Only some people know the many term insurance tax benefits that accompany a term life insurance plan, even though it is well known that it serves as a financial safety net for the family in an unfortunate event. Surprised? Certainly, there are various tax advantages to term insurance plans for you. Not only that, even the riders that term plans include can give you a way to lower your overall tax obligation.
Term insurance: what is it?
One kind of life insurance policy is term insurance. In exchange for regular, recurring payments known as premiums, it provides you with life insurance for a predetermined amount of time.
The insurance service provider would pay your beneficiaries or nominees a specified amount of money, known as the death benefit, in the case of your untimely passing. When they receive this money, they can utilise it to care for their needs and requirements, maintaining their lifestyle even after your passing.
Tax advantages for term insurance
Term insurance policies can be eligible for a few term insurance tax benefits under sections 80C and 10(10D) of the Income Tax Act of 1961, subject to their corresponding clauses.
Please read on for the details:
- Section 80C
The premiums you pay for a term plan during a fiscal year may be deducted from your total annual income up to a maximum of Rs. 1.5 lakh under section 80C of the Income Tax Act. It lowers your overall taxable income, which lowers your overall tax obligation.
Let’s examine an example:
Let’s say you pay a premium of Rs. 96,000 every year. You can now deduct this sum from your annual income total, ultimately lowering the tax amount you owe. You can always cross-check your premium amount using a term insurance calculator.
- Paragraph 10 (10D)
The death benefit granted to your beneficiaries or nominees, on the other hand, is exempt from taxation under Section 10(10D) of the Income Tax Act of 1961. It means that any money your beneficiaries or nominees get from the insurance company from the term plans due to your passing wouldn’t qualify as income and wouldn’t be subject to tax in their possession. Your beneficiaries or nominees are free to use the money they receive completely tax-free, thanks to section 10(10D) rules. However, the sum insured must be at least ten times greater than the amount of the yearly premium you pay for the death benefit to be completely tax-free.
Here is a brief illustration to help you better grasp the idea:
Let’s say you choose a term insurance policy with a death benefit sum assured of 15 lakh rupees. Possibly, the plan’s annual term insurance premium will cost you Rs. 1,50,000. (You can check your premium amount using the term insurance calculator. The death benefit of Rs. 15 lakhs will be completely tax-free for your beneficiaries or nominees because the total sum assured amount is 10 times that of the annual premium paid. Your beneficiaries or nominees can then spend the entire sum they receive to fulfil their objectives and needs without worrying about the impact of taxes on such receipts.
Tax advantages for riders on term insurance
Even the term riders you choose can help you lower your tax burden in addition to term plan tax advantages. Specifically, section 80D of the Income Tax Act of 1961 permits you to deduct the premiums you pay for health insurance policies from your annual income. Even with term insurance coverage, you can benefit from using this clause.
All you have to do is choose a health-based rider over and above the base term plan, such as a critical illness or surgical care cover. It would enable you to deduct the premium you pay for the rider from your overall income. However, the clause limits the amount of the premium that can be written off.
Let’s examine them:
- If a rider is added to a plan for your parents, who are under 60, the total premium you may deduct in a calendar year is limited to Rs. 25,000.
- The total term plan premium that you can deduct in a year increases to Rs. 50,000 if a rider is added to a plan for your parents older than 60.
We hope this article has educated you on how riders on term insurance can help you get more tax benefits over and above the claims on the premiums you are paying. Now you can decide on the riders to choose for your term insurance.
There are 2 tax regimes in India – new and old. Choose the correct one after consulting an expert to get the tax benefit you desire. You can opt for a regime change during the next financial year.
All savings are provided by the insurer as per the IRDAI-approved insurance plan. Standard T&C apply