Term life insurance is a necessary inclusion in every portfolio, as it financially secures the policyholder’s family from any unfortunate event in the future. Yet, you should know more about some taxation rules linked to term insurance plans, particularly since term insurance is regarded as a popular tax-saving instrument. So, here’s learning a little more about the same.
Section 80C Tax Deductions on Term Insurance
Did you know that the premium you pay towards life insurance is eligible for tax deductions? These can get you annual deductions of up to Rs. 1,50,000 under Section 80(80C) of the Income Tax Act. The policy could be in your name or even for your children or spouse. However, there are zero tax conditions for insurance plans for your child. Deductions may be claimed for these plans irrespective of age, profession, and other factors. Both individual taxpayers and HUFs (Hindu Undivided Families) are eligible for these deductions as per Section 80C.
The best part is that the deduction applies to every type of term life insurance policy in the country. The highest possible deduction allowed on the premium is Rs. 1.5 lakh in a single financial year. However, to be eligible for this deduction, the policy should be held for a minimum of two years.
Section 10 (10D) Tax Exemptions on Term Insurance
Section 10 (10D) exemptions are related to the death benefit (sum assured) or the maturity benefit payout from a life insurance policy. The former is the amount paid by the insurance company to the nominees of policyholders in case of their demise within the policy period. The latter is any amount paid out upon a policy’s maturity.
Here are a few aspects worth remembering in this regard:
- The maturity benefit, if applicable to your term insurance policy (as a return of premiums), will have a complete tax exemption if the annual premium does not surpass 10% of the sum assured. This is only for those policies bought after 1 April 2012. For policies purchased before this period, the premium should not cross 20% of the sum assured.
- Policies bought after 1 April 2013 should not have their premiums surpassing 15% of the sum assured for maturity exemptions. This applies to individuals with disabilities.
- Maturity benefits are taxable in the case of policies where the premium amount exceeds either 10% (for policies bought after 1 April 2012) or 20% (For those bought between April 2003 and April 2012) of the sum assured, depending on the purchase date.
Term Policies and TDS
You should also know about TDS deductions linked to your term insurance policy. Here are some of the conditions worth noting in this regard:
- If the amount garnered from any term insurance policy that does not come under Section 10 (10D) exemptions surpasses Rs. 1 lakh, then from October 2014 onwards, the insurance company will deduct TDS at 5% prior to the payment being made. This rule is enforced as per the guidelines of the TDS Section 194DA. It will also apply to all bonus payments. The 5% TDS will be worked out on the difference between the total premium amounts paid by the customer and the maturity amount.
Suppose an individual gets Rs. 20,00,000 as the policy maturity benefit, which includes applicable bonuses. However, the same individual has already paid Rs. 4 lakhs as a premium over a period of 10 years. Since the amount received exceeds Rs. 1 lakh, TDS will apply at 5% on the difference between the two amounts, i.e. Rs. 16 lakhs. This means the insurance company will deduct a sum of Rs. 80,000 (5% of Rs. 16,00,000) before making the payment. Hence, the person will get Rs. 19,20,000 in hand.
- In case the maturity benefit is lower than Rs. 1 lakh, there will be no TDS deductions by the insurance company. However, the amount will remain taxable, and the policyholder may later claim TDS credits while filing returns.
Some additional tax benefits to be aware of
Along with the tax benefits outlined above, there is another tax benefit that policyholders can avail of with a few strategic steps. If you add a critical illness rider, an extra deduction of Rs. 25,000 is possible with a term life insurance plan under Section 80D. This section allows this deduction for premium payments toward health coverage. The amount is Rs. 50,000 for senior citizens. You can opt for critical illness coverage or related health coverage as a rider with your term plan. The extra premium you pay will help you get even higher tax benefits while guaranteeing greater peace of mind.
Mastering the tax rules of term insurance plans is imperative before buying a policy. Proper knowledge will help you maximize your tax benefits while being aware of all the essential terms and conditions for availing of the same. At the same time, you should ensure that your premium amount is in sync with your budget. Calculate this using a term insurance premium calculator for your desired coverage amount. It will help you plan everything before purchasing a term policy.