A term insurance plan is a type of life cover that offers an assured sum to your heirs when you are not around anymore. There are no maturity benefits in such a plan. Term plans are designed to provide financial security to your family in the event of your death or any unfortunate circumstance that may prevent you from continuing to earn. Term plans offer substantial coverage at a premium that is comparatively lower than most other types of insurances.
The primary aim of purchasing a term insurance plan is to provide for the future security of your loved ones and safeguard their financial freedom. However, at the same time, the best term plan can also be an efficient instrument for saving tax. Under the rules of Income Tax in India, the death benefits, maturity amount, sum assured and the premium paid for a term plan offer varied tax benefits to the policyholder.
Benefits under Section 80C
As per the 1961 Income Tax Act of India, under Section 80C, you are eligible for deductions up to Rs 1.5 lakh on the insurance premium that you pay each financial year.
Hindu Undivided Families (HUFs), as well as individual assessees, who own the term plan, can claim tax deductions under Section 80C. The individual assessee eligible to receive tax benefits under this section includes:
- The person on whose name the term insurance has been purchased
- The spouse of the assessee
- The children and legal heirs of the insured person
A member of HUFs can also obtain benefits on tax under Section 80C.
When can you claim benefits under Section 80C?
Here are some important prerequisites you must know:
- Term plan issued on or before 31st March 2012: You can claim tax deductions on the paid premium if during the course of a financial year you pay a premium that exceeds 20% of the sum assured (SA) of the term plan.
- You have received the policy on or after 1st April 2012: You can claim tax benefits if the total premium you have paid in a financial year is less than or equal to 10% of the actual SA. The percentage limit is extended from 10% to 15% for an assessee who suffers from a critical illness listed under Section 80DDB or has a disability mentioned under Section 80U.
What is the applicability of Section 80CCE on tax benefits for term plans?
As per Section 80CCE of the Income Tax Act of India, the total amount of deduction that you can claim under Sections 80C, 80 CCC, and 80CCD is capped at Rs 1.5 lakh. It means that you can claim a maximum aggregate deduction of Rs 1.5lakh on the total of the premium paid on your term plan.
What are the tax exemptions that are available to you under Section 10(10D)?
Under this Section of the Income Tax Act, any amount that you receive from your insurance policy as maturity value – death benefit, sum assured or bonus, is tax-exempt. There is no upper limit attached to this value.
You must note that you can be barred from claiming tax benefits under Section 10(10D) if:
- The policy was issued to you between 1st April 2003 and 31st April 2012 and the premium that you have paid in any financial year during the policy tenure is over 20% of the Sum Assured.
- For policies issued later than 1st April 2012, the percentage has been revised from 20% to 10%.
However, the best term plans offer a sum assured that comfortably exceeds the total cost of the yearly premium.
In case of the policy holder’s death, the amount that the nominee will receive is not liable to taxation. There are several benefits of obtaining the best term plan, and tax benefits are just an added bonus. The principal benefit is to help your family meet all their expenses effortlessly even in your absence. To secure the future of your family against financial burdens, you can fill up an online term insurance application form and purchase the best term plan for a secure future.