Taxes are an essential component of both personal and professional transactions. Taxes are important for a country's development and for public infrastructure.
India has always been a country which understands that inflations and a tax hike can hamper public morale so she gives the public certain tax exemptions. Most of these tax benefits are mentioned in the Income Tax Act, 1961. Specific sections in the Act, can inform one of the tax benefits they can enjoy on a variety of financial instruments.
Term Life Insurance policies are also instruments which enjoy tax benefits. The premium you pay towards a term policy and the death benefit availed by beneficiaries are both exempted from being taxed under Sec 80C and Sec10 (10D), respectively, of the Income Tax Act.
Term insurance is life insurance for a limited number of years and you can avail a tax benefit of up to a maximum of ₹ 1.5 Lakh on the premium paid for self, spouse and children. In case of an eventuality or at the time of maturity, the return on term insurance is only a death benefit which is also exempted from tax as long as premium does not exceed 10% of the capital sum assured. There are also separate conditions in case of disability.
Tax saving is a healthy financial exercise which helps boost your finances and term insurance policies are a great protection for your family against unprecedented events. Put together, term insurance tax benefits can help you build a steady portfolio.
Let's understand each of these two sections:
Tax Benefits of Term Insurance under Sec 80 C:
In case your investments fall under sec 80CCC or 80CCD, these investments too will be considered under 80C for calculating ₹ 1.5 Lakh limit on the tax.
- Term insurance policy is a type of life insurance policy. Under sec 80 C (2) of the IT Act, any amount paid to an insurer for a life insurance policy, can be claimed as a deduction from gross total income of the policyholder. This entails that the premium amount paid to keep a life insurance policy active can be deducted from total income and then the actual, taxable income of policyholder can be arrived at.
- Under Sec 80 C (2), to claim a term insurance tax exemption on annual gross income, the gross or total premium must have been paid in the same financial year. Every financial year (FY) begins on 1st April each year and ends on 31st March of the next year. Hence, to claim a term insurance benefit under 80C, for FY 2018-19, the premium amount must be paid between 1.04.18 and 31.03.2019 (including both dates).
In case your premium date falls on 27.03.19 but you forget to pay on time and instead pay the premium on 5.04.2019, which is within the grace period of 15 days offered by the insurer. While your premium may be accepted by the insurer and your policy will be live, you cannot claim deduction for FY 2018-19, as the date of your actual payment took place after the end of FY 2018-19. However, you can claim this premium deduction in FY 2019-20, which is the actual financial year in which premium has been paid.
- Only an Individual or a Hindu Undivided Family (HUF) can enjoy term insurance tax exemption. The insured persons can only include self, spouse and children. There is no ceiling on the number of children and it is irrespective whether the children are major, minor, married, unmarried or adopted.
In case of an HUF, a term insurance policy can be taken in the name of any of the family members. However, a policy under the name of any other persons besides the ones specified (i.e. self, spouse, children, HUF member) cannot avail term insurance tax exemptions.
- Under sec 80C (3) of the IT Act, it is clarified that in case of an insurance policy issued on or before 31.03.12, the tax deduction for premium paid can only be claimed upto 20% of the actual sum assured. if the total premium paid in any year exceeds 20% of the actual sum assured, the deduction on gross income is still only available only up to 20% of the sum assured and the excess amount cannot be claimed as deduction.
According to Sec 80C (3A), actual sum assured is the least sum assured across all policy years. This actual sum assured does not include any bonus amount to be received over and above the sum assured and the premium which is to be returned to the policyholder is also not included in the actual sum assured. For policies issued on or after 1.04.2012, this limit has been changed to only 10% of assured sum instead.
In case the insured person suffers from disability as mentioned in Sec 80U(autism, mental retardation etc.) or those diseases as specified in Sec80DDB, read with Rule 11DD of Income Tax Rules (blindness, deafness etc.), and has a policy issued on or after 1.04.2013, the limit is raised to 15% of actual sum assured. Hence, for a disabled child/person, the total premium in a year must not exceed 15% of the actual sum assured as only 15% of tax exemption on total income will be calculated and the excess premium paid is not eligible for tax exemption.
- A term insurance policy purchased from any insurer, public (LIC) or private (Bharti AXA, Bajaj Allianz, Aditya Birla etc. ) is eligible for tax exemption under 80C, as long as the insurer is approved by the IRDAI. Thus, a term insurance plan bought from either a public/government or private company , approved by IRDAI is eligible for the same tax exemption under 80C.
- The maximum amount that can be claimed as deduction under 80C is ₹ 1.5 Lakh which includes premium paid for term life insurance and other tax saving schemes. Thus, on all your investments, a maximum deduction limited to ₹ 1.5 Lakh in one or more of the investment options (Life Insurance, PPF, ELSS etc.) can be availed. If your investments are more than ₹ 1.5 Lakh, the maximum available tax benefit is only ₹ 1.5 Lakh.
Provisions of the Income Tax Act:
|Section||Essentials||Exemption Limit (₹)|
|80C||Investments in PPF, PF, Insurance, NPS, ELSS etc.||1,50,000|
|80CCD||NPS investments (up to ₹50,000).||50,000|
|80D||Investment in medical insurance for self or parents.||25,000/50,000|
|80E||Interest on education loan.||Full Amount|
|24||Interest paid on Home Loan.||200,000|
|10(13A)||House Rent Allowance (HRA).||As per salary structure|
- The premium of a term insurance plan has to be paid regularly for a minimum number of years to retain eligibility for tax deduction under 80C. A term insurance plan must be active for a minimum period of 2 years. If the term plan is terminated (voluntarily surrendered by policyholder or cancelled by insurer) before expiry of 2 years, no tax benefits will be available to the person.
As clarified in Sec 80C (5), if the policyholder cancels or surrenders the policy voluntarily or if the policy lapses due to non-payment of premiums or non-renewal of policy and the insurer cancels the plan, then the tax exemption under 80C is not available to the person.
Hence, the premiums paid for the financial year in which policy is cancelled are no longer eligible for deduction and the claims received for previous years of policy will be considered as part of gross income for the financial year when policy was cancelled and the person will be taxed accordingly.
Term Insurance Tax Benefits under Sec 10 (10D):
- Under Sec 10 (10D) of the IT Act, the assured plus bonus received upon maturity or on surrender of policy or on death of insured are completely tax free, subject to certain conditions. In case of term insurance plans, the death benefit received by beneficiary in case of death of insured is completely tax free.
- In case of a term insurance plan issued after 1.4.2003 but on or before 31.3.2012, if the total premiums paid towards policy exceed 20% of the actual sum assured in any year, then the returns on policy would be taxable.
For policies issued on or after 1.4.2012, the amount of premiums paid must not exceed 10% and in case of disability of insured, the amount must not exceed 15%.
The definition of actual sum assured as defined in sec 80(3A) is applied and disability as mentioned in section 80U and disease as specified in 80DDB and read with Rule 11DD of Income Tax Rules (blindness etc.) is applicable.
- In case the premium payable exceeds the limit of 10%, 20% or 15%, as applicable to the policyholder, the total proceeds of the policy will be taxable in the year of receipt. However, in case of death of the insured, the proceeds received by beneficiary will remain completely tax free, even if the premium paid in any year has exceeded the specified percentage of sum assured.
Additional term insurance tax exemption under section 80D:
This section is relevant for health insurance policies, i.e, a policyholder can claim deductions on premiums paid towards health insurance policies for self, spouse, children and parents, with different deduction limits under specific conditions.
However, some term insurance plans are also eligible for exemptions under 80 D in specific conditions. If a policyholder opts for a term insurance plan which offers a healthcare or critical care 'rider benefit', he/she can also avail tax benefit under section 80D.
Riders are additional covers which you can add to your insurance policies which offer more benefits and make your insurance cover more holistic and comprehensive. Term insurance riders help make your term plan more comprehensive, ensuring minimal risk and liability on your family in an emergency.
Conditions for term insurance tax benefit under 80D:
- Deduction amount cannot exceed ₹25,000 on the healthcare/critical care rider.
- If the rider includes your parents, you can get an additional deduction of ₹25,000.
- If your parents are senior citizens, the deduction limit is raised to ₹50,000.
Term insurance benefits under 80C and 10 (10D) are crucial in helping you to avail the maximum term insurance tax exemption. Tax saving is a serious exercise in finance and it is wise to consult a professional tax advisor or financial advisor in order to ensure your tax saving is optimum.
The article is meant to be general and informative in nature and should not be construed as solicitation material. Please read the related product brochures for exclusions, terms and conditions, warranties, etc. carefully before concluding a sale
Calculate Term Insurance Premium
Is Income Tax Return (ITR) required for term insurance?
While you don't necessarily require an ITR to purchase term insurance, your insurance provider may ask for your previous year's ITR details so it is wise to keep your ITR details handy.
Tax benefits are deductions and not reimbursements and you can only avail tax benefits on term insurance when you file your Income Tax Returns or ITR. Your ITR takes into account all the premiums and other investments you make and accordingly determines the income tax slab applicable to you. While a Financial Year lasts from 1st April to 31st March, they can be filed till 31st July of the subsequent year.
For the year 2020, the date for filing ITR has been extended till 30th November 2020 because of the COVID-19 pandemic.
Is Term Plan Sum Assured Taxable?
Under Section 10(10D) of the Income Tax Act, the actual sum assured, any bonus received and the premiums returned to policyholder on maturity or in case of death of insurer or in case of surrender of policy or in cancellation of policy due to non-payment of premium or non-renewal of policy are completely tax free, subject to certain conditions.
Can I have 2 Term Insurance Policies?
Yes, you can have more than one term insurance policy to ensure extra security for your family and loved ones when you're not around. Term plans have significantly low premium rates so people can afford to buy and maintain two term plans. There are benefits to owning more than one term insurance plan as follows :
- Extra Protection : The benefits of term insurance plans are far and wide. Along with being simple to grasp, term insurance can make life a lot easier for the family after the breadwinner passes on. Having more than one term plan can extend that blanket of financial security for your family. Having an extra plan ensures that your family's future plans have sufficient financial backing, in case of an emergency.
- Managing Claim Rejection : There can be various reasons for rejecting a claim. These can range from a lapsed policy to incomplete information about the insurer's health or accurate reasons for death. Running after the insurer, trying to release your claim can put significant emotional and financial stress.
That's why comparing the Claim Settlement Ratios of various insurance providers is essential before buying insurance. While this can save you some trouble, having a 'back-up' term insurance plan can come in handy. One of the two plans, if claimed, can help your family or beneficiaries achieve financial security. Having another term insurance policy also minimises the risk of your family remaining unprotected in case of an emergency.
- Extra Policy for Loan Repayment : You can take out two term insurance policies , one with the sole purpose of loan repayment , in case of eventuality. This can help significantly reduce the burden of debt on your family. While one term policy of a higher value can help in repayment of your loan (home, personal loan etc.), the other policy payout can be used by your beneficiaries for their own expenses without worrying about repayment.
Also, in case of rejection of one term plan, the payout from the other term plan can help manage loan repayment and protect your family.
Restrictions on multiple insurance policies :
While there is no ban on having multiple policies , there are a few limits set on multiple term insurance policies :
- The total sum assured of all insurance policies should not exceed Human Life Value
- There is a risk assessment conducted by the insurance provider, taking into account your health conditions, age and health-related risks which determine your premium and sum assured.
- Your insurability depends on your annual income and existing life cover and is adjusted by the insurer alone.
Thus, buying multiple term insurance plans is possible as long as the restrictions are maintained and you are able to manage the additional cost of premium.
Term insurance is a great investment for financial security. Consult your financial advisor and be thorough in your research and documents before investing.