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Term Insurance Tax Benefits

Towards the end of every financial year, you hear a lot of people talking about tax planning. Most people will make strategic investments to minimise their taxes and maximise their savings. They use the deductions available under the Income Tax Act, 1961, to plan their taxes. Many individuals choose term insurance for tax deductions under Sections 80C and 80D. ...Read More

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Term Insurance Tax Benefits

Term Insurance Tax Benefits Under Section 80C & 80D

Term Insurance Tax Benefits Under Section 80C & 80D
July 25, 2024

Table of Content

 

How can a term insurance plan, meant to safeguard your family’s financial future, also help you save taxes? Most of us are unaware of the additional benefits a sound term insurance can give, but it’s time to educate ourselves on this crucial aspect.

What Is Term Insurance?

A term plan offers life cover to the policyholder. It is a pure protection policy and does not offer maturity or investment benefits. These affordable plans allow individuals to enjoy high life cover at pocket-friendly rates. If something happens to the individual while the policy is active, the beneficiary will receive the death benefit payout. The idea is to provide the policyholder’s loved ones with financial stability when they need it the most. The beneficiary can use this money to replace lost income or pay off debts.

The death benefit can be extended to the nominee(s) in the form of a lump sum or installments, based on their preference.

All in all, a term insurance plan offers peace of mind to the policyholder in the long term.

Term Insurance Tax Benefits Under Sections 80C and 10(10D)

With your term insurance policy, you can maximise your tax savings under Section 80C of the Income Tax Act, 1961. Here, you can claim deductions of up to INR 1,50,000 per year for the premiums you pay towards the upkeep of your life insurance policy. While claiming the deduction, remember that your premium amount should be less than 10% of the sum assured.

Additionally, under Section 10(10D) of the Income Tax Act, you can enjoy further term insurance tax benefits. The death proceeds received from the term plan by the beneficiaries on the death of the policyholder is exempt from tax without any cap on the claim.

Understanding Section 80D of the Income Tax Act

Section 80D of the Income Tax Act deals with health insurance policies. But, you can still enjoy Section 80D benefits against your term plan! Today, most term policies offer additional health cover. So, you may purchase a critical illness rider with your term plan. Since critical illness falls under the health category, you can now claim deductions under Section 80D of the Income Tax Act. Let’s take a closer look at what kind of deductions are allowed for term insurance policies under this section.

Let’s assume you pay the premiums for three term insurance plans. One plan is for you, one for your wife and the third is for your child. All three of you are below the age of 60 and have health riders on your policy. In total, you can claim a deduction of INR 25,000 for all three premiums. You can claim deductions against the rest of the premium under Section 80C of the Income Tax Act.

As a responsible child, you may also pay the premium for term plans for your parents. Let’s assume you have purchased separate policies for your parents who are above the age of 60. Both the term insurance policies have health insurance riders as well. You can claim an additional deduction of INR 50,000 under Section 80D. In total, you can claim Section 80D benefits up to INR 75,000 per year.

How Do I Claim Tax Benefits for Term Insurance Under Section 80D?

Since Section 80D only deals with health insurance, you need to be careful while claiming tax deductions for your term insurance policy. Start by checking your term plan details. See if there are any health riders you’d like to add to your policy. A critical illness rider, for example, will make you eligible to claim tax benefits under Section 80D. If you aren’t sure about the deductions, you can ask your insurance provider what qualifies as a health rider. A trusted financial consultant will also help you understand the tax benefits better. When you’re filing your taxes, make sure you enter all the details accurately. If you make a mistake, you risk losing your term insurance tax benefits.

With a term insurance policy, you get more than just life cover. You also get health riders and the opportunity to formulate a sound tax plan. By making smart investment choices, you can protect your family’s financial future while saving money today!

Tax benefits on term insurance riders

To strengthen their policy, policyholders can avail of certain add-ons or riders over and above a term insurance plan. In such cases, the insurer pays the total sum insured or a part of the sum insured, based on a particular illness that is specified by the insurance provider.

The premium paid for riders that are a part of the term insurance plan are deductible up to Rs 25,000 (Rs 50,000 for senior citizens) under Section 80D of the Income Tax Act, 1961

Eligibility criteria to claim tax benefit under Section 80D

Here’s what you need to keep in mind if you want to avail tax benefits under Section 80D. Individuals or Hindu Undivided Family (HUF) can claim deductions, whether it is for health insurance premium or any charges incurred towards any preventive health checkup for self, their spouse, dependent children or parents.

Payments Eligible for Deductions Under Section 80D

Before we move further, it is essential to note that the deduction that is permitted under Section 80D is Rs 25,000 in a given financial year. For senior citizens, it is Rs 50,000.

In the case of an individual or HUF, here’s what applies:

  • They can claim a deduction of up to Rs 25,000 on the premium paid towards a health insurance policy for self, spouse, and dependent children.
  • There is a separate deduction in the case of premium paid for parents’ insurance, which is capped at up to Rs 25,000 if they are less than 60 years of age. In the case of senior citizens, the deduction is up to Rs 50,000.
  • In case medical expenses are incurred towards senior citizen and are not covered under any health insurance, a deduction of up to Rs 50,000 under the above limit of Rs 50,000 can be claimed.
  • If the individual, spouse or parents are above 60 years and have medical covers, the maximum deduction that can be availed under Section 80D is Rs 1,00,000.
  • HUFs can also claim a deduction under Section 80D for premiums towards health insurance policies taken for members of HUF. The maximum deduction will be Rs 25,000 if the members insured are below 60 years, and Rs 50,000 if they are senior citizens.

Exclusions Under Section 80D of The Income Tax Act

Now that we know all about deductions under Section 80D, let’s find out about the exclusions.

  • In case the policyholder doesn’t pay premiums regularly, the tax benefits will not be applicable in their cases.
  • The tax benefits under Section 80D are not applicable if the premium is paid by an employer towards group health insurance.
  • It also does not apply to a premium paid on the behalf of working or employed children, or any other relatives.
  • Lastly, it does not hold value if the premium is paid in cash.

Summing Up

All in all, it’s important to understand the benefits available under Section 80D to claim the deductions and save tax. As they say, knowledge is power!

FAQs

1. What is the limit of the tax deduction for senior citizens under 80D?

As per Section 80D of the Income Tax Act, 1961, senior citizens can avail a deduction of up to Rs 50,000 for payment of premium towards a health insurance policy.

2. What is the tax deduction limit for ordinary citizens under 80D?

For those who do not fall under the senior citizens category, the tax deduction limit under Section 80D is Rs 25,000 for payment of premium towards a health insurance policy.

3. What are the rider covers that qualify for tax benefits?

Policyholders can avail tax benefits for riders like Critical Illness cover, Surgical Care Cover, and other health-related ones under Section 80D.

4. Do I have to pay taxes on the term insurance claim amount?

No. Under Section 10 (10D) of the Income Tax Act, 1961, policyholders can avail a tax exemption on the payouts. This means that the death benefit is also covered under this.

5. Can I claim tax benefits on term insurance even if I have terminated the policy?

No. You can’t claim tax benefits if you have terminated the policy.

6. Can I claim both 80D and 80C?

Yes. Section 80C offers deductions up to Rs. 1.5 lakhs per year, while Section 80D offers deductions up to Rs. 75,000 or in case of senior citizen, maximum benefit can be Rs.. 1,00,000 per year.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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Disclaimer

Note - Tax benefits are subject to conditions under Sections 80C, 80D, Section 10(10D) and other provisions of the Income Tax Act, 1961. Tax Laws are subject to change from time to time. This material has been prepared for information purposes only, should not be relied on for tax or accounting advice. You are requested to seek tax advice from Chartered Accountant or personal tax advisor with respect to personal tax liabilities under the Income-Tax law.

@Save 46,800 on taxes if the insurance premium amount is Rs.1.5 lakh per annum and you are a Regular Individual, Fall under 30% income tax slab having taxable income less than Rs. 50 lakh and Opt for Old tax regime.

@@Provided all due premiums have been paid and the policy is in force.

ARN - ED/05/23/1998

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