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When it is almost time to pay taxes, people start thinking about how to save money through tax planning. They make strategic investments to reduce their taxes and increase their savings. One of the best ways to do this is to buy 'term insurance'.
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This helps your family if something happens to you, and it also helps you pay less tax. Different tax deductions are available under the Income Tax Act 1961. Many individuals choose term insurance plans for tax deductions u/s 80C and 80D. You can even use an income tax calculator to check how a term insurance plan impacts your tax liabilities while offering financial protection.
Term insurance simply refers to a pure protection plan that does not provide investment or maturity benefits. These term plans offer high coverage at affordable premium rates.
If something happens to you while the policy is active, the beneficiary will get the death benefit. The main idea is to provide financial stability to the policyholder's family members in case of urgency. The beneficiary can use this payout to pay off debts or replace lost income.
Term insurance is a one-stop solution that offers policyholders peace of mind in the future.
Term Plans
This is the most common term insurance tax benefit that every Indian taxpayer can avail of under section 80C of the Income Tax Act, 1961. Under Section 80C, you can claim deductions of up to ₹1,50,000 per year on premiums paid towards your term insurance policy. One of the important aspects you should know about is the tax deductions. The upper limit available in these sections includes investment tax benefits in fixed deposits PPF and various other tax-saving tools.
Important Facts Related to Term Insurance Tax Benefits u/s 80C
The premium amount must be less than 10% of the sum assured to qualify for deductions under Section 80C.
Terms plans issued before 31st March 2012, the benefits in term insurance in tax are valid if the yearly premium is below 20% of the life cover.
The death benefit received by your nominee is completely tax-free under Section 10(10D) of the Income Tax Act. These tax benefits on term insurance have no upper limit. This ensures your loved ones receive the full amount without any tax deductions. As a policyholder, you should also know that term insurance tax benefits u/s 10(10D) are subjected to certain T&Cs. The death or maturity benefits under a term insurance plan are non-taxable if the premium amount paid during the policy term doesn't exceed 20% of the pre-specified life cover.
Section 80D of term insurance allows tax deductions on the premium amount paid for health insurance plans. You have the option to avail of the term insurance tax benefit u/s 80D if you already have health-related riders, such as surgical care cover, critical illness cover, and others. In simple words, you can increase your tax savings on your term plan premiums by buying these riders while getting health insurance plan coverage.
While primarily associated with health insurance, term insurance policies with health-related riders (such as critical illness cover) are also eligible for deductions under Section 80D.
Individuals below 60 years: Deduction of up to ₹25,000 for self, spouse, and dependent children.
Senior Citizens: Additional deduction of ₹50,000 if premiums are paid for parents aged 60 and above.
Maximum Deduction: Up to ₹75,000 annually, combining benefits for self, dependents, and senior citizen parents.
Take a look at the table below for a complete understanding of the term insurance tax benefits under section 80D will be as follows:
| Life stage | Premium amount paid | Upper limit to Term Insurance Tax benefits u/s 80D | |
| For Self, spouse, and children | Parents and in-laws | ||
| Individuals (covered) under 60 years | Rs. 25000 | Rs. 25000 | Rs. 50000 |
| Your parents are >60 years | Rs. 25000 | Rs 50000 | Rs 75000 |
| When both you and your parents are >60 years | Rs 50000 | Rs 50000 | Rs 100000 |
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The Union Budget 2023 introduced a new tax regime. You can choose to be taxed under either the old or new regime. Here's how tax benefits of term insurance differ under each:
| Term Insurance Tax Benefits | Old Tax Regime | New Tax Regime |
| Section 80C | Can be claimed | Cannot be Claimed |
| Section 80D | Can be claimed | Cannot be claimed |
| Section 10(10D) | Death Benefit is tax-free under both tax regimes for the nominee | |
Term insurance riders enhance your policy coverage and offer extra tax benefits. Choosing specific riders under certain conditions can help maximize your term life insurance tax advantages.
Critical Illness Rider: Adding this rider to your term insurance makes you eligible for additional tax deductions under Section 80D.
Return of Premium (ROP) Rider: Opting for this rider increases your premium, enabling higher tax savings under Section 80C.
Claiming tax benefits on term insurance premiums depends on whether you are a salaried individual or self-employed. Check the below steps to claim your tax benefits:
Salaried individuals can claim tax deductions under Section 80C and Section 80D (for applicable riders like Critical Illness) by following these steps:
Submit Form 12BB:
Form 12BB is an investment declaration form used to inform your employer about your planned tax-saving investments, including term insurance.
Fill and submit this form at the start of the financial year to ensure your premiums are reflected in your Form 16.
Keep Documents Handy:
Keep your premium payment receipts and premium certificate as proof.
While these documents are not required during initial submission, you may need to provide them if the tax department asks for verification.
Self-employed individuals can claim tax benefits by declaring their term insurance premiums while filing their Income Tax Return (ITR):
Declare Premiums in ITR Form:
Include the premium payments under the relevant sections (80C and 80D) when filing your ITR to claim deductions.
Understand Deduction Limits:
For Section 80D, you can claim up to ₹25,000 per year for premiums paid on riders like Accidental Benefit or Critical Illness.
However, you can only claim the actual premium paid. For example, if your annual premium is ₹12,000, you can claim that amount, not the full ₹25,000 limit.
GST on Premiums:
If GST is not included in your premium, you can claim it as part of your tax deduction.
You can claim tax benefits on premiums paid for term insurance policies only if the policyholder is:
Self
Spouse
Dependent Child
Dependent Parents or In-laws
TDS on Term Life Insurance Policy: If you receive a death benefit exceeding ₹1 lakh, the insurer will deduct 1% as TDS.
GST on Term Insurance: GST of 18% is levied on term insurance premiums. However, NRIs can claim a GST waiver on premiums paid to keep their policies active.
Consider diversifying your portfolio with structured investment plans:
5-Year Investment Plan: Ideal for short-term goals.
10-Year Investment Plan: Suitable for medium-term financial goals like car purchase or education funding.
20-Year Investment Plan: Best for long-term objectives such as retirement planning or buying a home.
5 Lakh Investment Plan: Tailored to optimize returns on a specific investment amount.
Term Life Insurance is one of the most efficient ways to secure your loved one's financial needs, but it also offers various tax benefits, making it one of the tax-saving tools. Everyone should be well aware of the term insurance tax benefits before purchasing a term plan to secure their financial future and that of their family. Understanding and knowing about term insurance tax benefits allows you to plan your finances better and helps you make the most of it.
†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
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