The Income Tax Act 1961 reinforces this by providing tax benefits across various insurance plans. Insurance helps an individual protect themselves from unforeseeable dangers. Moreover, insurance is an effective mechanism for tax planning. The Income Tax Act 1961 provides tax incentives for certain insurance plans by allowing tax rebates on premiums paid and on benefits received under certain insurance plans, such as 80C, 80D, 80DD, 80DDB, and 10(10D). This tax incentive applies to diverse insurance schemes, including life insurance, health insurance, term insurance, pension insurance, and disability insurance. Every insurance plan has its own unique benefits, depending on its objective, coverage, and plan design. If an individual chooses one or more of these tax savings insurance plans, they can minimise their tax obligations while simultaneously protecting themselves and their dependents from financial unpredictability.
What is Term Insurance?
Term insurance is a life insurance plan that provides financial coverage for the insured’s dependents upon death within a specified period, referred to as the term. It is designed to provide significant life cover at a low cost, with no provision for saving or investment.
- Definition: Term insurance is a type of insurance that falls under life insurance, whereby one agrees to pay an amount to the beneficiary upon death during a specified period.
- Pure risk cover: It gives exclusive coverage of risks. In contrast to other endowment or ULIP plans, maturity benefits are usually not offered in Term Insurance policies.
- Policy Terms: The coverage is for a stated period of years, such as 10, 20, or 30 years; until a given age, such as 60 years or 65 years, etc.
- Premium amount: Premiums charged tend to remain low, as investment or savings are involved.
- Death Benefit: If death occurs during the policy period, the full sum assured will be paid to the nominee.
- No survival benefit: In most cases, no payment is made if the insured survives the policy period, except with return of premium policies.
- Flexibility with Riders: In addition, term insurance offers options for riders such as critical illness, death from accidents, and disability insurance.
- Purpose of Term Insurance: The main objective is to replace income, pay off debts, and provide for dependents financially.
Term Insurance Tax Benefits
Along with the significant cost-effective proposition of securing ample life insurance with a small payout, the policies of this nature are greatly subsidised by India’s tax policy environment, as there are significant tax exemptions on the payment of insurance premiums under the Act.
Term insurance enjoys tax advantages under Sections 80C, 80D, and 10D.
1. Tax Advantages Under Section 80C
- Under section 80C, taxpayers can claim deductions for investments and expenses made by them during any financial year.
- Under this section, premiums paid on life insurance, including term insurance, are also included.
- The deduction is allowed on “premiums paid” on a term insurance policy and is deductible from “the gross total income” according to Section 80C.
- Maximum deduction limit under Section 80C is: ₹1,50,000 for each fiscal year
- This category comprises investments within the Provident Fund/ PPF, ELSS Mutual Funds, National Savings Certificates, tuition fees, home loan repayments, etc.
- The total limit of ₹1.5 lakh includes premiums paid for term insurance as well.
- The deductions are allowable for individual taxpayers and Hindu Undivided Families (HUF) under Section 80C.
- Companies and firms in partnerships are not eligible to claim a deduction.
- Term insurance policies made in the name of self, spouse, and children, whether dependent or independent.
- In respect of HUF, premiums of any member can be claimed.
- To qualify for a deduction, newly issued plans after April 1, 2012, must meet a requirement where their premium should not be more than 10% of the total assured.
- The maximum allowable, provided that the policies are of a date before April 1, 2012, is 20% of the total guaranteed.
- For policies taken by individuals with disabilities or certain illnesses, it cannot be more than 15% of the sum insured.
- If the premium paid exceeds certain specified limits, then the deduction will decrease proportionally.
2. Tax Benefits Available Under Section 80D
While the general provision offers the facility of tax deduction under Section 80D, this applies only to health insurance premiums. Generally speaking, term insurance policies do not fall under that provision unless they include health-related riders.
- Optional riders available with term insurance might include critical illness cover, surgical care, and hospital cash benefits.
- The premiums paid for health-related riders come under Section 80D.
- Deductions available under Section 80D differ from those under Section 80C, thereby allowing taxpayers to avail of both sections simultaneously.
- Limits of Deductions under Section 80D:
Category Maximum Deduction
1. Self, Spouse, and Children ₹25,000
2. Senior citizen ₹50,000
3. Parents ₹25,000 / ₹50,000
Therefore, the total deduction allowed under Sec 80D can go up to: ₹1,00,000 per year
- Only the health rider portion of the premium qualifies.
- Pure life insurance premium is not included under Section 80D.
3. Tax Exemption under Section 10(10D)
Under section 10(10D), taxation is levied on insurance companies.
- Death Benefit: Completely Tax-Free
- Amount received by the nominee when the insured dies, provided the insured purchased a term life insurance: 100% exempt from income tax.
- The above exemption is applicable without considering any specific monetary limitation, depending on the premium size and the date of policy issuance.
- Even if the premium amounts to more than 10% of the total amount insured, providing that there is no deduction under section 80C.
- In traditional term policies, there are no maturity benefits.
- Term Return of Premium plans come with the facility for payout.
- The maturity proceeds are excluded by reason of Sec 10 (10D), provided the premium paid does not exceed 10% of the total insured amount, and 15% in special categories.
- If the stated criteria are not satisfied, the maturity amount becomes taxable. TDS can be applied to the income portion itself.
4. There is No Tax on Capital Gains Applied to Term Insurance Payouts
Insurance payouts are exempted from the category of capital gains and, as such, any applicability of tax or exemption is covered under Section 10(10D) alone.
5. There is No TDS on Exempt Term Insurance Claims
- The payable amount of the death claim is not subject to any deduction of TDS.
- Distributions at maturity are tax-exempt.
- TDS will apply only if the policy does not meet the exemption criteria.
6. Integrated Tax Incentive Scheme
Term insurance provides tax benefits on three different counts:
- Premium payment stage: Deduction under Section 80C.
- Health Protection Phase: Rider Deduction under Section 80D.
- Claim or payout stage: Exemption under Section 10(10D) in full. It provides one of the biggest tax benefit structures under the Income Tax Act, 1961. Premiums are deductible under Section 80C; health-related riders provide additional relief under Section 80D, and death or eligible maturity benefits are wholly exempt under Section 10(10D).
Why is Term Insurance the Most Tax-Efficient Insurance?
Term insurance is a type of life insurance that provides financial protection to an individual’s family for a particular period, referred to as a policy term.
Its primary purpose is to provide large life cover with a low premium, with no features of savings or investments.
Term insurance acts as a basic, yet effective, and extremely essential financial tool which provides security for the future of the family in case of an untimely death.
- Definition of Term Insurance: Term insurance is a type of life insurance that involves an insurance firm’s pledge to pay an agreed-upon sum on death within an agreed-upon term.
- Pure Risk Cover: It offers exclusive coverage for risks. As opposed to the endowment or ULIP policies, term insurance policies do not provide the facility for the settlement of the mature sum by the insurer.
- Policy Terms: The availability is provided for a certain period of time, such as 10 years, 20 years, or 30 years, or until attaining a certain age, such as 60 years or 65 years.
- Amount of premium: Normally, such premiums paid under insurance schemes are low since they do not require any investment.
- Death Benefit: In case the insured dies during the policy term, the face value is paid to the nominee.
- No Survival Benefit: Generally, no payout is made if the insured lives to the end of the term, unless it is a “return of premium” policy.
- Flexibility with Riders: Other forms of term life insurance may come with riders offering coverage in case of critical diseases, accidental death, or disability.
- Purpose of Term Insurance: The main aim is, therefore, replacement of lost earnings, discharge of liabilities, and providing support.
Conclusion
Significant tax benefits are offered by term insurance plans, as stated in the Income Tax Act 1961. It can be clearly stated that term insurance plans are one of the most tax-beneficial options for income tax planning, always keeping in view financial security along with substantial tax benefits for investors.
The various tax advantages that can be availed by individuals purchasing term insurance plans include an opportunity for investors to be immune from income taxes, with no financial limits due to the various advantages that can be availed under Section 10(10D) regarding these insurance plans. As such, it can be argued that it is one of the most secure and legitimate avenues that is available for income creation for individuals.
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