Understanding The Tax Implications Of Term Insurance: A Comprehensive Guide

Term insurance is a type of life insurance that provides coverage for a certain period in return for regular premium payments. It is typically affordable and offers additional benefits through add-ons or riders. One of the main advantages of term insurance is the associated tax benefits, which can provide increased savings and earnings.

In most cases, term insurance proceeds are not subject to income or estate taxes. However, there are certain situations where the death benefit may be taxable. For instance, if the death benefit is paid out in installments, the interest accrued will be taxable. Additionally, if the policy is owned by a third party, the beneficiaries might have to pay taxes.

Term insurance tax benefits can be categorised into deductions and exemptions. Deductions allow policyholders to reduce their tax liability by claiming up to a certain amount each year. Exemptions refer to a part of the income that is not subject to tax and can be excluded from the total income.

Under Section 80C of the Income Tax Act, policyholders can claim deductions of up to a specified limit on the premiums paid toward term insurance. This section also covers premiums paid for policies purchased for spouses or children. Section 80D offers deductions on premiums paid for health insurance, including critical illness cover.

It is important to note that the tax implications of term insurance can be complex, and it is always advisable to consult a financial advisor or tax professional for personalised guidance.

Tax benefits on term insurance premiums

Term insurance is a pure protection plan that offers coverage against an unfortunate event during the policy term. One of its most significant advantages is the tax benefits associated with it. Here are some of the tax benefits of term insurance:

Tax Benefits under Section 80C

The premiums paid towards a term insurance plan can help save money in the present as a tax benefit. Individuals can get deductions of up to ₹1.5 lakh under Section 80C. The annual premiums must not exceed 10% of the chosen sum assured. For policies issued before 31st March 2012, the deduction is applicable if the annual premium does not exceed 20% of the sum assured.

Tax Benefits under Section 10(10D)

The tax benefits are also extended to the death benefit given to the nominee. In the event of an unfortunate event, the family receives the policyholder's death benefit or sum assured, without losing out on taxes. The death benefit or maturity benefit received under the term insurance policy is tax-exempt.

Tax Benefits under Section 80D

A deduction of up to ₹25,000 is available under Section 80D on premiums paid for term plans with a critical illness cover option. This section deals with health insurance policies, but if a critical illness rider is added to the term plan, deductions can be claimed under this section.

Other Considerations

• The death benefit received by the plan's beneficiary is tax-free, subject to conditions prescribed under Section 10(10D).
• If the benefit payout exceeds ₹1,00,000 and the policyholder's PAN is available, a TDS (Tax Deducted at Source) of 1% is applied.
• Term insurance tax benefits can be maximized by opting for suitable riders, which are optional and can be added to the base plan for an extra premium.
• The insurance company offers a grace period to pay overdue premiums. If the premium is not paid during this period, the policy will lapse, and policy benefits will be lost.
• The policyholder and the nominee can claim the term insurance tax benefit under Section 80C, Section 80D, and Section 10(10D) of The Income Tax Act, 1961.
• GST (Goods and Services Tax) and relevant cesses are levied as per applicable rates on the premium amount.

Tax benefits on term insurance claims

Term insurance is a financial instrument that offers tax benefits to its policyholders. These tax benefits are one of the prime reasons people purchase term insurance policy plans.

Section 80C

Under Section 80C of the Income Tax Act, 1961, the premiums you pay towards your term insurance plan can help you save money in the present as a tax benefit. You can get deductions of up to ₹1.5 lakh under Section 80C. This section also covers critical illness insurance premium deductions of up to ₹25,000. Senior citizens can claim benefits of up to ₹50,000.

Section 10(10D)

The tax benefits are also extended to the death benefit given to the nominee. When there is an unfortunate event, the family receives the policyholder's death benefit or sum assured, which ensures that the family gets the necessary financial protection it requires, without losing out on taxes.

Section 80D

A deduction of up to ₹25,000 is also available under Section 80D on premiums paid for term plans with a critical illness cover option.

Tax benefits on term insurance riders

Term insurance riders offer additional coverage to the policyholder and are charged separately, leading to an increase in the premiums of the term plan. These riders are optional and can be chosen based on the policyholder's financial goals. Here are some common types of term insurance riders and their tax benefits:

• Critical Illness Rider: This rider provides a lump-sum payout if the policyholder is diagnosed with a critical illness specified in the policy, such as cancer, heart attack, kidney failure, or paralysis. The premiums paid towards this rider are eligible for tax deductions under Section 80D of the Income Tax Act, with a maximum limit of Rs. 25,000 per annum for self, spouse, and dependent children.
• 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 benefits for this rider are covered under Section 80C, which allows deductions of up to Rs. 1.5 lakh per annum on the total premiums paid for life insurance policies.
• 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 benefits for this rider can be claimed under Section 80C.
• Income Benefit Rider: This rider generates income for the beneficiaries after the death of the policyholder, providing them with additional income for a certain number of years. The tax benefits for this rider can be claimed under Section 80D if it is considered a health rider.
• 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 benefits for this rider can be claimed under Section 80C, as it reduces the total premium paid in a financial year.

It is important to note that the availability and specifics of these riders may vary across different insurance providers. Additionally, the eligibility criteria and conditions for claiming tax benefits under Sections 80C and 80D should be carefully reviewed before making any decisions.

Tax exemptions on term insurance payouts

Term insurance is a pure protection plan that offers coverage to your family in your absence. It is a life insurance product that provides financial protection to your family in the event of your death. The death benefit is the sum assured under a policy and is paid to the registered beneficiaries in the event of your death during the policy term.

The death benefit payout received by the nominee(s) on the life assured’s demise may be exempted from taxation under Section 10 (10D) of the Income Tax Act, 1961 ('the Act'). This means that the proceeds from the insurance policy is tax-free.

Section 10 (10D) may also include tax exemption on the maturity proceeds of the plan subject to provisions stated in the Act. To be eligible for this tax benefit on term insurance claim amounts, the premium of the term insurance plan may not be more than 10% of the death sum assured if the plan was purchased after 1st April 2012. If the plan has been purchased before 1st April 2012, then the claim amount may not be more than 20% of the death sum assured to receive this tax exemption.

In addition to the Section 10 (10D) tax exemption, there may be other tax benefits a term insurance policyholder may enjoy. For example, under Section 80C and Section 80D of the Income Tax Act of 1961, term insurance tax benefits are offered in the form of a deduction from total income to the extent of the term insurance premiums subject to the limits specified in the section under the old tax regime.

Under Section 80C, the premiums of a term plan may be used to claim deductions of up to Rs 1.5 lakhs during a financial year. Section 80C tax deductions also have the same terms and conditions as the taxability of insurance claim amounts received on death and the policy’s maturity. Thus, the yearly premium of the plan may not be more than 10% of the death sum assured if the plan has been bought after 1st April 2012. And, for policies bought before the given date, the premium may be in the limit of 20% of the death sum assured.

While Section 10 (10D) considers the taxability of insurance claim amounts received on death and maturity, Section 80D includes tax benefits for health-related insurance covers. If you opt for a health-related rider such as a critical illness rider along with your base term plan, then you may be able to claim tax deductions under Section 80D of up to Rs 25,000 if the person insured under the plan is under 60 years of age. The deduction limit may increase to Rs 50,000 if the person insured is over 60 years of age.

Please note that Section 80C and Section 80D tax benefits are only applicable under the old tax regime.

Tax deductions on term insurance premiums

Tax Benefits under Section 80C

The premiums paid towards a term insurance plan can help save money in the present as a tax benefit. Individuals can get deductions of up to ₹ 1.5 lakh under Section 80C.

Tax Benefits under Section 10(10D)

The tax benefits are also extended to the death benefit given to the nominee. The family receives the policyholder's death benefit or sum assured, ensuring the family gets the necessary financial protection without losing out on taxes.

Tax Benefits under Section 80D

A deduction of up to ₹ 25,000/- is also available under Section 80D on premiums paid for term plans with a critical illness cover option.

Eligibility criteria to claim tax benefit

To claim tax benefits, the policyholder must pay the premium. The tax benefit applies to the total premium paid in a financial year.

Grace period for premium payment

The insurance company offers a grace period during which the policyholder can clear the due premium. If they fail to pay the premium during the grace period, the policy will lapse, and the policyholder will lose the policy benefits.

GST on term insurance under Section 80C

GST (Goods and Services Tax) and relevant cesses are levied as per applicable rates on the premium amount.

Scenarios where the beneficiary might have to pay tax

The death benefit received by the plan's beneficiary is tax-free, subject to conditions prescribed under Section 10(10D) of The Income Tax Act, 1961. However, life insurance plans may be taxed in some cases, such as:

• Benefits received under Section 80DD(3) are taxed.
• Benefits received under a Keyman insurance policy are also taxed.

Frequently asked questions