exceed 10%.
2. The reduction will be available only for insurance issued before March 31, 2012, if the yearly premium does not exceed 20% of the total guaranteed.
3. Section 80C(5) states that if a policy is voluntarily relinquished or cancelled within two years of its inception, the policyholder will not get Section 80C tax benefits on premium payments.

4. Section 80D Term Insurance Tax Break

Section has traditionally only been used for health insurance coverage. It provides a deduction for health insurance coverage purchased for oneself, one’s spouse, one’s children, or one’s parents, with varied deduction limitations under different conditions.

Certain term plans, however, are eligible for Section 80D tax breaks. Deductions are also available to policyholders who have chosen a health-related rider (such as Critical Illness, Surgical Care, or Hospital Care Rider) with their term insurance policy. The following conditions apply to the term insurance benefit 80D:

1. Deductions under Section 80D are available for amounts up to Rs. 25,000.
2. If you have purchased an insurance coverage for your parents, you can claim an additional Rs. 25,000 deduction.
3. The deduction limit increases to Rs. 50,000 if your parents are senior citizens.

Section 10 Term Insurance Tax Exemption (10D)

According to Section 10(10D) of the Income Tax Act, the sum insured received upon the maturity or surrender of a policy, or upon the unfortunate demise of the policyholder, is totally tax-free. Section 10 also exempts bonuses obtained with such an amount (10D).

Conditions for exemption from term insurance taxes under Section 10(10D):

1. Section 10(10D) term plan tax benefits apply if the premium is less than 10% of the sum assured or the sum assured is at least 10 times the premium.
2. If the compensation exceeds Rs.1,00,000 and the insurer has the policyholder’s PAN, a 1% TDS (Tax Deducted at Source) is levied.

They can also tailor their payout options, such as receiving a lump sum, a monthly income, or a part lump sum-part monthly income. They can select from three plan versions, each with its own set of advantages such as premium refunds, spousal coverage, and more. Thus, in addition to tax advantages, policyholders can reap a slew of other benefits by choosing a term plan. A term insurance calculator can help you plan this.

When the policyholder chooses not to have the benefit paid out immediately, the benefit amount may be subject to tax. In this situation, the insurance company holds the cash until it is paid out, and the amount is paid out after a time of interest accrual. This cumulative percentage of interest is often taxed.

Individuals and Hindu Undivided Families (HUFs) can claim term insurance tax benefits by deducting the premiums paid for a term insurance policy.

Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.

Source: https://www.canarahsbclife.com/term-insurance/term-insurance-tax-benefits.html