Can Term Insurance Help Reduce your Tax Liabilities?

The importance of term insurance plans in safeguarding the financial future of loved ones is unparalleled. Term insurance plans protect your life and provide a financial shied to your family. In case of your unfortunate demise during the plan tenure, a term insurance policy pays out a definite sum to your family, enabling them to take care of their financial needs and maintain their standard of living after you are gone.

However, term insurance plans offer more than financial assurance for your family. Term plans also help you reduce your tax. So, if you are looking for the best tax-saving options, you should consider investing in a sound term plan. A term insurance policy enables you to create failproof financial support for your family while reducing your tax liability.

Here is how term insurance helps you in reducing your tax liability:

What are the different tax-saving benefits available for term insurance?

To encourage people to buy term insurance to financially secure their families, the Indian government has laid out several provisions under the Income Tax Act, 1961, allowing tax deductions on term insurance premium payments and benefits received. These deductions reduce your tax liability by a significant margin, helping you cut your tax bill each year that your term plan continues. You can get the tax deductions for term plans for self, spouse and dependent children.

What are the tax-saving benefits under Section 80C?

One of the most important tax exemptions offered by term insurance plans is under Section 80C of the Income Tax Act, 1961. Under this section, you can avail of a tax exemption of up to ₹1.5 lakh in a financial year for term insurance policy premiums paid. The term insurance premiums are deducted from your overall taxable income, which reduces your tax liability. This tax deduction is relevant for term plan premiums paid for self, spouse and dependent children. Further, individuals and HUFs (Hindu Undivided Family) can avail of this tax relief under Section 80C.

That said, the tax benefits under Section 80C are applicable only if the annual premiums of the term policy are not more than 10% of the sum assured. For term plans issued before 2012, the tax exemption is valid only if the annual premiums are less than 20% of the sum assured. In case the premiums of the term plan exceed the specified threshold, the deductions will be applied proportionately and not in full. Further, if the term insurance plan is surrendered or terminated before the expiry of two years from the purchase of the policy, no tax benefits will be available. In this case, if the tax benefits have been applied before, they will be reversed, and the income will become taxable in the following financial year.

What are the tax-saving benefits under Section 10(10D)?

Apart from reducing your taxable income, term insurance plans also offer tax savings for your beneficiary in the future. In case of an unfortunate event causing your demise during the term plan tenure, the insurance company will pay out a defined sum to the beneficiary. This amount received by the beneficiary is given exemption from taxes under Section 10(10D) of the Income Tax Act, 1961. This means that in the future, when your beneficiary receives any financial benefit from your term insurance plan, the entire sum will be tax-free.

This makes term plans an ideal investment to safeguard the financial future of those you love the most. If you have a term plan with the money-back feature, the amount received upon maturity of the term plan is also exempt from taxes under section 10(10D). These term insurance tax saving advantages are valid for the core insurance policy and additional riders, which you buy to enhance your insurance coverage.

Conclusion

In all, these tax savings available on your term insurance policy help to reduce your tax liability significantly. Moreover, term insurance premiums are the lowest among the different insurance plans. The monetary benefits coupled with the financial security offered by term insurance plans make term policies a sound investment for you and your family.

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The income tax is levied on all earning individuals who fall under a taxable income bracket. The income tax is paid to the Government of India and is charged annually. However, there are several tax deductions and exemptions that you can claim to lower your tax liability. The Income Tax Calculator helps you ascertain your tax output for a financial year based on your taxable income. This can help you plan well and save tax using the tax-saving deductions and exemptions, if possible.