Who doesn’t love tax savings? Most people do, or let’s rephrase it- everyone does. So now, every tax season, there is always a rush to invest in instruments that accomplish this purpose seamlessly. However, it is not a good strategy if you choose something to invest in, just for saving taxes, without any long-term value generation. This is why financial planners often recommend investing in life insurance for more significant tax benefits. 

There are numerous types of life insurance policies, including endowment plans, unit-linked insurance plans (ULIPs), child plans, retirement plans, and, most importantly, term insurance policies. Term insurance is a highly effective way to save taxes and is a popular pick every year. Here’s decoding the what and why of this phenomenon. 

What Term Insurance Brings To The Table

Term insurance is considered one of the most popular types of life insurance policies for customers. Let us keep the life insurance tax benefits aside for a moment. Term insurance has several value offerings for policyholders. These include the following: 

  • Term insurance offers pure life coverage for policyholders in return for a premium. 
  • You can get comparatively higher coverage with a term insurance policy at a lower premium amount. 
  • Term insurance pays a fixed sum assured to the nominees of the policyholder in case of their unfortunate and sudden demise within the policy tenure. 
  • The policyholder can select the tenure of the policy, depending on retirement age and other factors. 
  • An online term insurance calculator can be used to understand the premium payable for a particular coverage amount. 
  • The family of the insured person can use the sum assured at a distressing time to take care of their monthly costs and future goals and even repay liabilities left behind by them. 

These are reasons why term insurance is one of the best investment options during the tax season. Now let us come to the life insurance tax benefits that make term insurance even more attractive for policyholders.

Term Insurance Tax Benefits: What You Should Know

Term insurance offers numerous tax benefits to policyholders, making it quite attractive from diverse perspectives. These include the following: 

Section 80C – Term insurance plans offer attractive tax deductions under Section 80C of the Income Tax Act. You can get deductions up to Rs. 1.5 lakh under this section on your premium payments. However, this section encompasses contributions to investment options like ELSS, ULIPs, EPF, PPF, and many others, including home loan principal repayment. Hence, you should be able to maximize your deductions under Section 80C with your term insurance premium payments and some other investments. 

The annual premium should be a maximum of 10% of the sum assured, and deductions are proportionately applicable if it crosses this threshold. For policies that were issued before the 31st of March, 2012, the deduction will only apply if the annual premium does not cross 20% of the sum assured. Remember that if a policy is surrendered or terminated within two years from its inception date, then tax benefits will not be given on the premium amounts. 

Section 80D – One of the most interesting life insurance tax benefits is available under Section 80D. You can add a health-related rider to your term insurance policy, like critical illness, hospital care, and so on, for availing of the same. The section offers deductions up to Rs. 25,000 for non-senior citizens and up to Rs. 50,000 for non-senior citizens. You can get up to Rs. 25,000 in deductions if you are paying premiums for yourself, your spouse, and your children (if you are below 60). Depending on their age, you can get another Rs. 25,000 or Rs. 50,000 if you have bought a policy for your parents. 

Section 10 (10D) – Term insurance offers tax exemptions on the sum assured payout under Section 10 (10D). The key aspect to note here is that payouts arising from life insurance death claims are tax-exempted under this section. This ensures that the money in the hands of the nominees is not subject to taxation. In case of any non-death claims, for term insurance plans with the return of premium feature, there are specific terms and conditions that apply. However, it is not an issue in the case of pure term insurance policies. 

As you can see, there are handsome tax savings on offer if you choose term insurance plans for your portfolio. It is not just about saving on taxes but also about financially securing your family’s future in case of your unfortunate demise down the line. Hence, the complete value proposition offered by term insurance policies is beneficial for policyholders. Term insurance is thus necessary for every household, and it is the most popular pick for customers every tax season.