Term Insurance Tax Benefits

Under Section 80C, premiums paid towards the upkeep of your term insurance policy are eligible for tax deductions. The deductions are allowed on a payment basis, i.e., all premiums paid within a financial year can only be claimed as a deduction in that financial year.

Individuals and Hindu Undivided Families (HUFs) are eligible for this tax deduction. For individuals, the term insurance policy can be taken in the name of the taxpayer or their spouse and dependent children. 

You can claim up to a maximum amount of ₹1.5 Lakh as per the income tax laws. For example, you can have a term plan that includes you, your spouse and dependent children. All the premiums under the policy will be eligible for tax# deductions. 

Here are some conditions to keep in mind before filing tax deductions for term insurance under 80C:

• For term policies issued on or before March 31, 2012, the deduction will be restricted to 20% of the sum assured. E.g., if the sum assured is 30,000 and the premium is ₹8,000; Up to ₹6,000 can be claimed as a deduction.
• For term policies issued on or after April 1, 2012, the deduction will be restricted to 10% of the sum assured. E.g., If the sum assured is ₹2 lakhs, and the premium is ₹30,000, you can claim ₹20,000 as a deduction.
  Provided that where the policy, issued on or after the 1st day of April, 2013, is for insurance on life of any person, who is—
  (a) a person with disability or a person with severe disability as referred to in section 80U,
  or  
  (b) suffering from disease or ailment as specified in the rules made under section 80DDB,the deduction will be restricted to 15% of the sum assured.
  
• For a single premium payment, the sum assured should be 10 times the sum assured to claim the full deduction amount – ₹1.5 lakhs. If not, only 10% of the sum assured can be claimed as a deduction.
  E.g. If the premium is ₹1.2 lakhs, the sum assured should be ₹12 lakhs. If the sum assured is ₹7 lakhs, only ₹70,000 can be claimed as a deduction.  
• The term policy must be held for a minimum of 2 years as per Section 80C(5). If the policy is surrendered within 2 years, then any deductions filed will be deemed as income from the previous year of termination, sale, etc. No deductions will be allowed under the policy on the year of termination/surrender.

Only the death benefit amounts paid under term insurance policies are fully tax^#-exempt under Section 10 (10D) of the Income Tax Act, 1961. Hence, in the event of the policyholder’s death, their family can receive the full death benefit amount.

For maturity benefits, term insurance plans purchased on or after April 1, 2023, will have their maturity payout amounts taxed if the annual premium exceeds ₹5 lakhs. The amount will be taxed as per the policyholder’s tax slab rate. . 

Most taxpayers can claim the amount if they are mentioned as a policy nominee or beneficiary under the term plan. . 

Here are some scenarios where the term insurance tax exemption cannot be applied, and your beneficiary may need to pay tax on the payout amounts:

• If the amount is paid out under Section 80DD (3) of the Income Tax Act for the medical treatment and maintenance of a disabled nominee.
• If the benefit is paid out under a Keyman Insurance Policy.
• If the total premiums paid towards the policy exceed 20% of the sum assured.
• For term plans issued on or after April 1, 2012, the exemption benefit would apply only if the total premium paid is below 10% of the sum assured.