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Term Life Insurance & Tax Laws: Tax Rules You Must Know

23/09/2022 |

Taxes can leave an unsettling feeling especially if you don’t have adequate information about saving them. This is the reason why there is chaos at the end of the financial year when we undertake an evaluation of the savings done to claim tax* benefits on the relevant investment avenues.

Term insurance is amongst the most common tax-saving investment. The premium paid towards a term policy is eligible for tax deductions.

Owing to inadequate knowledge about investments in tax*-saving instruments, several people are unaware of the fact that there are different types of life insurance plans that can cater to your personal financial requirements. The diverse term insurance plans in India enable choosing a cover based on the financial requirements of each individual.

Moreover, buying online term insurance can enable easier differentiation of different policies to choose a suitable cover. However, because insurance ensures the financial protection of your family and loved ones in your absence, it is important to not purchase insurance simply for saving tax.

Tax Deduction Under Section 80C

Term insurance deduction under income tax Section 80C states that the premiums paid towards term insurance plans in India are eligible for a tax* deduction. The insurance policy could either be your own, for your spouse, or your child. There are no tax* conditions for the child’s policy.

Regardless of their marital status, age, and working status, tax* deduction can be claimed towards a child’s term insurance plan. An individual, as well as a Hindu joint family, are both eligible for deduction under Section 80C.

Several taxpayers are often unaware of whether this deduction is permissible to all term insurance policies.. It will ease their worries to know that the tax* deduction applies to every term insurance plans in India. Even online term insurance purchases are eligible for tax deduction on premium payment.

However, there are certain conditions with the amount that is permitted for a deduction under the Section 80C of the Indian Income Tax Act:

  • The maximum premium amount deduction is subject to cap limit of ₹1.5 lakhs in one financial year.

Sum assured is the amount that is payable by the insurance provider to the surviving beneficiaries in the unfortunate event of the policyholder’s death.


Tax Exemption Under Section 10 (10D)

The exemption under this section concerns the amount received on the maturity of the term policy, also called the maturity benefit. Here are the conditions associated with the term insurance tax benefit:

  • The maturity benefit, as well as the  bonus2, is fully exempted from taxes* if the premium is not more than 10% of the sum assured for policies purchased after 1st April 2012. For policies purchased before this time, the premium must not exceed 20% of the sum assured for tax* exemption upon term policy maturity.

  • Policies purchased after 1st April 2013 for people with disability the condition for maturity exemption under Section 10(10D) is that their premium must not exceed 15% of the sum assured.

The maturity benefit from a life insurance policy where the premium amount exceeds 10% or 20% of the sum assured is taxable. 

TDS of Term Policy

Aside from the exemptions, it is also important to be aware of the TDS deductible from the term policy. Appended are the conditions for TDS deduction on the maturity amount of your life cover:-

  • If the amount received from a term policy that is not covered under the exemption of Section 10(10D) exceeds ₹1 lakh, then starting October 2014, 5% of TDS is deductible by the insurer before making the payment as per TDS Section 194DA. This will also apply to the bonus2 payments. This 5% is calculated on the difference between the maturity amount and the total premiums paid.

    For instance, Mr Sharma received Rs 10,00,000 as maturity benefits (inclusive of all bonus payments) on his policy. He had paid a total of ₹2,00,000 as premiums over a course of 10 years. Here, the TDS would be applicable as the payable amount is over ₹1,00,000. The applicable TDS would be on ₹8,00,000 (10 lakhs – 2 lakhs). So, at 5% the TDS would be ₹40,000. So, Mr Sharma will be paid ₹7,60,000 after TDS deductions.

  • If the maturity benefit is less than ₹1 lakh, then no TDS will be deducted, but the amount is taxable by you, for which you can claim the TDS credit on your income tax return. 
      
Term Insurance Tax Benefit


In the current day and age, when medical costs have been accelerating, term insurance is a necessity. Fortunately, despite the tax* conditions, most term insurance policies remain unaffected.

This is why one need not hesitate before saving in a term insurance cover. Here are the tax* benefits that policyholders can avail themselves of on term insurance:

  • Under Section 80C, a deduction of up to ₹1.5 lakhs is permissible towards term insurance premiums. However, the policy has to be held for at least two years.

  • Under Section 80D, an additional deduction of ₹25,000 over the permissible ₹1.5 lakhs is allowed on premiums paid towards a health cover. Moreover, in the case of health-related policies for senior citizens, then the deductible tax is ₹50,000

Aside from the tax* benefit, the Tata AIA term plan offers much more. It helps you plan and secure your tomorrow through a host of options catered to suit your financial requirements. It comes with unique rider# options to further enhance your protection.

The online term insurance purchase promises a hassle-free buying experience that enables better control of your purchase.

To conclude

Term insurance is a long-term financial commitment. This is why it is important to carefully analyse your needs before hastening to make a tax-saving purchase that might later be regrettable. Financial literacy, especially concerning the taxation laws of a term policy, helps you make an informed decision.

However, tax* alone should not be the criteria for making an insurance purchase as it can act as an income replacement for your family in your absence. To choose the right term policy cover, observe your lifestyle and financial requirements.  

L&C/Advt/2022/Sep/2244

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TATA AIA Life Insurance Co. Ltd will send you updates on your policy, new products & services, insurance solutions or related information. Select here to opt-in.

Looking to get a new plan? 

Connect with us now

+91

TATA AIA Life Insurance Co. Ltd will send you updates on your policy, new products & services, insurance solutions or related information. Select here to opt-in.

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA), Tata AIA Life Insurance is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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Disclaimers

  • Insurance cover is available under the product.
  • The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not a guaranteed issuance plan, and they will be subject to Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions please read the sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.
  • * Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.
  • # Riders are not mandatory and are available for a nominal extra cost. For more details on the benefits, premiums and exclusions under the riders please refer to the Rider Brochure or contact our Insurance Advisor or visit our nearest branch office.
  • 2 These bonuses are not guaranteed in nature. The Company may declare Cash Bonus rate annually in advance. The Cash Bonuses if declared, will be applicable provided all due premiums have been paid.

Need more information?

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TATA AIA Life Insurance Co. Ltd will send you updates on your policy, new products & services, insurance solutions or related information. Select here to opt-in.

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TATA AIA Life Insurance Co. Ltd will send you updates on your policy, new products & services, insurance solutions or related information. Select here to opt-in.