Term insurance, a life insurance policy that offers life coverage for a pre-agreed number of years, and many insurers offer coverage up to 99 years or 100 years of age. During the term insurance period, if the insured passes away while the policy is still in effect, a death benefit (or return of premiums in case of add-on cover -Return of Premium) will be paid by the insurance company to his/her loved ones. Most term insurance policies have pre-defined premiums for the life of the policy. The insured can avail tax benefits on the term insurance premium to reduce their tax liability.
Who Is Eligible for Tax Benefits on Term Insurance Premiums?
Any Indian taxpayer who has purchased term insurance can claim tax benefits on term insurance premiums under multiple sections. The premium paid in a financial year can be deducted from your gross annual income to lessen the taxable income, provided the annual premium should be at most 10% of the sum assured in the policy issued after 31st March 2012. While for the policies issued on or before 31st March 2012, to avail the deduction under section 80C of The Income Tax Act 1961, the premium paid should be at most 20% of the sum assured.
Tax Advantages of Term Insurance Plans in India under multiple sections
Choosing term insurance plans in India provides you with tax benefits, most commonly under Sections 80C of the Income Tax Act 1961 and 10(10D) of the Income Tax Act 1961, subject to the indicated restrictions. Section 80C allows you to claim an annual deduction of up to INR 1.5 lakhs on paid premiums. In addition, the death benefit of your term plan your nominee(s) will receive after your demise within the policy period is tax-free under Section 10(10D).
Let us look at these benefits in detail:
Term Insurance Tax Benefits under Section 80C
According to the section 80C of the Income Tax Act 1961 in India, a taxpayer is qualified for a tax deduction on the premium paid for a term life insurance policy. The yearly cap for tax deduction under Section 80C of the Income Tax Act 1961 remains at INR 1.5 lakhs.
The premium paid during a fiscal year may be deducted from your gross annual income to reduce your taxable income, provided that the annual premium does not exceed 10% of the sum assured for policies issued after 31st March 2012 and 20% of the sum assured for policies issued on or before that date, to qualify for the deduction under section 80C of the Income Tax Act 1961. However, the tax-benefit cap is raised to 15% of the sum assured if a person has a disability listed under section 80U or disease listed under section 80DDB.
Term Insurance Tax Benefits under Section 10(10D)
As per section 10(10D) of the Income Tax Act, 1961, any payout, such as a death benefit, remains tax-free. In other words, the amount your nominee(s) or family receives, subject to the satisfaction of the conditions mentioned in the policy and after your unfortunate demise within the policy period, the sum received by the nominee will not be counted as income of the person receiving it. Hence, there is no need to pay any tax on it. Plus, it has no maximum limit.
Tax Advantages for Term Insurance Riders
Riders are add-ons that provide you with more coverage on the base plan at a nominal additional premium. So, to offer more coverage, insurance companies provide various riders on term plans. However, their advantages go beyond strengthening a term plan’s fundamental components.
To maximize the term insurance tax benefits and strengthen the cover, you can select riders such as critical illness benefit riders or accidental death benefit riders. You qualify for tax benefits under Section 80D when a rider is attached to a base-term insurance policy.
Term Insurance Types
· Level Term Plans
As the standard life insurance coverage, most insurers in India offer a level-term plan. It is the most common type of term insurance policy.
The sum assured is chosen at the start of the policy, and the premium amount remains the same throughout the policy term. This policy is best for young people as it allows for higher coverage, lower premium, and easier financial planning, given that there is a fixed premium.
· Increasing Term Insurance
This type of term insurance plan promises an increase in sum assured at a fixed rate after every financial year. However, the premium remains the same throughout the policy period, which can be paid monthly, quarterly, half-yearly, or annually. The premium payment frequency can be changed on the policy anniversary. The increasing term insurance plan is a great way to stay up with rising costs and guarantee that your family will have enough money to cover their expenditures. Increasing term insurance plan will be appropriate if you foresee a significant rise in your financial obligations.
· Decreasing term insurance
As the name suggests, and in contrast to the increasing term insurance, this term insurance plan in India allows for a decrease in the sum assured each financial year until a pre-agreed amount is reached. The thought behind decreasing term insurance plans is that you will probably pay off all your debts and reduce your financial obligations as you age. It shields your loved ones left behind from the burden of paying off those debts.
· Return of Premium Term Insurance
Term insurance with Return of Premium (TROP) is a new and popular term plan that offers you a survival benefit that other term plans do not provide. In this plan, all premiums paid up to maturity are refunded if you survive your insurance term, subject to the deduction of applicable taxes.
· Convertible Term Plans
A convertible term insurance plan in India can be changed later into another form of insurance, such as a whole life or an endowment plan. You might choose this term plan if you foresee your financial priorities shifting in the following years. For example, if you are now risk-averse but anticipate becoming even more risk-averse, you can choose a term plan that can be changed into a whole life plan.
Term insurance is one of the most common and straightforward future-securing investments, which also comes with add-on covers or rider options (as it is called), such as critical illness cover, accidental death cover, and disability cover. It is a low-cost and dependable financial safeguard for your family that provides financial stability in times of emergency and also helps you save money through tax benefits.
