Term insurance is not only an effective way to provide financial security for your family but also a useful tool for tax savings. Understanding the tax benefits of term insurance can help policyholders make informed financial decisions while ensuring protection for their loved ones. Under the Indian Income Tax Act, various provisions allow individuals to claim deductions on premiums paid towards life insurance policies.
This article explores what is life insurance in simple words to help readers understand the basics before diving deeper into financial benefits. It further explains how term insurance can contribute to tax savings and how individuals can maximise their benefits under different sections of tax laws.
What is life insurance in simple words?
Life insurance is a financial contract between an individual and an insurer, where the policyholder pays premiums in exchange for a sum assured, which is paid to their beneficiaries in case of an untimely demise. In simple words, life insurance ensures financial protection for your dependents by providing a lump sum amount to support them if you are no longer around.
Term insurance, a form of life insurance, is a pure protection plan that offers a high sum assured at an affordable premium, making it one of the best options for securing financial stability for your family.
Tax benefits of term insurance
Investing in an insurance offers multiple tax benefits under the Income Tax Act, 1961.
1. Tax deduction under Section 80C
Policyholders can claim a deduction of up to Rs. 1.5 lakh per year on premiums paid for policies under Section 80C. To qualify, the sum assured should be at least 10 times the annual premium.
2. Tax-free death benefit under Section 10(10D)
The death benefit received by the nominee is fully exempt from tax under Section 10(10D), ensuring financial security without tax deductions on payouts.
3. Deductions for health-related riders under Section 80D
Premiums paid for critical illness or health riders in term insurance are eligible for deductions under Section 80D:
- Rs. 25,000 per year for self, spouse, or children
- Rs. 50,000 per year if covering senior citizens
4. Tax benefits under different tax regimes
Under the old tax regime, policyholders can claim deductions under Sections 80C and 80D. However, the new tax regime does not allow these deductions, requiring individuals to choose based on their financial strategy.
How to maximise tax benefits on term insurance
A sum assured of at least 10 times the annual premium ensures eligibility for tax deductions.
2. Add riders for additional tax savings
Critical illness and accidental death riders qualify for extra tax benefits while providing enhanced protection.
3. Opt for annual premium payments
Annual premium payments can help policyholders save on additional administrative charges while maintaining tax benefits.
4. Maintain tax compliance
Ensure that the policy complies with tax-saving provisions and retain premium payment receipts for tax filing.
Common misconceptions about term insurance and tax benefits
There are several misconceptions regarding tax benefits of term insurance. Let’s clarify some common ones:
- Term insurance is only for financial protection While the primary purpose of term insurance is to provide life cover, it also serves as an excellent tax-saving instrument under Sections 80C and 80D.
- The tax deduction applies to all life insurance policies Not all life insurance policies offer the same tax benefits. Policies with a sum assured lower than ten times the annual premium may not qualify for full deductions under Section 80C.
- Surrendering a policy retains tax benefits If a term insurance policy is surrendered before the minimum lock-in period, the deductions claimed under Section 80C may become taxable.
Conclusion
A term insurance policy is not just a tool for securing financial protection for your family but also an effective way to save on taxes. With deductions available under Sections 80C and 80D, and tax-free death benefits under Section 10(10D), term insurance serves as a smart investment for both security and savings.
To maximise tax benefits, policyholders should choose an adequate sum assured, include health riders, and ensure compliance with tax regulations. By understanding the tax benefits of term insurance, individuals can make well-informed decisions that provide both financial security and efficient tax planning.
