Term Insurance Tax Benefits

Saving the future of loved ones after a demise or reducing the burden of medical expenses in case of a health emergency is one of the most boasted advantages of different types of insurance plans. But an insurance plan also offers one of the significant yet underrated advantages, i.e. Tax Benefits. Shelling out thousands of rupees every year to pay taxes becomes even more painful when one realizes that the money could have been invested efficiently to make its potential utilization to make the future financially independent.  

Especially the new tax-payers looking for intelligent ways of saving tax and, at the same time, wish to make the right investment choices to have a financially abundant future; buying term insurance policies is the right option to do so. Moreover, term insurance policies save your tax and money, which might get wasted on unforeseen unfortunate incidents.

However, more than having a term insurance plan is required. The crux of having the right tax-saving strategy is to be insightful about the right plan, precise amount, and the time to buy a policy, as these three factors determine the amount one can save from taxes.

Term Insurance and its Benefits

The most crucial role of term insurance is to provide the death benefit to the policyholder's nominee. The death benefit is the sum assured amount guaranteed under a policy and paid to the named beneficiaries if the policyholder dies during the policy tenure. This death benefit can be used to cover income loss If the policyholder is the family's only breadwinner. It can also be used to pay off debts and meet other financial obligations.

Besides death benefits, term insurance also offers various tax benefits to the policyholder. According to the Income Tax Act of 1961, any policyholder is eligible for tax benefits. Term insurance policies often provide customers tax deductions under Section 80C of the Income Tax Act of 1961, along with further deductions up to INR 1.5 Lakhs. Policyholders can also avail of exemptions under Section 10(10)D if they receive any amount as part of their insurance policy's maturity benefits.

Tax Benefits under section 80C

Section 80C of the Income Tax Act allows you to claim a tax deduction for the premium you pay for your term plan. This includes premiums paid for yourself, your spouse, and any dependent children you have. Section 80C allows you to claim a maximum tax benefit of INR 1.5 lakhs. Following are the conditions to avail of term insurance tax benefits under Section 80C include:

• If term plans purchased on or after April 1, 2012, are eligible to give you a tax benefit of up to 10% of the total sum assured.
• If you have purchased your term plan before March 31, 2012, you can get a tax deduction of up to 20% of the sum assured amount.
• In case you are suffering from a condition that is specified under Section 80DDB or a disability that is listed under Section 80U, then the tax benefit limit increase from 10% to 15% of the total sum assured amount. 

Tax Benefit under section 80D

Section 80D allows a deduction on the premium paid for health insurance. But many insurance providers offer a term plan with surgical care coverage, critical illness coverage, etc. If you buy your term plan along with these additional riders, you can only avail of the term insurance tax benefit under this section 80D.

Tax Benefits under section 80D

Tax Benefits of Term Insurance under Section 10 (10D)

Under section 10 (10D), a person can also claim for the tax on the returns. This means the death benefits given to the nominees or the maturity amount given is exempted from all taxes. 

But this is not valid for the following: 

1. If anyone received any amount under "Section 80DD or 80DDA".
2. If anyone received any amount under the "Keyman Insurance Policy".
3. The tax benefit will be at most 10% of the sum assured if the term plan is issued on or after April 1, 2012.

Note: 

Keyman insurance is described as an insurance policy in which the employer is both the proposer and the premium payer, the life to be insured is that of the employee, and the benefit is paid to the employer in the event of a claim.

Income Tax Benefit under Section 10 (10D)

Term Insurance Riders Tax Benefits

Life insurance companies offer various types of term insurance riders to enhance the coverage of your term plan. However, they offer benefits that go beyond enhancing the coverage i.e. tax benefit. Here are some ways that term insurance plan riders can enable you to receive additional tax benefits.

• Critical illness rider makes you eligible for tax deduction under section 80D
• TROP rider makes you eligible to save money under section 80C

Conclusion

A term insurance plan provides life cover and ensures tax benefits, making it a valuable tax-saving tool. Term plans are one of the best ways to protect oneself. At the same time, it's critical to understand the laws while claiming tax or filing returns thoroughly. Year after year, you should keep updated on the Income Tax Act changes.