Term Insurance AWARD WINNING

Investment Plans

NRI Plans

All Plans

Customer Service

Calculators

Fund Performance

Need assistance in choosing the right insurance plan?

Need assistance in choosing the right insurance plan?Get a call from our Expert.

Are you an NRI?

Yes

Name

Mobile number

+91

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

dd MMM yyyy1786706209993 - 9

Understanding the tax benefits of term life insurance can help you protect your family's financial future while reducing your tax liability. If you are wondering term insurance comes under which section, the answer lies primarily in Section 123 of the Income Tax Act, 1961, which allows deductions on eligible premiums, and Section 10(10D), which provides tax exemption on eligible payouts. Knowing the Income Tax Section for Term Insurance and Which Section Covers Term Insurance can help you claim the available tax benefits correctly and avoid mistakes while filing your income tax return.

Tax deduction under section 123

Section 123 of the Income Tax Act allows eligible taxpayers to claim a deduction on premiums paid for term life insurance policies, subject to prescribed conditions and limits.

Who can claim the deduction?

You can claim a deduction under Section 123 if you pay premiums for:

Yourself
Your spouse
Your dependent children

Maximum deduction limit

You can claim deductions of up to ₹1.5 lakh in a financial year under Section 123.
This limit is combined with other eligible investments such as PPF, ELSS, EPF, NSC, and tax-saving fixed deposits.

Conditions to claim the benefit

To qualify for the deduction:

The premium should generally not exceed the prescribed percentage of the policy's sum assured, as specified under the Income Tax Act.
The policy should remain active and not be discontinued within the applicable lock-in period.
The deduction is available only under the old tax regime.

Tax exemption under section 10(10D)

Section 10(10D) provides tax exemption on the amount received from a term life insurance policy, provided the policy meets the applicable conditions under the Income Tax Act.

What amounts are tax-exempt?

Eligible tax-free payouts may include:

Death benefit paid to the nominee
Maturity benefits from eligible life insurance policies (where applicable under the law)

Conditions for tax exemption

The exemption is available if:

The policy satisfies the conditions prescribed under Section 10(10D).
The premium does not exceed the applicable percentage of the sum assured for the relevant policy issuance period.
The policy is not covered under the exceptions specified in the Income Tax Act.

Important points to remember

The death benefit received under a term insurance policy is generally exempt from tax under Section 10(10D).
Tax treatment may vary if the policy does not satisfy the prescribed conditions.
Always retain premium receipts and policy documents for tax filing and record-keeping.

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 Lakh – 2 Lakh). 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 term insurance cover. Here is the tax benefits that policyholders can avail themselves of on term insurance:

Under Section 123, a deduction of up to ₹1.5 Lakh 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 Lakh is allowed on premiums paid towards 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.

Conclusion

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.

Key Takeaways:

Term insurance premiums may qualify for tax deductions under applicable provisions of the Income Tax Act
Eligible payouts, including death benefits, may receive tax exemptions subject to prescribed conditions
Understanding tax rules for term insurance can help maximise benefits and improve financial planning

Need assistance in choosing the right insurance plan?

Get complete protection at affordable cost & tax benefits

Are you an NRI?

Yes

Name

Mobile number

+91

Plan

Looking to buy a new insurance plan?

Our experts are happy to help you!

Are you an NRI?

Yes

Are you an NRI?

Yes

Name

Plan

Are term insurance tax benefits available under the new tax regime?

No. In most cases, tax deductions on term insurance premiums under Section 123 are available only under the old tax regime. However, eligible death benefits may still remain exempt under Section 10(10D), subject to the applicable conditions.

Can I claim tax benefits on term insurance riders?

Depending on the rider, yes, there could be tax benefits. Eligible health-related riders, for instance, might be eligible for deduction under section 80D and the base term insurance premium is generally claimed under Section 123.

Are there any situations when the beneficiary might still have to pay tax on term insurance?

Death benefits of a term insurance are normally tax-free under Section 10(10D) but there are certain situations where tax may be applicable if the term insurance does not satisfy the condition specified under the Income Tax Act.

Can I claim deduction under both Section 80D and Section 123 for term insurance?

Yes. Claiming deductions on term insurance is available under Section 123 and benefits are available under Section 80D if term insurance premiums are paid to get covered under health insurance or eligible health-related riders.

Who is eligible to claim term insurance premium tax benefit?

Section 123 allows tax deductions on term insurance premiums for those who choose the old tax system, as long as they have dependent children and the other specified requirements are fulfilled.

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.
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.