Tax Benefits on Term Insurance

When you are creating a financial portfolio, one of the most important aspects you need to consider is a term insurance plan. Such an insurance plan helps your loved ones lead a life of financial well-being even when you are no longer present to take care of them. Some experts even suggest that a term life insurance should be bought before you start opting for investment avenues. Life insurance coverage is an undeniable purchase for anyone who has financial dependents. Besides the life coverage option, term insurance plans offer another lucrative benefit and that is the tax advantages they come with.

What is term insurance and how do tax benefits work with it?

Term insurance plans help you secure the future of your family and protect them against life’s uncertainties. If the policyholder were to pass away during the tenure of the policy, the insurer pays the life cover amount to the nominees of the policy.When you buy a term insurance plan and pay regular premiums for the same, you ensure that your family has financial support duringdifficult situations. To get an idea of how much premium you may incur for your policy, you can use a term insurance premium calculator.

Term insurance tax benefits are valid in two ways – exemptions and deductions. A tax exemption means that a particular amount, which can be considered a source of income, is not taxed as it usually would. Tax deductions, on the other hand, refer to the deduction in your tax liability against a particular payment or investment you have made.

Tax deductions on term insurance

When you are filing your taxes the next time, ensure to claim for term insurance premium deductions. The premiums that you pay for your term insurance plan can be used to claim tax deductions up to Rs 1.5 lakhs. Section 80C of the Income Tax Act, 1961, allows for this deduction.

Along with life coverage, you can also opt for additional protection with your term plan in the form of riders. Opting for the critical illness rider provides you with even more term insurance tax benefits. Under Section 80D of the ITA, 1961, the premium paid for critical illness insurance can be used to claim tax deductions up to Rs 25,000. For senior citizens, the maximum limit can increase to Rs 50,000.

Buying a rider may lead to a small hike in your premium, however. You can use a term insurance premium calculator to get an estimate of the same.

Tax exemptions on term insurance

The importance of the life cover amount, especially in the event of the main breadwinner passing away, cannot be underestimated. Hence, relevant authorities have allowed the death benefit amount to be exempted from taxation under Section 10 (10D) of the ITA.

If your plan has a feature wherein you receive pay-outs during the maturity of the policy, then that amount, too, is exempted from taxation. The surrender value that the policyholder receives on voluntarily surrendering their policy is also tax-exempted.

One must note that these term insurance tax benefits are subject to several terms and conditions.

Terms and conditions on term insurance tax benefits

  • The benefits mentioned above are only valid for those who have opted for the old tax regime. The new tax regime does not allow for several of these deductions and exemptions.
  • For these benefits to be applicable, one must buy their term plan from an IRDAI-registered insurer only.
  • To be eligible for Section 80C deductions, the annual premium should not exceed 20% of the sum assured if the policy is bought before 1st April 2012. For policies bought after the given date, the annual premium should not exceed 10% of the sum assured amount.
  • To be eligible for Section 10 (10D) deduction, the premium paid during the policy period should not exceed 20% of the sum assured if the term life insurance plan is bought before 1st April 2012. The limit reduces to 10% of the sum assured for policies bought after the given date.

One must always consult a tax expert before making any major tax-related decisions. It is also advisable to read the policy wordings and consider the pros and cons of term insurance before proceeding with any purchase.

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