Michael Curry
While it is general knowledge that term life insurance provides a financial cushion for your family in the event of a catastrophic occurrence, many people are unaware of the many term insurance tax benefits that come with it. Every individual seeks strategies to lower tax responsibility, especially when it comes to saving taxes. You can also get tax breaks by purchasing term insurance. Surprised? Yes, term insurance products provide you with various tax advantages.
But that’s not all. Even the riders available with term policies can help you minimise your overall tax liability. Do you want to learn more? Then keep reading. The tax benefits mentioned in the article may not apply if you opt for the new tax regime since many tax exemptions and deductions have been scrapped within the new regime. These are also subject to change with any changes in laws.
A term insurance policy is a form of a life insurance policy. It provides you with life insurance for a set length of time in exchange for regular and recurring payments, known as premiums.
In the event of an unfortunate and untimely demise, the insurance company will pay a predetermined quantity of money to the beneficiaries/nominees, which is known as the death benefit. This sum of money can then be utilised to suit their needs and requirements, ensuring that their lifestyle does not suffer even after they are gone.
The Income Tax Act of 1961 provides a couple of term insurance tax benefits to term insurance policies under sections 80C and 10(10D), subject to certain conditions. Here is some further information –
- Section 80C.
The premiums you pay for term insurance plans during a fiscal year can be deducted from your total yearly income up to Rs. 1.5 lakh, according to Section 80C of the Act. This essentially lowers your total taxable income, lowering your overall tax liability. Consider the following example:
Assume you pay Rs. 8,000 per month for a term insurance policy with a death benefit sum insured of Rs. 25 lakhs. The annual premium you would be required to pay is Rs. 96,000. You can now deduct this amount from your total yearly income, lowering the amount of tax you will have to pay. A term insurance calculator can help you understand this better.
- Section ten (10D)
In contrast, Section 10(10D) of the Income Tax Act of 1961 provides a tax exemption on the death benefit handed out to your beneficiaries/ nominees. This practically indicates that the amount of money received by your beneficiaries/nominees from the insurance service provider as a result your lose of life does not constitute income and is thus not taxable in their hands.
Because of the terms of section 10(10D), your beneficiaries/ nominees can utilise the cash they receive without paying any tax on it. However, in order for the death benefit to be totally tax-free, the sum assured must be at least ten times greater than the yearly premium paid. Here’s an example to help you understand the concept better:
Using a term insurance calculator, assume you choose a term insurance policy with a death benefit sum assured of Rs. 15 lakhs. The yearly term insurance premium that you must pay for the plan is estimated to be Rs. 1,50,000. Because the total value covered is 10 times the annual premium paid, the death benefit of Rs. 15 lakhs is entirely tax-free in the hands of your beneficiaries/ nominees. The entire money received by your beneficiaries/nominees can thereafter be utilised to achieve their goals and requirements without regard for the tax implications.
In addition to term plans providing tax advantages, the riders you select can help you lower your tax liability. With Section 80D of the Indian Income Tax Act of 1961, to be specific, you are permitted to deduct the yearly premiums you pay for health insurance coverage from your total income for that year. This part, however, can be used to your benefit even with term insurance contracts.
All you have to do is add a health-related rider, such as critical illness or surgical care coverage, to your base term plan. This would allow you to deduct the premium you pay for the rider from your overall income. However, the clause imposes a few limitations on the amount of premium that can be deducted. Let us examine them –
- If you add a rider to a plan for your parents who are under the age of 60, the total amount of premium you can claim as a deduction in a year is limited to Rs. 25,000.
- If you add the rider to a plan for your parents over the age of 60, the total amount of premium you can claim as a deduction in a year increases to Rs. 50,000.
Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.
Source: https://www.bajajallianzlife.com/life-insurance-guide/term/term-insurance-tax-benefits-on-riders.html
