The Income Tax Act provides several deductions and exemptions under various sections to help you save money if you invest in policies like term insurance online. Taxpayers can invest in these investment instruments to claim such deductions and exemptions under the IT Act. The deadline for investing in tax-advantaged policies is March 31, 2022, for the current financial year. Term insurance is a tax-saving tool that provides benefits like receiving the term insurance tax benefit and a secured life insurance policy for their families that will reduce stress in the long run.
Tax Benefits on Life Insurance Payouts
The primary function of a life insurance policy is to provide the death benefit to the nominees of the policyholder. A death benefit is a sum insured under the term insurance policy that is paid to the nominees of the policy after the claim is filed in the event of the untimely death of the insured. It also helps the beneficiaries to carry out everyday expenses during the crisis. Investing in a life insurance policy provides tax benefits to the policyholder by allowing them deduction on the premium paid, apart from providing security to their family members.
Tax Benefit on The Benefit Amount Received
In normal insurance policies, the death benefit is paid if the insured dies within the policy term. But if he does not die, then he receives a refund of a certain amount from the premium paid during the policy term. Section 10(10D) of the Income Tax Act also allowed this premium refund to be tax-free apart from the death benefit received by the nominees of the policy on account of the policyholder’s death. However, if a death benefit is received by the nominees in the following circumstances it would not be exempted under this section –
- Any sum received under Section 80 DD(3) or Section 80DDA Subsection (3)
- Any amount received as a result of a Keyman insurance policy
Income Tax Benefit Received Under 80C For Term Insurance
Section 80c of the Income Tax Act of 1961 is the most important section for taxpayers. Under this section, an individual is entitled to a maximum deduction of Rs 1.5 lakhs if he or she invests in the listed instrument such as EPF, ELS, ULIP, and PPF. Individuals are also entitled to get direction under 80C for their payment towards children’s tuition fees, home loan repayment, life insurance premiums, etc. The following conditions must be met to receive Section 80C tax benefit on term insurance:
- The annual premiums paid towards an insurance policy should not exceed 10% of the sum assured of that policy. If it does there will be proportional deductions applied.
- For policies and instruments issued before March 31, 2012, the deductions are available only when the annual premium paid towards such policy is not more than 20% of the sum assured.
- Section 80C(5) states that if the policyholder voluntarily surrenders the policy or if it gets terminated before two years of investing in the policy, the insured will not be entitled to receive any benefit under section 80c against the premium paid.
Tax Benefit for Term Insurance Under 80D
Initially, the section only provided tax deductions for premiums paid against health insurance policies by the assessed for himself, his spouse, children, and parents. The deduction limits are different for individuals of different ages. Premium paid for the health insurance policy of senior citizens gets the maximum deduction of Rs 50000. For individuals below 60 years of age, the maximum deduction allowed is Rs 25000
Tax Exemption Receive for Term Insurance Under Sec 10 (10D)
Section 10(10D) of the Income Tax Act, states that the sum assured received by the nominees of a term insurance policy in the event of an untimely death of the policyholder, or when the policy matures will be entirely tax-free.
Conditions for exemption from term insurance taxes under Section 10(10D):
- The tax benefits are available under Section 10(10D) of the Income Tax Act, the premium paid towards the policy is less than 10% of the sum assured for the sum insured is 10 times more than the premium.
- The payout of the policy is more than Rs 100000 and the policyholder’s PAN is available to the insurer, a TDS of 1% will be applicable on the amount paid out.