Term Insurance Policy Tax benefits under section 80C & 80D

Tax Benefit on the Benefit Payout Received
Term Insurance Income Tax Benefit Under Section 80C
Term Insurance Tax Benefit 80D
Conclusion

The single, most important role of a life insurance policy is to provide a death benefit to the policy holder’s nominees. The death benefit is the sum assured under a policy and paid to the registered beneficiaries in case the unfortunate happens during the policy tenure. The death benefit is mostly paid out after the claim is registered, helping them carry out their day to day expenses.

Tax Benefit on the Benefit Payout Received

The sum received as death benefit under an insurance policy is fully exempt from tax under Section 10(10D) of the Income Tax Act. In other words, the proceeds from the insurance policy are tax-free.

While normal term insurance plans pay the death benefit during the policy tenure, there is a return of premium term plan that refunds the premium paid after maturity, when the insured survives through the policy term. Even this premium refund is treated as tax-free under Section 10(10D).

Term Insurance Income Tax Benefit Under Section 80C

Section 80C of the Income Tax Act is the most popular tool used for tax-saving by individuals. This Section offers a maximum deduction of Rs.1.5 lakh for all the listed investments and instruments put together. It includes a number of instruments like PPF, EPF, ULIP, ELSS, and payments like repayment of home loan, children’s tuition fees, life insurance premium, etc.

Under this Section, the premium paid for a term life insurance is also eligible for deduction up to Rs.1.5 lakhs (total of all investments and payments under this Section). The conditions to avail term insurance tax benefit under Section 80C include:

The yearly premiums paid should not exceed 10% of the sum assured. If the premiums do exceed 10%, deductions will be applied proportionately.
For policies issued before 31st March 2012, the deduction will be applicable only if the yearly premium does not exceed 20% of the sum assured.
As per Section 80C(5), in the case of a policy that is voluntarily surrendered or terminated before two years from the beginning of the policy, the policyholder won’t receive Section 80C tax benefits on premium payments.

Term Insurance Tax Benefit 80D

Traditionally, the Section is reserved only for health insurance policies. If offers a deduction on health insurance policies taken for self, spouse, children, or parents with different deduction limits under different conditions.

However, certain term plans can also avail the tax benefits under Section 80D. Policyholders who have opted for a health-related rider (such as Critical Illness, Surgical Care, Hospital Care Rider) with their term insurance policy, can also avail deductions. Conditions for term insurance benefit 80D include:

Deductions under Section 80D can be availed for an amount that doesn’t exceed Rs. 25,000.
If you have taken an insurance policy for your parents, you can avail additional deductions of Rs. 25,000.
If your parents are senior citizens, the deduction limit goes up to Rs. 50,000.

Conclusion

One such situation where the benefit amount may attract tax is when the policyholder chooses not to have the benefit paid out immediately. In this case, the amount is held by the insurance company until paid out, and the amount is paid out after a period of interest accumulation. This accumulated portion of interest is usually liable to taxes.