Term Insurance Tax Benefits & Refund Details

Is term insurance tax-free?

The response to the query is fairly straightforward. Term plans can give several different tax benefits under different provisions of the Income Tax Act 1961, even though the policy itself is not tax-free.

Term insurance: what is it?

Before we dig into the numerous tax benefits, let’s quickly review the idea of a term insurance plan.

A type of life insurance plan, known as a term insurance plan, provides you with life coverage for a certain amount of time in exchange for regular and recurring payments from the policyholder, known as premiums. The insurer would pay your nominees a specific pre-decided amount known as the death benefit in the event of your passing within the policy period. Your nominees are free to use this death benefit in any way they see appropriate to achieve their objectives in life. Term plan rates can be substantially less expensive than standard life insurance premiums.

Now that you are comfortable with term insurance, let’s look at the plan’s tax advantages.

Sections 80C, 10(10D), and 80D of the Income Tax Act of 1961 are the three main sections that provide tax benefits for term life insurance plans.

1. Income Tax Act benefits under Section 80C

A term insurance policy’s premiums paid during a financial year may be deducted from your overall income up to a maximum of Rs. 1.5 lakh under the rules of section 80C of the Income Tax Act of 1961, subject to certain restrictions. By doing this, you can lower your overall taxable income through term insurance tax benefits and the amount of tax you would owe.

Here is an illustration to help make things clear:

Imagine deciding on a term insurance policy for 10 years with a death benefit of Rs. 1 crore. It is safe to assume that the premium you must pay each month will cost Rs. 12,500. Let’s say your annual income totals Rs. 12,00,000. You can now deduct the premiums you pay for a term insurance policy utilising the rules of section 80C. Given that you pay roughly Rs. 1.5 lakh in premiums per year, you can deduct the entire sum, bringing your total taxable income down to Rs. 10,50,000. (Rs. 12,00,000 – Rs. 1,50,000). In this case, you would only be required to pay tax on Rs. 10,50,000 rather than Rs. 12,000,000.

In this way, term insurance tax benefits might reduce your taxable income.

2. Advantages provided by the Income Tax Act Section 10(10D)

The death benefit provided by a term insurance plan is now totally exempt from taxation in the hands of your nominees under section 10(10D) of the IT Act of 1961. However, this is only true if the death benefit payment is at least ten times what you pay in premiums each year for the plan.

3. Compensation under section 80D of the Income Tax Act

You may deduct the premiums you pay for a health insurance plan from your gross income under Section 80D of the Income Tax Act of 1961. Despite the fact that term insurance policies are not specifically mentioned in this section, you can still use them to lower your overall tax obligation.

You may deduct the premium you pay for the rider under Section 80D of the Income Tax Act if you choose any health-related riders besides your base term life insurance, such as the critical illness benefit rider. In addition, as described above, you can recover the premium you have paid for your base term plan under Section 80C of the Income Tax Act.

You can check your premium using the term insurance calculator. But the riders you choose will add to the premium you will have to pay finally. Be sure to calculate the correct premium value, so it is not a burden to pay later on.

Details of refunds for term insurance

The insurance sector’s regulatory organisation is the Insurance Regulatory and Development Authority (IRDAI). Insurance coverage must provide a free-look period under the requirements imposed by the IRDAI.

You can return the policy to your insurer within this free-look time and get a refund of the premium you paid if there are any terms or conditions you disagree with, subject to certain deductions. Term and other life insurance types are covered during this free-look period. If you need more clarity on how much you get back, you can always use a term insurance calculator but be sure to include the riders you have chosen.

In this way, you can protect your family’s future as well as take advantage of the tax benefits provided by term insurance.

There are 2 tax regimes in India – new and old. Choose the correct one after consulting an expert to get the tax benefit you desire. You can opt for a regime change during the next financial year.

Visit the official website of IRDAI for further details.

All savings are provided by the insurer as per the IRDAI-approved insurance plan. Standard T&C apply.