How Term Insurance Helps You Save Tax While Securing Your Family’s Future

 

Term insurance is one of the simplest and most effective ways to secure your family’s financial future. It offers a high life cover at an affordable premium. Beyond the life coverage, it also provides valuable tax benefits under the Income Tax Act.

Understanding how Section 80C and Section 10(10D) apply to term insurance is essential if you're looking to optimise your tax savings while protecting your loved ones.

 

What is Term Insurance?

Term Insurance is a type of life insurance that offers financial protection for a specific period, or "term." In the event of the policyholder's untimely death during this period, the nominee receives a predetermined sum assured, helping the family stay financially secure.

It is one of the most affordable ways to protect your loved ones from life’s uncertainties, making it a smart and essential part of financial planning.

 

How Term Insurance Offers Tax Deductions?

Term insurance offers tax benefits under Section 80C of the Income Tax Act, helping you lower your taxable income.

 

1. Tax Deduction Under Section 80C

 

Under Section 80C, the premium paid towards a term insurance policy can be deducted from your gross total income.

• Maximum Deduction Limit: ₹1.5 lakh per financial year
  
  
• Eligibility: The policy must be in the name of the taxpayer, their spouse, or children.
  
  
• Conditions:
  
  
  • For policies issued before 1 April 2012, premium should not exceed 20% of the sum assured.
    
    
  • For policies issued on or after 1 April 2012, premium should not exceed 10% of the sum assured.
    
    

Example: If you pay ₹50,000 annually towards your term plan, you can claim this amount as a deduction under 80C, reducing your taxable income accordingly.

 

2. Tax-Free Payout Under Section 10(10D)

 

While Section 80C covers the premiums, Section 10(10D) offers a tax exemption on the policy's payout.

• Who gets the benefit: The nominee (usually a family member) receives the sum assured and applicable bonuses tax-free in the event of the policyholder’s death.
  
  
• Maturity Benefit: While term plans usually don’t have maturity benefits, if your term policy comes with a return of premium option, the maturity amount is exempt under Section 10(10D).
  
  

Conditions:

• To get this benefit, the sum assured should be at least 10 times the annual premium.
  
  
• Policies that do not meet this condition may still qualify for the exemption, but the maturity amount will be taxed based on the income slab.
  
  

3. TDS Implication on Non-Exempt Policies

 

If your policy doesn't qualify under Section 10(10D), the insurance provider may deduct TDS at 5% on the net income (i.e., maturity amount minus premiums paid), provided the payout exceeds ₹1 lakh.

This makes it even more critical to ensure your policy complies with the eligibility criteria for tax-free benefits.

 

Additional Tax Benefits with a Guaranteed Return Plan

 

Some insurers offer term plans bundled with a guaranteed return plan or investment components. These may offer additional tax savings beyond 80C and 10(10D).

1. Combined Benefits of Protection + Savings

Guaranteed return plans (also known as endowment or money-back plans) offer life cover and provide returns on maturity. They are especially useful for those looking for risk-free, long-term investment options with tax advantages.

• Premiums paid: Still qualify under Section 80C
  
  
• Returns received: Can be exempt under Section 10(10D) if policy conditions are met
  
  

This dual benefit makes guaranteed return plans an attractive option for conservative investors.

 

2. Tax-Free Maturity Amount

Unlike mutual funds or fixed deposits, which are taxed on returns, guaranteed plans can offer a completely tax-free maturity payout. This is a big advantage if you plan for long-term goals like children’s education or retirement.

Do note:

• You should stay invested for the full policy term to receive the tax-free benefit.
  
  
• Early surrender or partial withdrawals might attract tax.
•  

3. Section 80D Benefit in Riders

If you purchase additional riders, such as critical illness, the premiums for such health-related add-ons may be eligible for tax deductions under Section 80D.

• Limit under 80D: Up to ₹25,000 annually (₹50,000 for senior citizens)
  
  
• These riders provide both financial security and extra tax relief

 

Investing in a term plan allows you to claim deductions under Section 80C and receive tax-free payouts under Section 10(10D). And if you opt for a guaranteed returns plan or add critical illness riders, you unlock further tax advantages under Sections 80D and beyond. \

So, when planning your financial year, don’t overlook the tax-saving power of term insurance. Choose a policy that aligns with your needs, complies with tax rules, and offers peace of mind to your family.