Term insurance is the simplest form of life insurance that provides only death benefit to the nominees of the insured person. With term insurance, your insurance provider promises to pay a specific amount, known as the sum assured, to your beneficiaries in case of your death, in exchange for premiums. You do not receive any death benefit if you survive the policy term.
Premiums paid on best term insurance plans are eligible for tax benefits under various sections of the Income Tax Act, 1961. Here, we break down the benefits under section 80C.
What is section 80C of the Income Tax Act, 1961?
Under section 80C of the I-T Act, you can get a tax deduction of up to ₹1.5 lakh per financial year on specific investments. These include investments in Public Provident Fund (PPF), National Savings Certificate (NSC), or National Pension Scheme (NPS), premiums paid on life insurance policies, etc. Note that deductions under section 80C are not available if you opt for the new tax regime.
Section 80C and term insurance
To claim deductions under 80C for life insurance, you ought to know the following:
● Eligibility
To be eligible for tax deductions, your life insurance policy must be in your name. You can also claim deductions for policies taken in the names of your spouse or children, provided you pay the premiums. In this case, you are called the proposer of the policy.
As a member of Hindu Undivided Family (HUF), you can claim deductions for policy taken in the name of any members of the HUF.
● Limits on the deduction amount with respect to sum assured
The deductions under section 80C are applicable only if the premium paid does not exceed 20% of the sum assured for policies issued on or before 31st March 2012 and 10% for policies issued on or after 1st April 2012.
● Minimum holding period
You must hold a term life insurance policy for at least 2 years to claim deductions against it.
● Illustration
Let’s assume that you bought a life insurance policy in May 2011 with a sum assured of ₹2.5 lakh. Since the policy was bought before 31st March 2012, you can claim 80C deduction on premium paid up to 20% of sum assured as deduction, which in this case will be ₹50,000 (20% of ₹2.5 lakh). Now, let’s say you bought a life insurance policy in June 2014 for your spouse with a sum assured of ₹2 lakh. On this, you can claim a deduction on premium payment of up to 10% of sum assured, i.e., ₹20,000 (10% of ₹2 lakh) since you meet the eligibility criteria.
Other tax benefits of term insurance
Per Section 10 (10D) of the I-T Act, the sum received by the beneficiaries on the death of a life insured is tax-free.
Bottom line
Term insurance offers a valuable opportunity to save taxes while securing your family’s future. However, it is essential to evaluate your insurance needs and financial obligations while searching for term plans. The best term insurance plans in India are low-cost yet offer multiple plan options, different payout options and flexibility to increase or decrease your life coverage according to your needs. Choose a policy that best aligns with your financial goals and enjoy the benefits of Section 80C to optimise your tax savings.
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