A term insurance plan is the best bet when it comes to opting for a tax saving financial avenue. If you have dependents like spouse, children and aging parents, it is extremely essential to have an adequate life cover. A term insurance plan ensures financial protection for your family as it provides a death benefit. Term insurance plans are pure protection plans that pay an amount equal to the sum assured mentioned in the policy document to the nominee upon the unfortunate demise of the policyholder during the policy term.
In addition to providing financial aid to the family members during uncertain times, a term insurance policy also offers tax benefits under section 80C & 10(10D) of the Income Tax Act.
A term plan helps you in reducing your tax liability in the following manner:
- You purchase a term insurance policy and you pay the premium amount as per your current age, sum assured and policy term chosen
- This premium amount is then reduced from your total income, thereby reducing your income and subsequent tax
- You can avail tax deductions up to Rs 1.5 lakh under section 80C
- Your income reduces up to Rs 1.5 lakhs in the eyes of the income tax authorities
- With the reduced income, your tax reduces too
- By buying life insurance of up to Rs 1.5 lakhs, you avail tax benefit of as much as 30% of Rs 1.5 lakhs which accounts to be Rs 45,000
- Under Section 80C
The premium paid towards term insurance policy is eligible for tax deductions under section 80C of the Income Tax Act, 1961. You can enjoy the tax benefit in case the policy is taken in your life, your spouse and/or children’s life.
Below are certain clauses for deduction under this section:
- For term plans that are issued on or after 1st April 2012, if the premium amount exceeds 10% of the ‘sum assured amount’ then you may claim a maximum limit of up to 10% of the sum assured.
- If your term plan was purchased on or before 31st March 2012, the tax deduction is applicable on the total premium subject to a maximum limit of 20% of the sum assured amount.
- You may avail of an extension of the limit from 10% to 15% if you are suffering from an ailment listed under Section 80DDB or a disability listed under Section 80U. This clause is applicable for term plans that have been issued on or after 1st April 2012.
- Under Section 10 (10D)
Then death benefit or the sum assured received under a term insurance policy is tax exempted under section 10(10D) of the Income Tax Act, 1961.
Below are the exemptions for the above clause:
- If the amount is received under Section 80DD (3) which includes the deposits made towards maintenance, the medical treatment of handicapped dependent
- If the amount is not a part of the death benefit for the policy issued on or after before1st April 2003, but on or after 31st March 2012. Besides, such a benefit is not applicable if the total premiums paid during the policy term are more than 20% of the sum assured amount received
- In an event that the term plan is issued on or after 1st April 2012, you may avail of exemption benefit only if the total premium paid does not exceed 10% of the sum assured amount.
Why choose a term insurance plan as a tax saving option?
A term plan is the most effective tax saving option because it not only helps to reduce your tax liability, but it also offers financial protection to your loved ones against uncertainties. The lumpsum amount acts as an income replacement and can be used to pay outstanding debts, home loan EMIs, utility bills, household expenses and for child education fees. Purchasing a term plan, therefore, provides peace of mind, knowing that your family’s financial needs will be taken care of even in your absence. Opting for a term plan early will not only help you reap tax savings but also enjoy low premium rates.