How to Maximise Your Tax Benefits from Life Insurance Premiums

Buying a life insurance policy is essential for you, especially if you have a family that’s dependent on you to ensure their financial security. In case something happens to you and you don’t have a life insurance plan, your loved ones will not only have to deal with the emotional trauma but will also have to tackle financial hardships. 

A life insurance policy can ensure the financial security of your family for the time ahead. Additionally, you can also claim term life insurance tax benefits on premium payments and payouts under Section 80C, a popular life insurance tax exemption section in India.

Life insurance tax benefits mainly fall into two categories – life insurance deduction in income tax for premium payments and exemptions on payout upon maturity. Here’s a look at each of these tax benefits of a life insurance policy in detail.

If you buy a life insurance policy from an insurer that is approved by the Insurance Regulatory and Development Authority of India (IRDAI), you are eligible for term insurance premium tax benefit of up to ₹1.5 lakh limit under Section 80C. This includes the life insurance income tax deduction on premiums, provided the policy meets the prescribed conditions. 

This deduction is applicable to policies held in the name of the taxpayer, their spouse, or their children. The premium you pay for your life insurance policy is eligible for deductions, subject to the conditions mentioned under Section 80C.

For policies issued on or after March 31st, 2012, the premium should not exceed 10% of the sum assured to be eligible for the deduction. If it does exceed, only the premiums up to 10% of the sum assured are considered for deduction. 

For policies issued before March 31st, 2012, the premium should not exceed 20% of the sum assured to be eligible for the deduction.

The deductions available on payouts upon the policy’s maturity are based on the date of issuance of the policy and conditions mentioned under Section 10(10D) of the Income Tax Act. 

As per the rules, the death benefit or maturity benefit is exempt from taxation with no upper limit. 

Moreover, the maturity payout is non-taxable only if the premium paid during the term plan does not exceed 20% of the pre-defined sum assured. For instance, if the sum assured is ₹5 lakh, the premium payment should not exceed 20% of this amount, i.e., ₹1 lakh. 

The proceeds received on the maturity of the policy or as a death benefit are exempt from tax under Section 10(10D). This includes the sum assured plus any bonuses or additional amounts. This is the only term insurance tax exemption and not a deduction.

• Self-Employed and HUFs: Both self-employed individuals and Hindu Undivided Families (HUFs) are eligible for these tax benefits.

• Non-Resident Indians: NRIs can also avail of these tax benefits on premiums paid towards term life insurance policies in India.

• Group Insurance Policies: Premiums paid by employers for group term insurance policies are tax-deductible, and the death benefit received by the employee's family is tax-free.

A life insurance policy not only safeguards your loved ones financially against unforeseen events but also gives term life insurance tax benefits. Claiming the maximum life insurance tax benefits is both simple and hassle-free. All you need to do is to understand which types of life insurance policies qualify for the tax benefits, the maximum amount you can save, and when and how to claim benefits.

Although you can avail of the life insurance tax benefits, you must consider different aspects of the plan, including the tenure of the life insurance policy you choose, the premium payable, policy inclusions and exclusions, and implications of defaulting on the premium.

The continuation of a life insurance policy is vital to getting income tax benefits. So, you cannot skip paying the premiums during the selected policy tenure to save income tax. In case you stop paying the premium of your life insurance policy, your policy is liable for discontinuation, which means you cannot avail of the income tax benefits of life insurance any further and your life insurance benefits may also be affected.

Ideally, you should select the sum assured of a life insurance policy based on your financial needs. The sum assured determines the premium you need to pay, which in turn makes you eligible to get the life insurance tax benefits. 

Key Takeaways

• Life insurance premiums qualify for tax deductions up to ₹1.5 lakh under Section 80C, provided the premium does not exceed 10% (or 20% for older policies) of the sum assured.

• The maturity or death benefit received from a life insurance policy is exempt from tax, provided the premium-to-sum-assured ratio meets the required conditions.

• To retain tax benefits and policy coverage, ensure timely payment of premiums.

You can claim a deduction equal to the amount of the premium paid for the life insurance, provided the premium is within the deductible limit. This is based on when you purchased the policy.

For policies issued after April 1, 2012, the premium should not exceed 10% of the sum assured to be eligible for the deduction. If it does exceed, only the premiums up to 10% of the sum assured are considered for deduction. For policies issued before April 1, 2012, the premium should not exceed 20% of the sum assured to be eligible for the deduction.

If the premium of the life insurance policy is within the prescribed limits of ₹5 lakh, the proceeds are not taxable. In case of death, the payout from the life insurance is completely exempt without any limit.

You can maximise the tax deductions with your life insurance by buying policies whose premiums are within the deductible limit.

You can claim a tax deduction on your life insurance premiums under Section 80C of the Income Tax Act.

Yes, the total deduction claimed under Section 80C cannot exceed ₹1.5 lakh, including the deductions claimed on other expenses covered under the section.

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