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A comprehensive guide to taxation around term insurance

taxation around term insurance

Tax savings should not be the sole objective of your term insurance plan ; however, it’s an important benefit you get from investing in a term life insurance plan. Most people hurry to buy life insurance during the tax paying season, which is the end of the financial year. In fact, more than 50% of life insurance policies are purchased during the last three months of the financial year (i.e. January – March). [1]

The sole objective of this rush is to save taxes and it does work. However, such purchases shouldn’t be done by overlooking the protection needs of your family. Many tend to forget that term life insurance is for the protection of their family’s future when they buy these policies.

Tax-saving investments should be as well-planned as other investments made for making good returns. The income tax section for term insurance can be a bit confusing for some taxpayers; therefore, this comprehensive guide helps simplify the taxation rules around term insurance.


Sum assured and tax benefits on term insurance

Premiums paid for a term life insurance plan is eligible for tax deductions up to Rs. 1.5 lakh under Section 80C of the Income Tax rules. The income tax section for term insurance states that if the sum assured is less than 10 times the annual premium amount, the policyholder is eligible for a tax deduction only up to 10% of the sum assured.

For instance, if your sum assured is Rs. 5 lakh but you are paying annual premium of Rs. 70,000, you will not get tax deductions of Rs. 70,000 but only Rs. 50,000, which is 10% of the sum assured.

TDS on maturity

Budget 2019 has proposed that there will be 5% tax deducted at source (TDS) on maturity proceeds of life insurance policies where the premium paid is more than 10% of the sum assured amount. Before Budget 2019, the TDS rate was 1%. [2]

However, term plan policyholder don’t have to worry much about these rules because in most cases the sum assured is several times more than the premium paid.

Rules for tax benefit eligibility under Section 80C

Though 80C tax section for term insurance allows deductions up to Rs. 1.5 lakh on the premium paid for your term insurance plan, there are certain rules and provisions related to deductions.

  • If your term insurance policy was issued before March 31, 2012, you are eligible for tax deductions up to 20% of the sum assured.
  • If it was issued on or after April 1, 2012, you are eligible for tax deductions only up to 10% of the sum assured.
  • A person with a disability or critical illness is also eligible for tax deductions if the annual premium amount is not more than 15% of the total sum assured. This rule is applicable for policies issued on or after April 1, 2013. [3]
Rules for Section 10(10D) tax benefits on term plan

Under Section 10(10D) the death benefit is also exempt from tax if the sum assured is at least 10 times the annual premium. However, for term plan policies issued after April 1, 2003, death benefits are not exempted from tax if the annual premium payment is more than 20% of the sum assured. [4]

Benefits under Section 80D

Term plan is also eligible for tax deductions under Section 80D similar to health insurance if it has an in-built or add on cover such as:

  • Critical illness rider
  • Surgical care
  • Hospital care, etc.

However, there are certain limits to the tax deductions that you can claim under Section 80D. The maximum tax deduction allowed for a taxpayer is Rs. 25,000 per annum. If the taxpayer has the term insurance policy with health riders for parents, they can get an additional tax benefit of Rs. 25,000. Therefore, a taxpayer with a term insurance plan can get an additional maximum tax benefit of Rs. 50,000 on top of tax deductions up to Rs. 1.5 lakh under Section 80C.

Though a term insurance plan offers a host of tax benefits, don’t buy one with the sole objective to save tax. Keep in mind the life coverage aspect and ensure that you have adequate life insurance protection for your family. With a Future Generali Flexi Online Term Plan , you can get amazing tax benefits while securing your family

A detailed guide for tax benefits under term plan , keep on reading.

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