Life Insurance And Taxes: What You Need To Know

Term life insurance is a tax-saving tool that provides death benefits to the policyholder's nominees in the event of their death. The tax benefits of a term plan are available for the entire duration of the premium payment term, i.e. whenever the policyholder makes a premium payment for continuing their insurance policy. These benefits help the policyholder save money on tax outgo while ensuring their loved one's financial future.

The most basic term insurance tax benefits that any Indian taxpayer can avail fall under the purview of Section 80C of the Income Tax Act, 1961. Under Section 80C, the policyholder can get tax benefits of up to ₹1.5 Lakh for the premiums paid for buying the term insurance plans. The premium payable amount and tax savings are a key consideration among Indians planning to purchase a life insurance plan.

Additionally, under Section 10(10D) of the Income Tax Act, the policyholder can enjoy further term insurance tax benefits. The death proceeds received from the term plan by the beneficiaries on the death of the policyholder are exempt from tax without any cap on the claim.

Term insurance tax benefits are also available under Section 80D of the Income Tax Act. Section 80D deals with health insurance policies, and today, most term policies offer additional health cover. So, if the policyholder has purchased a critical illness rider with their term plan, they can claim deductions under Section 80D of the Income Tax Act.

Tax benefits on term insurance riders

Term insurance riders offer additional coverage to the policyholder and are charged separately, increasing the premium of the term plan. Riders can be added to a term insurance plan to enhance the policy benefits and provide increased coverage.

• Critical Illness Rider: This rider provides a lump-sum payment if the policyholder is diagnosed with a critical illness, such as cancer, heart attack, kidney failure, or paralysis. The premium paid for this rider is eligible for a tax deduction of up to ₹25,000 per annum under Section 80D of the Income Tax Act, 1961.
• Accidental Death Benefit Rider: This rider provides an additional sum assured to the beneficiary if the policyholder passes away due to an accident. The tax benefit for this rider is available under Section 80C, where the premium paid is eligible for a tax deduction of up to ₹1.5 lakhs per annum.
• Accidental Disability Benefit Rider: This rider provides financial support if the policyholder becomes partially or permanently disabled due to an accident. Similar to the Accidental Death Benefit Rider, the tax benefit for this rider is available under Section 80C.
• Income Benefit Rider: This rider generates income for the beneficiaries after the death of the policyholder. The beneficiaries receive a certain percentage of the sum assured for a specified period after the policyholder's demise. The tax benefit for this rider is available under Section 80D.
• Waiver of Premium Rider: This rider waives off future premiums if the policyholder becomes unable to pay due to disability or loss of income. The tax benefit for this rider may be available under Section 80C, depending on the specific conditions of the policy.
• Child Support Benefit Rider: This rider provides additional financial support to the child/children of the policyholder upon their death. It ensures that the child's needs are taken care of and helps them achieve their life goals. The tax benefit for this rider may depend on the specific conditions of the policy and the applicable sections of the Income Tax Act.

It is important to note that the availability and specific conditions of these riders may vary depending on the insurance provider and the term insurance plan chosen. It is recommended to carefully review the terms and conditions, inclusions, and exclusions of the riders before adding them to your term insurance plan.

Tax exemption on death benefits

The death benefit payout received by the nominee(s) on the policyholder’s/life assured’s demise may be exempted from taxation under Section 10 (10D) of the Income Tax Act, 1961. This means that the death benefit is not subject to tax and the full amount will be paid out to the beneficiaries. This provision offers peace of mind to the policyholder, knowing that their loved ones will receive financial support in the event of their death.

The death benefit can be paid to the nominee(s) in the form of a lump sum or in installments, depending on their preference. This flexibility ensures that the beneficiaries can utilise the funds in a way that best meets their needs, whether it is for immediate expenses or long-term financial stability.

It is important to note that the tax exemption on death benefits under Section 10 (10D) is subject to certain conditions. The premium of the term insurance plan should not exceed 10% of the death sum assured if the plan was purchased after 1st April 2012. For policies purchased before this date, the claim amount should not exceed 20% of the death sum assured to receive the tax exemption. Additionally, it is crucial to pay the premiums on time and maintain an active policy to be eligible for this tax benefit.

The tax exemption on death benefits under Section 10 (10D) is a significant advantage of term insurance plans, providing financial security and protection to the policyholder's loved ones in their absence. This benefit ensures that the full amount of the death benefit is available to the beneficiaries, without any tax deductions, helping them to maintain their standard of living and achieve their future goals.

Tax deductions under Section 80C

Section 80C of the Income Tax Act of 1961 offers tax deductions on premiums paid for term life insurance policies. Individuals and Hindu Undivided Families (HUFs) can claim deductions of up to Rs. 1.5 lakh per year on premiums paid towards their term insurance plans. This deduction is available alongside other eligible items, such as NSC, PPF, fixed deposits, ELSS, tuition fees, home loan repayment, and provident fund contributions.

To claim the deduction under Section 80C, the yearly premium paid should not exceed 10% of the sum assured. If the premium exceeds this limit, a proportional tax deduction is applied. For policies issued before April 1, 2012, the yearly premium should not exceed 20% of the sum assured to be eligible for the deduction.

Additionally, if a policyholder voluntarily surrenders their policy or if the policy is terminated within two years of its commencement, they will not receive any tax benefits on the premium payments under Section 80C(5).

• The policyholder's premium must not exceed 10% of the sum assured.
• If the premium paid exceeds 10%, the tax deduction is adjusted proportionally.
• For policies issued before March 31, 2012, the deduction is applicable only if the yearly premium does not exceed 20% of the sum assured.
• In the case of a voluntarily surrendered policy or a policy terminated within two years of inception, the policyholder will not receive tax benefits on premium payments.

Other Tax Benefits on Term Insurance

In addition to Section 80C, there are other sections of the Income Tax Act that offer tax benefits for term insurance:

• Section 80D: This section allows deductions of up to Rs. 25,000 on premiums paid for term plans with a critical illness cover. If the policy includes a health-related rider, such as Critical Illness, Surgical Care, or Hospital Care, additional deductions of up to Rs. 25,000 can be claimed. If the policy is taken for parents, an additional deduction of up to Rs. 25,000 is allowed, which increases to Rs. 50,000 if the parents are senior citizens.
• Section 10(10D): This section ensures that in the event of the unexpected death of the term insurance policyholder, the entire insurance amount is provided to the nominee without any tax deductions. Additionally, incentives and surrendering values are also exempted from taxation under this section.

Tax benefits under Section 10(10D)

Section 10(10D) of the Income Tax Act offers tax exemption on life insurance payouts, subject to terms and conditions. This section covers all types of life insurance policy claims, including surrender values and bonuses. Individuals, associations, bodies of persons, Hindu Undivided Families (HUFs), trusts, companies, and foreign companies are eligible for these tax benefits.

• Exemption on Death and Maturity Benefits: The death benefit payout received by the nominee(s) upon the policyholder's demise is generally exempt from taxation under Section 10(10D). Additionally, the maturity proceeds from a life insurance policy are also tax-exempt under this section, provided certain conditions are met.
• Tax Exemption Limit: There is no upper limit set by the IT Department on the tax exemption under Section 10(10D). The total payment received under a life insurance policy, including maturity benefits and bonuses, is exempt from tax.
• Eligibility Criteria: To be eligible for tax benefits under Section 10(10D), the premium payable for the insurance policy should not exceed specific percentages of the sum assured, depending on when the policy was purchased. For policies bought after April 1, 2012, the premium should not exceed 10% of the sum assured. For policies purchased between April 1, 2003, and March 31, 2012, the premium should not exceed 20% of the sum assured.
• Exclusions: It's important to note that Section 10(10D) does not cover payouts received under the Keyman Insurance Policy or payouts received under Section 80DD (3) or 80DDA (3) of the Income Tax Act. Additionally, if the premiums exceed the specified percentages of the sum assured, the payouts may not be eligible for tax exemption.
• TDS on Life Insurance Policies: Any payment from a life insurance policy exceeding ₹1 Lakh and not applicable under Section 10(10D) is subject to a 1% TDS. This provision has been in effect since October 2014. The insurer will also deduct TDS on bonus payments, and there is no TDS exemption if the payment is less than ₹1 Lakh.
• Tax on Single Premium Insurance Policies: Section 10(10D) does not provide exemptions on maturity amounts from single premium insurance policies. However, there are no taxes on maturity benefit amounts if the sum assured is ten times the premium payable for the policy duration.
• Tax Exemption for ULIP Plans: The Finance Bill 2021 proposed amendments to Section 10(10D), stating that the provision should not apply to ULIPs purchased on or after February 1, 2021, with an aggregate annual premium of more than ₹2,50,000. ULIP plans will be treated as capital assets, and maturity, surrender, or partial withdrawal proceeds will be taxed as Capital Gains. However, in the event of the policyholder's death, the entire death benefit remains tax-exempt.

Tax benefits under Section 80D

Section 80D of the Income Tax Act, 1961, deals with health insurance policies. However, you can still claim tax benefits under this section if you have a term insurance plan with a health cover rider. For instance, if you have a critical illness rider with your term plan, you can claim deductions under Section 80D.

• If you, your spouse, and children are insured under a term plan with health riders and are below 60 years of age, you can claim a deduction of up to ₹25,000.
• If your parents are insured under a similar term plan with health riders and are above 60, you can claim an additional deduction of up to ₹50,000.
• The total deduction under Section 80D for individuals below 60 is ₹25,000, while for those above 60, it is ₹50,000.
• If you have a term plan with health riders for yourself, your spouse, and children, and your parents (all above 60), the maximum deduction under Section 80D is ₹1,00,000 per year.

It is important to note that the tax benefits under Section 80D are only applicable to individuals and Hindu Undivided Families (HUF). Additionally, the premium amount should not exceed 10% of the sum assured to avail of the tax benefits.

Frequently asked questions