Tax Savings

Tax Benefits Associated with Term Insurance


Managing a family and its expenses is often complicated, especially regarding tax expenses. But it doesn’t have to be this way. With a little knowledge of term plan tax benefits, one can easily manage this without any stress.

Getting term insurance helps people avail themselves of various tax benefits. Let’s look at the tax benefits, restrictions, and limitations. But before we do that, let’s first understand term insurance.

What is term insurance?

Term insurance is a life insurance policy that benefits people for a certain “term” of years in exchange for regular premium payments. They can choose how many “term” of years will be in the insurance. In other words, the nominee of their policy (mostly their wife or children) will get all the benefits in the event of the untimely death of the insured.

Life is precious, and even when they are away from this world, their loved ones will be taken care of with the term insurance benefits they have secured. It’s about tax benefits, which brings us to the second part of the term insurance. Getting a term insurance policy also allows one to take advantage of several tax benefits under Section 80C and 10(10D) of the ITA, 1961, that wouldn’t have been available to them otherwise. Let’s take a look:

Tax Benefits That One Can Avail From Term Insurance

Getting a term insurance policy provides the individual with various tax benefits under 80C and 10D of the ITA, 1961, but what exactly are they? Let’s check them out in detail.

  • Term Insurance Tax Benefits Under the 80C Section

According to Section 80C of the Indian Tax Act, an individual will benefit from tax exemption if they have a term insurance policy. The benefits will be provided to their wives or children in the event of their untimely death, so long as the claimed tax benefits are limited to Rs 1.5 lakh per year. If they are also included in the premium that the individual pays, then even that will be eligible for tax exemption.

However, ITA has recently declared that this policy has been limited to term insurance policies issued before March 31, 2012, which is certainly a bummer. The term insurance policies issued after March 31, 2012, will only get a maximum of 10% of the sum as tax deduction benefits. Also, if the taxpayer is disabled, then the taxpayer will receive 5% more tax deduction benefits, leading to a total of 15%.

Also, if the individual wishes to close the term insurance within 2 years of the coverage for any reason, then no tax benefits will be provided to them.

  • Term Insurance Tax Benefits Under 10(10D) Section

While one can apply for tax benefits under the 10(10D) section of the ITA, one can also avail of tax benefits on the returns paid under the 10(10D) section. The beneficiary who receives the said tax benefits will also be completely exempt, and unlike the 80C section, there’s no upper limit to this, not even the limitation of Rs. 1.5 lakh per year that it had.

One will also get further benefits if the maturity amount is higher and hence taxable under the 10D section. Such taxes will be exempted. However, this is rare and only limited to 20%, which is usually not the case as the sum insured in the term insurance is higher than that of the yearly premium.

Restrictions on Term Insurance’s Tax Benefits

There are certain restrictions, however. According to the ITA, only 20% of tax breaks are provided for the total amount if the premium they pay is more than 20% of the total amount they originally had to pay. Also, term insurance policies issued after 31st March 2012 can only get a maximum of 10% tax deductions, which will increase by 5% if the taxpayer is disabled.

The term insurance policies issued before March 31, 2012, will get tax benefits only if the premium doesn’t cost more than 10% of the total amount insured. Also, if the individual has a certain illness or disability, they are further eligible for tax benefits.

Limitations of Tax Benefits from Term Insurance

Even after getting a term insurance policy, the individual may still have to pay taxes if they fall under these two categories.

  • 1st Category

Suppose the term insurance policy says that the death benefits will not be paid immediately after the policyholder dies. In that case, the insurance company will keep the cash and only give it back when the period is over. Here, the person who gets the benefits will still have to pay taxes on the benefits they receive. This is because interest has been built over the years that death benefits money was being held by the insurance company. So, the individual will have to pay tax, and only then will they receive the benefits.

  • 2nd Category

If the death benefits fall under the category of inheritance, then the individual who gets the benefits will still have to pay the tax to receive the said death benefit.

Wrapping Up

You can indeed lower the amount of tax you have to pay if you have a term insurance policy, but you have to be careful about the limitations and exceptions of these policies. So, as long as you mind the limitations and steer clear of the exceptions, you are good to go.

If you need help with financing your term insurance, you can always reach out to the experts at Piramal Finance. We help you find the best solutions to finance your purchase, such as a personal loan or credit card. Visit us to learn more!