Term insurance plans are pure protection life insurance plans which help in providing financial security for your family if you are not around. These plans pay a benefit in case the life insured dies during the policy tenure. Since only the risk of death is covered by the policy, the premiums are quite low allowing you to afford a high sum assured for optimal financial protection for your family. Moreover, the modern-day term insurance plans, offered by some of the leading insurance companies, also offer lifelong coverage thereby ensuring financial assistance whenever the insured dies before attaining 99 or 100 years of age.

Term insurance plans, given their coverage, provide a sense of financial relief and are essential in your financial portfolio. Moreover, the plans also allow you tax benefits to reduce your taxable income. Let’s understand term insurance tax benefits in details –

Term insurance tax benefits

Term insurance plans allow two types of tax benefits. One is on the premium paid and the other is on the benefits received from the policy. Here are the tax benefits under different sections of the Income Tax Act, 1961, which you can avail from term insurance plans –

● Tax benefit under Section 80C on the premium paid

The premium paid for a term insurance plan is allowed as a deduction from your taxable income under Section 80C. The maximum deduction which you can claim under Section 80C is INR 1.5 lakhs. Moreover, to claim the deduction, the following conditions would have to be fulfilled –

  • If the policy is issued before 1st April 2012, the deduction would be allowed on the premium which is up to 20% of the sum assured. If the premium is more than 20% of the sum assured, the excess premium paid would not be allowed as a deduction. It would form a part of your taxable income and taxed at your income tax slab rates. For instance, if the sum assured is INR 10 lakhs, the premium should be up to INR 2 lakhs to be eligible for deduction. If the premium is higher than INR 2 lakhs, the excess premium would be taxable.
  • If the policy is issued on or after 1st April 2012, the deduction would be allowed on the premium which is up to 10% of the sum assured. If the premium is more than 10% of the sum assured, the excess premium paid would not be allowed as a deduction. It would form a part of your taxable income and taxed at your income tax slab rates. For instance, if the sum assured is INR 10 lakhs, the premium should be up to INR 1 lakh to be eligible for deduction. If the premium is higher than INR 1 lakh, the excess premium would be taxable.
  • If the policy is taken on the life of an individual who suffers from a disability as defined under Section 80U or from a specific ailment as defined under Section 80DDB and the issue date of the policy is on or after 1st April 2013, the deduction would be allowed on the premium which is up to 15% of the sum assured. If the premium is more than 15% of the sum assured, the excess premium paid would not be allowed as a deduction. It would form a part of your taxable income and taxed at your income tax slab rates. For instance, if the sum assured is INR 10 lakhs, the premium should be up to INR 1.5 lakhs to be eligible for deduction. If the premium is higher than INR 1.5 lakhs, the excess premium would be taxable

● Tax benefit under Section 80D on rider premium

Term insurance policies offer different types of riders along with the plan. Riders are additional coverage benefits which increase the scope of coverage of the policy. The commonly available riders include the following –

  • Accidental death benefit rider
  • Critical illness rider
  • Surgical benefit rider
  • Terminal illness rider
  • Term rider, etc.

If you choose riders which provide health insurance coverage, like critical illness, surgical benefit and terminal illness riders, the premium paid for such riders would be allowed as a deduction under Section 80D. These riders can be bought along with a policy taken on the life of self, spouse and dependent children. The maximum deduction available is INR 25,000 which becomes INR 50,000 if you or the insured member is a senior citizen, i.e. aged 60 years and above.

● Tax benefit under Section 10(10D) on the benefits received

Normal term insurance plans pay a death benefit on death during the policy tenure. Moreover, there are the return of premium term plans which refund the premium paid if the policy duration comes to an end and the insured is alive. Both the death benefit and the premium refunded are treated as tax-free benefits under Section 10 (10D) of the Income Tax Act, 1961. To claim the exemption, the following rules would apply –

  • Any benefit which is received under the provisions of Section 80 DD(3) would not qualify for an exemption
  • If the benefit is received under a Keyman insurance plan, the benefit received would not be exempted
  • If a return of premium policy is taken, the maturity benefit received would be exempted only if the following conditions are fulfilled –
    • ✔ The policy has been taken before 1st April 2012 and the premium is not more than 20% of the sum assured
    • ✔ The policy has been taken on or after 1st April 2012 and the premium is not more than 10% of the sum assured
    • ✔ The policy has been taken on or after 1st April 2013 for a disabled or a medically ailing individual (as mentioned under Sections 80U and 80DDB respectively) and the premium is not more than 15% of the sum assured 
  • Death benefit received from a term insurance policy would always be exempted from tax irrespective of the premium amount vis-à-vis the sum assured

Who is eligible to claim term insurance tax benefits?

Term insurance tax benefits can be claimed by individuals and HUFs. Individuals can claim benefit on premiums paid for the policies bought on the life of self, spouse and dependent children. Hindu Undivided Families (HUFs) can claim deduction on the premiums paid for a term insurance policy bought on the life of a member of the HUF.

These are the tax benefits which you can claim from a term insurance policy. Know these benefits before you invest in a term insurance plan so that you can plan your taxes effectively and reduce your tax liability by the maximum possible amount.


FAQ’s

Term insurance plans do not have a surrender value. If you surrender your policy, you would not get any surrender value and so there would be no tax benefits applicable.


Yes, the tax deduction on the premium amount would be available whether you buy the policy online or offline.


In your income tax return, the tax benefit would reflect under the head of ‘Deductions under Chapter VI A’. The amount of premium paid would be mentioned under Section 80C under the head ‘Deductions under Chapter VI A’ and would be deducted from your gross taxable income.


Since the premium was up to 20% of the sum assured, your policy qualifies for exemption under Section 10(10D) of the Income Tax Act, 1961. The maturity benefit that you would receive, which would be the refund of the premium, would be completely tax-free in your hands.


If you use the new tax slabs, deductions under Section 80C would not be allowed. So, you would not be able to claim a deduction for the premium paid for the policy which you buy in May 2020.