The Indian Income Tax Act of 1961 allows taxpayers to claim a deduction from their taxable income for premiums paid on term insurance policies. In addition, the tax benefits are extended to the receiving of the death benefits by the policy nominee.
When exploring the tax benefits of term insurance plans, it’s also important to consider the broader aspects of financial planning. Implementing effective GST registration solutions can help ensure compliance and optimize your tax strategy. This approach can provide a comprehensive framework for managing both personal and business tax obligations, leading to better financial health overall.
This is one of the many reasons why people buy term insurance plans. With all that said, understanding the income tax benefits under various sections, such as section 80C or 10(10D) of the IT Act, 1961, with regard to term insurance plans, is essential. It can help individuals make informed financial planning and extract maximum term insurance tax benefits.
Understanding the Term Insurance Tax Benefits
If you have a term insurance policy, you can claim a deduction of up to ₹1,50,000 annually as per section 80C of the income tax act. The deduction will be allowed on the premiums you have paid in one financial year.
In addition, term insurance policy falls under Section 10(10D) of the Income Tax Act 1961, so the maturity income received is non-taxable. But to claim tax exemption under Section 10(10D) of the Income Tax Act 1961, the sum assured ought to be at least 10 times the premium paid.
But — does term insurance offer tax benefits under Section 80D of the Income Tax Act 1961?
Generally, Section 80D of the IT Act allows tax exemption for health insurance. But insurance companies also extend the tax benefits for their term insurance policies through health care riders. So, if you buy a critical illness rider, you can claim tax benefits on the premiums paid for the add-on.
Term Insurance Benefits at Various Stages
- First, you receive term insurance tax benefits under Section 80C (term insurance) on premium payments during the enrollment benefit period.
- Second, our investments have the potential to grow during the Earning Advantage phase and are currently tax-free.
- Finally, during the maturity phase, subject to certain conditions of Section 10 (10D) of the IT Act 1961, the maturity income received under the policy is exempt from taxation.
What Does the 2023 Budget Say About Term Insurance?
The 2023 Finance Bill added two new provisions to Article 10 of the Act (10D).
- The first provision indicates that income from term insurance policies issued on or after April 1, 2023, will not be tax-exempt. However, the death benefit paid to the policy nominee shall remain tax-free.
- The second requirement is that if a person pays premiums for multiple term insurance policies issued on or after April 1, 2023, the exemption clause will only apply to those policies where the total premium amount does not exceed five lakh rupees in any previous year during the term of the policy.
Key Highlights
- Term insurance plans offer several income tax benefits to policyholders. Taxpayers can claim deductions on the premiums paid towards term insurance policies u/s 80C of the IT Act up to a maximum limit of ₹1,50,000. Furthermore, the maturity proceeds received under the policy are exempt from taxation under Section 10 (10D) of the IT Act, 1961.
- However, as per the Finance Bill 2023, the exemption limit on the premium payable for any previous year during the policy term is capped at ₹5,00,000, except for unit-linked insurance policies issued on or after April 1, 2023. Therefore, if the premium payable exceeds ₹5,00,000 in a financial year, the Income from the policy will be taxable under “Income from other sources.”
- It is important to note that these provisions will not apply to any amount received on the death of an insured person.
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Conclusion
Term insurance plans provide not only financial protection but also provide several income tax benefits to the policyholders. Therefore, understanding the income tax laws and provisions related to term insurance policies is essential to maximise the benefits and make informed financial planning and taxation decisions.
