Everyone wants to save taxes. In a country like India, which collects both direct and indirect taxes, the former constitutes a significant part. However, to promote savings and keep the economy liquid, the Government encourages people to invest in insurance policies, by offering them tax benefits.
Tax Benefits under Section 80C on Policy Premiums Paid
As per the Income Tax Act of 1961, premiums paid to insure your own life or the life of the spouse or child are tax-deductible. The amount is eligible for deduction under Section 80C up to a maximum of ₹1, 50,000. Any individual or a HUF (Hindu Undivided Family) can claim the deduction for a nominee who is single or married, dependent or independent, or minor or major.
The deduction is provided by all insurance companies that are regulated by the Insurance Regulatory and Development Authority of India (IRDAI). That said, the following conditions must be met to claim the deduction under Section 80 C of the Act.
- The premium of the term policy should not exceed 10 per cent of the total sum assured for all policies issued post-April 2012.
- For policies issued before April 2012, the premium should not be more than 20 per cent of the total sum assured
- For all plans issued post-April 2013 that protects a disabled individual or one suffering from a covered disease, the premium should not exceed 15 per cent of the sum assured
Tax Benefits under Section 10(10D) on the Maturity Amount
If a policyholder meets the above conditions, the Income Tax Act of 1961 also allows a further tax exemption. As per Section 10(10D) of the Act, the amount of the term policy received on maturity or as a bonus is completely exempted from taxes. However, for policies where the premium paid is more than 10 per cent, 20 per cent or 15 per cent depending on the issue date, there is no exemption granted to the insured or the family on the maturity of the policy.
Tax Deducted at Source (TDS)
The exceptions above do not apply in case the maturity amount of the term policy exceeds more than ₹1 lakh in a single year. If the case happens, then the whole amount is taxable as income. TDS deductions in such case are charged as:
- 1 per cent deductions if the PAN of the insured is available and registered
- 20 per cent deductions if the PAN of the insured is not available and registered
Tax Benefits under Section 80D for Healthcare Policies or Related Add-ons
As per the Income Tax Act of 1961, a policyholder can claim tax benefits under Section 80D, provided it is a health insurance premium. In terms of term plan, this benefit can be claimed if the policy has add-on or riders such as critical illness, surgical care, hospital care, etc.
The tax benefit can be claimed by the insured, spouse, dependent children or parents (irrespective of dependency).
However, certain clauses of the deduction are:
- The exemption is provided only up till ₹25,000
- For term plans in the name of the parents, an additional deduction of ₹25,000 is allowed
- For term plans in the name of senior citizen parents, a tax benefit of ₹50,000 is offered
As a policyholder, it is your fundamental right to know about the tax exemptions and deductions for your term insurance plan. To be more prudent in your approach, you can thoroughly read and enquire about the tax benefits and calculate the amount beforehand to be more certain of the life insurance policy. Financial prudence today will enable a better future!