Term Insurance Policy – Taxability & Tax Benefits


A term insurance policy, apart from providing protection against life risks, also offers tax benefits to the policyholders. This makes it an excellent choice of investment to reduce tax liability. Read on to more about tax implications on Term life insurance policy.

Term insurance is one of the most popular types of life insurance policies. As the name suggests, it offers protection for a specific period as decided at the time of buying the policy. If the policyholder dies before the end of the policy tenure, the insurance company pays the death benefit (equal to the sum insured of the policy) to the appointed nominee. Apart from the death benefit, another significant reason why a lot of people invest in term insurance is that it allows the policyholder to get a tax benefit.

The premium you pay for the term insurance is eligible for tax deduction under Section 80C of the Indian Income Tax Act, 1961. The maximum tax deduction you can get under the section is Rs. 1.5 lakhs on the premium paid for self, and other family members including spouse and children.

Also, the death benefit received by the nominee is eligible for tax saving. Under Section 10(10D) of the IT Act, the maturity amount is totally exempted from tax provided the premium paid is not more than 10% of the sum assured. A term policy offers wide coverage at a lesser premium as compared to other types of insurance policies. Let us understand this with an example.

If you are a 30-year-old man with a smoking habit, you can opt for a term insurance plan for 30 years at a monthly premium of about Rs. 600.

You must not buy a term insurance policy only to save taxes, you must also consider the coverage benefits it offers.

Term Insurance – Taxability and Tax Benefits

Under Section 80C of the IT Act, all taxpayers are eligible for tax deduction on the premium paid for a term life insurance policy. The maximum deduction you can claim in a financial year is 1.5 lakh Rupees. The exemption is also applicable if you pay the premium for the protection of your spouse and children.

The tax exemption on the premium paid towards term insurance is only applicable if you purchased the policy before 31st March 2012.

If you have purchased the policy after 31st March 2012, you are eligible to get a deduction up to 10% of the sum insured value of the policy. However, if the policyholder has any form of disability that is listed under section 80U, the tax deduction limit is increased to 15% of the sum assured.

Under Section 80C(5), if you surrender the term policy voluntarily within two years from the date of purchase, you are not eligible for any tax exemption.

Apart from the premium amount, you can also claim tax benefit under Section 10(10D) of the IT Act. The death benefit received by the beneficiary is fully exempted from tax and there is no cap on the maximum amount.

Final Word

Although a term insurance policy offers various tax benefits, it is advisable that you consult a trusted financial advisor to make an informed decision. Additionally, while choosing the best term insurance policy you must carefully review the policy terms and check if it suits your needs.

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