Complete guide on how term insurance policy can help you save tax

term insurance and tax

Term insurance policy is an essential requirement for every earning member of the family who has financial dependants. If you have spouse, children or elderly parents financially depending on you, it’s essential to have adequate insurance coverage to protect your family in the event of eventualities. Though the primary objective of buying term insurance plan is for financial protection, it also offers the tax benefits. Let’s take a detailed look at how to save income tax with the help of these online tax calculators for term insurance plans.

Buy term insurance to serve dual aim – protect your family and save tax too!

Term insurance plans are pure insurance plans that only offer death benefits. That means, if you survive the policy term, you will be paid nothing in return. Term insurance premiums are not invested anywhere. It’s basically an essential cost you are making every year to secure your family’s financial future when you are not around. As you make every financial decision, be it insurance or any investment, tax planning has to be part of the buying process. Part of the money that is spending to buy life protection cover can save you some amount of tax.

Term insurance as a tax saving tool

Life insurance products are one of the most effective tax saving schemes available in the market. Let’s see how to save tax using term insurance plans. Here are the host of tax benefits offered by term insurance plans.

  • Premium Invested: Tax Exemption U/S 80C till INR 1.5 lakhs p.a.

You can avail tax benefits on the premiums you pay on term insurance every year. Premiums paid on life insurance policies up to INR. 1,50,000 qualifies for tax deductions under Section 80C of the Income Tax Act, 1961.The deduction is available in respect of policy bought in your own name, spouse name or in the name of children (deduction is allowed for all children irrespective of the fact whether they are minor or major, dependent or independent and married or unmarried). There are certain clauses applicable for the deductions.

  • In case your term insurance policy is issued on or before 31st March 2012, your tax deduction eligibility is limited to 20% of the sum assured.
  • In case your term insurance policy is issued on or after 1st April 2012, your tax deduction eligibility gets restricted to 10% of the sum assured.
  • In the case of disabilities as mentioned in Section 80U or suffering from any ailments listed under Section 80DDB of the Income Tax Act, 1961, then the 10% mentioned above would be increased to 15%.

PS: However, for term insurance plans, the sum assured would always be higher than 10 times the premium.

  • Maturity Benefit: Tax exemption U/S 10(10)D

The maturity benefit of any life insurance policy is tax free in the hands of the policyholder under section 10(10)D of the Income Tax Act 1961 provided the premium is at least 10% of the sum assured for policies issued before 1st April 2012 and at least 20% of the sum assured after that. However, most term plans do not have maturity benefit. Thus, it applies only to those few term plans which have a maturity benefit.

For example, Term Plan with Return of Premium. In this variant of Term Plan, the total premiums paid during the policy tenure is returned to the policyholder on policy maturity as Maturity Benefit. In this case, the maturity benefit would be tax-free U/S 10(10)D provided the sum assured is more than 10 times the premium paid, which is usually the case in Term Plans.

Read more about types of life insurance plans.

  • Death Benefit: Tax-free in the hands of the beneficiaries

The death benefit, a huge lump sum amount paid out under term insurance (i.e. sum assured chosen by you), is fully exempt from income tax in the hands of beneficiaries. There is no restriction on the amount received by the beneficiaries as a death benefit.

  • Health Rider: Tax exemption U/S 80D

In case you have availed critical illness or an additional accidental death rider or any other health rider under your term insurance plan; then you can claim tax deductions under Section 80D on the additional premium that you are paying for the rider. Section 80D of the Income Tax Act, 1961 allows tax benefits on premiums paid for health insurance. However, the maximum cap for tax deduction is INR. 25000 p.a.

Though how to save tax would be an integral part of any investments that you make, it’s not the only criteria. Buying term insurance is a crucial financial decision. Hence, it’s important to consider various other important elements like exploring a suitable plan, selection of right coverage and the right term etc. Ensuring family’s future financial stability is the primary purpose of availing any term insurance plan. Tax saving benefit is an added advantage for availing the term insurance plan.

Conclusion

With the host of tax benefits offered, term insurance is definitely considered as the most effective tax saving scheme. Take help of online tax calculators to strategize your taxes while you make insurance and investment decisions. Though the primary goal is to adequately insure yourself, knowing all the tax provisions and planning taxes with every investment you make can help you save more!

Read more Do you know all the tax benefit of your life insurance policy

Read more Know all the tax benefits of life insurance policy before buying