Tax Benefits under Term Insurance

Term insurance offers tax benefits with deductions up to Rs. 1.5 lakh under Section 80C and tax-free death benefits under Section 10(10D), ensuring financial security for your family.
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Tax Benefits under Term Insurance
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3 min
02-September-2024

Term insurance is a kind of life insurance. It gives financial support to the policyholder’s family if they pass away unexpectedly. In addition to financial security, term insurance policies also offer some tax benefits to policyholders. Let us take a closer look at what is term insurance, its benefits, and the tax benefits of term insurance.

What is term insurance?

Term insurance is a type of life insurance that provides coverage for a specific period, usually ranging from 5 to 30 years. It ensures financial security for the policyholder’s family in case of an untimely demise. Term insurance policies are affordable and offer high coverage at low premiums. Additionally, they provide tax benefits under Section 80C and Section 10(10D) of the Income Tax Act. Some plans also come with riders like critical illness or accidental death benefits, enhancing the overall protection. With different types of term insurance available, individuals can select a plan that best suits their financial needs and future goals.

Benefits of term insurance

Term insurance offers several benefits to policyholders, such as:

  1. Financial security: Term insurance policies offer financial security to the policyholder's family, ensuring that they have a good financial backup during critical times.
  2. Affordable premiums: Term insurance premiums come at relatively affordable premiums when compared to other life insurance policies like endowment and unit-linked insurance plans.
  3. Flexibility: Term insurance policies come with flexible terms and customisable add-on features, allowing policyholders to choose the options that best suit their needs.

Term insurance tax benefits under different income tax sections

Term insurance policies are eligible for tax benefits under two sections of the Income Tax Act of India. Here are the tax benefits of term insurance:

Section 80C:

Policyholders can claim a tax deduction of up to Rs. 1.5 lakhs for premiums paid on your term insurance plan under Section 80C of the Income Tax Act. This section also offers deductions for other investments and payments, such as:

  • Public Provident Fund (PPF)
  • Employees' Provident Fund (EPF)
  • Unit Linked Insurance Plans (ULIPs)
  • Equity Linked Savings Schemes (ELSS)
  • Home loan repayments
  • Children's tuition fees
  • Life insurance premiums

Since Section 80C covers multiple investment options, it is important for policyholders to carefully allocate their funds to maximise tax savings. Choosing term insurance under this section ensures both financial security and tax efficiency.

Section 80D:

Policyholders can claim deductions on premiums paid for health insurance riders added to term insurance plans. This applies to critical illness and hospitalisation benefits, helping policyholders reduce their taxable income while ensuring comprehensive financial protection.

Under Section 80D, deductions can be claimed for self, spouse, dependent children, and parents. For individuals below 60 years, the deduction limit is Rs. 25,000, while senior citizens can claim up to Rs. 50,000. This benefit encourages individuals to opt for health riders along with their term insurance, providing dual protection.

Section 10 (10D)

Under Section 10(10D), any amount received from a life insurance policy, including death covers, bonuses, and maturity payouts, is exempt from tax. This exemption applies if the sum assured is at least 10 times the annual premium. This provision encourages individuals to invest in life insurance for long-term financial security.

For policies issued after April 1, 2023, the maturity proceeds are taxable if the total premium paid in a year exceeds Rs. 5 lakh. However, this does not impact the tax-free status of death covers, ensuring that nominees receive the full claim amount without deductions.

Additional tax benefits to consider

  • No tax on death covers: The payout received by nominees in case of the policyholder’s demise is completely tax-free.
  • Tax-free maturity benefits: If conditions under Section 10(10D) are met, policyholders can enjoy tax-free maturity proceeds.
  • Deductions for salaried individuals: Term insurance helps salaried employees reduce taxable income, making it a smart financial tool for tax planning.

By leveraging these tax benefits, policyholders can save more while ensuring financial stability for their loved ones. Proper planning and understanding of tax provisions can help individuals make the most of their term insurance investments.

Tax benefits on term insurance riders

Term insurance riders offer additional financial protection and come with tax benefits under Section 80D of the Income Tax Act. These riders enhance the coverage of a basic term insurance plan and provide policyholders with security in case of unforeseen events. By including eligible riders, policyholders can reduce their taxable income while ensuring better financial protection.

  • Term insurance riders provide additional coverage and may offer tax benefits under Section 80D of the Income Tax Act.
  • Riders such as critical illness, accidental disability, and hospitalisation benefits qualify for tax deductions.
  • Premiums paid for health-related riders are eligible for deductions up to Rs. 25,000 per year for individuals and Rs. 50,000 for senior citizens.
  • Non-health-related riders like waiver of premium and income benefit riders are not eligible for tax deductions.
  • To avail tax benefits, the premium must be paid via online banking, credit/debit cards, or cheque (cash payments are not accepted).
  • Policyholders must keep premium receipts and payment proofs for tax filing.
  • Claiming deductions on rider premiums helps policyholders reduce their tax liability while securing additional protection.

How to claim tax benefits on term insurance under Section 80D?

Policyholders can claim tax benefits on health-related term insurance riders under Section 80D. To successfully claim deductions, the premium payment should meet specific conditions set by the Income Tax Act. Proper documentation and adherence to tax filing procedures ensure smooth processing of claims.

  • Only health-related riders in term insurance qualify for deductions under Section 80D.
  • Premium payments must be made through traceable methods (cheque, bank transfer, credit/debit card).
  • Keep payment receipts, premium certificates, and bank statements for tax filing.
  • Declare the premium amount under Section 80D while filing the Income Tax Return (ITR).
  • If claiming for dependent parents, ensure their age is correctly mentioned to claim Rs. 25,000 or Rs. 50,000.
  • Group health insurance plans offered by employers do not qualify for deductions under Section 80D.
  • Tax benefits help reduce taxable income while ensuring financial protection.

Payments eligible for deductions under Section 80D

The Income Tax Act allows deductions under Section 80D for certain premium payments related to health insurance and medical riders. These payments must be made through approved methods to qualify for tax deductions.

  • Health insurance premiums paid for self, spouse, children, and parents.
  • Critical illness rider premiums added to a term insurance policy.
  • Accidental disability rider premiums if they include hospitalisation benefits.
  • Preventive health check-ups up to Rs. 5,000 per financial year.
  • Family floater health insurance premiums covering multiple members under one policy.
  • Senior citizen health insurance premiums with a higher deduction limit of Rs. 50,000.
  • Medical insurance for parents (Rs. 25,000 deduction for parents below 60, Rs. 50,000 for senior citizens).

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Exclusions under Section 80D of the Income Tax Act

Not all premium payments qualify for tax deductions under Section 80D. Certain exclusions apply to ensure that only health-related premiums receive tax benefits. Policyholders should be aware of these exclusions to avoid incorrect tax claims.

  • Basic term insurance premiums do not qualify under Section 80D; they fall under Section 80C.
  • Non-health-related riders such as waiver of premium and income benefit riders are not eligible.
  • Premiums paid in cash (except for preventive health check-ups) do not qualify for deductions.
  • Group health insurance premiums paid by employers are not eligible for tax deductions.
  • Medical insurance covering overseas treatments does not qualify for Section 80D benefits.
  • GST and service charges on premiums are not included in the deductible amount.
  • Insurance policies covering only personal accident death covers are excluded.

Conclusion

Term insurance provides essential financial security to policyholders and their families. In addition to offering life cover, term insurance plans come with tax benefits under Sections 80C, 80D, and 10(10D) of the Income Tax Act. Understanding these tax-saving opportunities helps policyholders maximise benefits while ensuring adequate coverage. Selecting the right riders and payment methods is crucial for claiming tax deductions. However, policyholders must be aware of exclusions to avoid incorrect tax claims. By making informed choices, individuals can enjoy financial protection along with significant tax savings, securing their future and that of their loved ones.

Frequently asked questions

Is term insurance covered under 80D?

No, term insurance is not covered under Section 80D of the Income Tax Act, 1961. This section deals with tax benefits on health insurance premiums and medical expenses.

What is the 80D tax benefit?

Under Section 80D, individuals can claim a tax deduction on the premiums paid for health insurance policies. The deduction can be claimed for self, spouse, dependent children, and parents. The tax benefit can go up to Rs. 25,000 for individuals and Rs. 50,000 for senior citizens and very senior citizens.

Can I claim both 80D and 80C?

Yes, taxpayers can claim both Section 80D and Section 80C tax benefits on their income tax returns. While Section 80D provides deductions on health insurance premiums, Section 80C provides deductions on investments and expenses such as life insurance premiums, PPF contributions, and tuition fees. However, there are limits to the total deduction available under both sections.

What is the limit of 80D term insurance benefit?

As mentioned earlier, term insurance is not covered under Section 80D; hence no deduction is available for term insurance premiums. However, if you have a term insurance policy that also provides critical illness cover, you can claim a deduction for the critical illness part under Section 80D. The deduction can be up to Rs. 25,000 for individuals and Rs. 50,000 for senior citizens.

What is the maximum tax deduction available under Section 80D for regular taxpayers?

Under Section 80D of the Income Tax Act, ordinary taxpayers can claim a tax deduction of up to Rs. 25,000 for health insurance premiums paid for themselves, spouses, and children. For senior citizens, the deduction limit increases to Rs. 50,000 per financial year.

Can I still avail tax benefits on term insurance after cancelling the policy?

No, tax benefits cannot be claimed if the term insurance policy has been terminated. To retain the deductions under Sections 80C or 80D, the policy must remain active. If discontinued early, the tax deductions availed previously may become taxable.

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Disclaimer: *T&C Apply - Bajaj Finance Limited (‘BFL’) is a registered corporate agent of third party insurance products of Bajaj Allianz Life Insurance Company Limited, HDFC Life Insurance Company Limited, Future Generali Life Insurance Company Limited, Life Insurance Corporation of India (LIC), Bajaj Allianz General Insurance Company Limited, SBI General Insurance Company Limited, ACKO General Insurance Company Limited, HDFC ERGO General Insurance Company, TATA AIG General Insurance Company Limited, ICICI Lombard General Insurance Company Limited, New India Assurance Limited, Chola MS General Insurance Company Limited, Zurich Kotak General Insurance Company Limited , Star Health & Allied  Insurance Company Limited, Care Health Insurance Company Limited,  Niva Bupa Health Insurance Company Limited, Aditya Birla Health Insurance Company Limited and Manipal Cigna Health Insurance Company Limited under the IRDAI composite CA registration number CA0101. Please note that, BFL does not underwrite the risk or act as an insurer. Your purchase of an insurance product is purely on a voluntary basis after your exercise of an independent due diligence on the suitability, viability of any insurance product. Any decision to purchase insurance product is solely at your own risk and responsibility and BFL shall not be liable for any loss or damage that any person may suffer, whether directly or indirectly. Please refer insurer's website for Policy Wordings. For more details on risk factors, terms and conditions and exclusions please read the product sales brochure carefully before concluding a sale. Tax benefits applicable if any, will be as per the prevailing tax laws. Tax laws are subject to change. BFL does NOT provide Tax/Investment advisory services.  Please consult your advisors before proceeding to purchase an insurance product. Visitors are hereby informed that their information submitted on the website may also be shared with insurers. BFL is also a distributor of other third-party products from Assistance Services providers such as CPP Assistance Services Pvt. Ltd., Bajaj Finserv Health Ltd. etc. All product information such as premium, benefits, exclusions, sum insured, value added services, etc. are authentic and solely based on the information received from the respective insurance company or the respective Assistance service provider company.

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