Term insurance is one of the most useful life insurance plans out there that makes large amounts of sum assured accessible at low premiums. What is term insurance meaning, really? Well, term insurance is a type of life insurance policy that is a pure protection plan i.e., it only offers a death benefit. This means that in the event of the demise of the policyholder, their family will receive the payout. However, if the policyholder were to survive the policy term, there would be no maturity benefit paid. Term insurance tax benefits are also several under various sections of the Income Tax Act, 1961 that help with tax planning.
However, an important thing to consider is that depending on whether you follow the old tax regime or the new one, you may not be eligible for all term insurance tax benefits. The new tax regime has lower tax rates compared to the old tax regime. But it has also removed about 70 tax deductions and exemptions that an individual can claim under the old tax regime.
Let’s go over the term insurance tax benefits under different sections and see which ones are available under the old vs new tax regime.
Section 80C – Premium deduction on life insurance policies
Section 80C allows for tax deductions of up to Rs 1.5 lakh for the premium paid on life insurance policies. It is one of the most popular tax-saving tools used as it offers this deduction for a variety of other financial instruments such as Equity-Linked Savings Scheme (ELSS), Public Provident Fund (PPF), Unit-Linked Insurance Plan (ULIP), repayment of home loans, etc.
This tax deduction is not available under the new tax regime. While it is available under the old tax regime, the following conditions should be noted:
- This deduction can be claimed by individuals and Hindu Undivided Families (HUFs). An individual can claim this deduction for the premium paid for their own life insurance policy as well as the premiums paid for the life insurance policies of their spouse and children.
- The maximum limit of the deduction is Rs 1.5 lakh per year is for all the investments combined that are eligible under section 80C.
- The premium paid yearly should not exceed 20% of the sum assured for term insurance policies bought on or before 31st March 2012.
- For policies bought on or after 1st April 2012, the premium paid yearly should not exceed 10% of the sum assured of the policy.
- This 10% limit can be increased to 15% for policyholders who suffer from an illness or disability as specified under section 80U or section 80DDB.
- The tax benefits received under this section will be reversed if your term insurance policy is terminated within two years either by choice or due to non-payment of premiums.
Section 10(10D) – Tax exemption on the term insurance proceeds
Under this section, the term insurance sum assured paid either as a death benefit on the demise of the policyholder or on the maturity or surrender of the policy is exempt from tax. This term insurance tax benefit is available under both the old and new tax regimes.
The following conditions should be kept in mind:
- Premium paid in any one year should not exceed 20% of the sum assured for policies bought on or before 31st March 2012 and 10% for policies bought on or after 1st April 2012. The limit is 15% for policyholders with a disability or disease as specified under sections 80U and 80DDB.
- A term insurance policy that is part of a group insurance plan offered by the employer or a keyman insurance policy is not eligible.
- A 2% Tax Deducted at Source (TDS) is charged if the death benefit payout is over Rs 1 lakh, and the insurance company has your PAN information.
- This deduction is not available if the term insurance amount is received under either section 80DD(3) or section 80DDDA(3).
Section 80D – Premium deduction on health insurance components
This section relates to the premium paid on health insurance policies. However, there are term insurance policies that come with health-related riders or add on such as critical illness cover. For such policies, a premium deduction of up to Rs 25,000 is available under section 80D.
This deduction, however, is only available under the old tax regime and not the new one.
- An individual can claim this deduction for premiums paid on term insurance with health insurance riders for self, spouse, children, and dependent parents.
- In the case of dependent parents, the individual can claim an additional tax deduction of Rs 25,000. This limit is increased to Rs 50,000 if the parent is a senior citizen.
You should consult your financial advisor to figure out which is more beneficial for you – following the old or the new tax regime. This should not be solely based on the tax deductions under one section or for one instrument but on your overall financial planning and goals.