Term Insurance Plans can be quite helpful when dealing with uncertainties in life. It provides you with life cover, from which your loved ones will benefit if you are no longer around. It is an affordable way to protect your loved ones from financial strain in the event of your death, as the family receives the specified sum assured in the tragic event of your passing. In addition, you can take advantage of term insurance tax benefits to save tax every year.

One of the most common ways to take advantage of these benefits is through Sections 80C and 10(10D) of the Income Tax Act of 1961. The latter of these sections is worth understanding, especially if you have to get a clearer picture of the taxation rules applicable to death and maturity benefits received under term insurance plans in India. 

Section 10 (10D)-Examining its meaning and implications for term plans

Section 10D of the Income Tax Act of 1961 addresses the taxability of claims in which accrued bonuses and maturity or death benefit payouts are tax-free. Under this clause, an individual can claim a tax exemption on the principal amount and accrued bonus (if any) acquired from a life insurance tax saving claim.

Since term insurance has no maturity benefits, only the death benefit comes under the purview of this section. There is no upper limit to it, and it is always tax-free for the nominees.

In case of maturity benefits from term plans with a return of premium option, the other conditions of Section 10(10D) can be looked into. These conditions must be met if the maturity benefits are to be considered exempt from taxation. Note that these conditions apply to all kinds of life insurance policies.

• The annual premium paid for life insurance policies issued between April 1, 2003, and March 31, 2012, can be at most 20% of the sum assured.
• For plans acquired after April 1, 2012, the premium amount cannot exceed 10% of the guaranteed total sum.
• Each payment received under a life insurance plan, such as the death benefit, bonus, or maturity benefit, is eligible for tax deductions as insurance tax advantages.
• If you have a major disability and your policy was issued on or after April 1, 2013, the 10% limitation has been increased to 15%. Individuals who meet the following criteria qualify:
  • Considered disabled/severely impaired under the Income Tax Act of 1961 Section 80U
  • Any of the illnesses mentioned in Section 80DDB of the Income Tax Act of 1961

In case non of these conditions are met, then the payout will be considered taxable as per your income tax slab. Furthermore, suppose the amount you receive from your life insurance policy is greater than ₹1,00,000, and you do not qualify for the exemption under Section 10(10D). In that case, the insurance company will deduct 1% before payment. TDS is also levied on bonus payments. However, no TDS is deducted if the amount received is less than ₹1,00,000. While the amount received is completely taxable, a credit for TDS deducted can be claimed by filing an Income Tax Return.

Why term insurance makes for an excellent addition to any portfolio 

One of the key advantages of term insurance is that it provides coverage for a specific period, and the death benefit is paid only if the policyholder meets an untimely demise during the term of the policy. This means that the premium payments are lower than those of permanent life insurance policies, such as whole life or universal life, making it more accessible and affordable for many people.

In addition to protecting your loved ones and tax savings, term insurance can also be a foundation for a broader insurance strategy. For example, you may purchase a term policy when you are young and healthy and then supplement it with permanent insurance later. This can help you ensure adequate coverage throughout your life while keeping costs down in the early years.

Another vital aspect to consider is the riders or add-ons. Riders, such as accidental death benefits, critical illness cover, permanent disability cover, etc., can add significant value to your term insurance policy. This is because the premium for these riders is usually low, and they can be added to your policy with minimal cost. At the same time, some health-related riders, like critical illness riders, can get additional tax benefits under Section 80D up to Rs. 25,000 (for policyholders younger than 60; the limit is ₹50,000 for senior citizens). 

Conclusion 

It is thus important to evaluate the tax benefits of term insurance, particularly under Section 10 (10D) and other sections, before purchasing a policy. In addition, keep some other aspects in mind, including rider selection and the coverage amount, before inking your agreement with the insurance provider.