Term Insurance & Tax Season: Can You Still Score Savings for 2023-24?
Term Insurance & Tax Season: Can You Still Score Savings for 2023-24?
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Term Insurance & Tax Season: Can You Still Score Savings for 2023-24?

Term Insurance plans are one of the most popular tax-saving instruments in India. Adding a term plan to your financial portfolio is a no-brainer. Additionally, they are great life insurance products that can ensure a significantly high sum assured for a low premium amount. If, for some reason, you have still not purchased a term plan and are now considering it for the tax advantages it can give you, then this article is for you. 

Considering that we have around three months to wrap up the financial year, is it even worth considering a term plan this late? Well, the simple answer is a resounding ‘YES’.

Tax Advantages of Term Insurance in Different Income Tax Categories

In the realm of income tax, term insurance policies offer various tax benefits, which can be categorised under the following three sections of the Income Tax Act:

Tax Benefit for Term Insurance under Section 80C

Under Section 80C, you have the opportunity to claim a tax deduction of up to ₹1.5 lakhs for the premiums paid toward your term insurance plan. This section extends its deductions to a wide array of financial instruments, including PPF, EPF, ULIP, and ELSS, as well as expenses such as home loan repayments, tuition fees for children, and life insurance premiums.

To avail of the term insurance tax benefits under Section 80C, keep the following conditions in mind:

  • Yearly premiums paid should not exceed 10% of the sum assured, with proportional deductions for amounts exceeding this threshold.
  • For policies issued before March 31, 2012, the deduction applies only if the yearly premium does not exceed 20% of the sum assured.
  • As per Section 80C(5), voluntarily surrendered policies or those terminated within two years from inception do not qualify for tax benefits on premium payments.

Tax Benefit for Term Insurance under Section 80D

Section 80D provides deductions for health insurance plans that you have purchased for yourself, your spouse, children, or parents, each with different limits under various conditions.

It's worth noting that certain term insurance plans, like the offerings from Edelweiss Tokio Life Insurance, also offer tax benefits under Section 80D. Policyholders who have chosen health-related riders, such as Critical Illness Riders, can benefit from deductions under this section.

To qualify for tax benefits on a term plan under Section 80D, consider these conditions:

  • The deduction can be claimed for amounts up to ₹25,000.
  • If you've purchased an insurance policy for your parents, you can additionally claim a deduction of up to ₹25,000.
  • If your parents are senior citizens, the deduction limit increases to ₹50,000.

Tax Benefit for Term Insurance under Section 10(10D)

Section 10(10D) of the Income Tax Act provides tax exemptions for the sum assured upon death, policy surrender, and the maturity benefit returns. Any bonuses received through an insurance plan may also be tax exempt under Section 10(10D).

To qualify for term insurance tax exemption under this section, consider the following conditions:

  • The term plan qualifies for tax benefits if the premium is less than 10% of the sum assured or if the sum assured is at least ten times the premium.
  • If the payout exceeds ₹1,00,000 and the policyholder's PAN is available, a 1% TDS (Tax Deducted at Source) is applied.

How Much Can You Save with a Term Plan in 2023-24?

The answer is a maximum of ₹46,800 (with only Section 80C Deductions). Now, how do we get to this number, and is it universal? Let us understand. 

The first thing to understand before we dive deeper is that the tax benefit on term insurance premiums is available only under the old tax regime

The deduction limit for term insurance under Section 80C is set at Rs 1.5 lakh, offering a smart way to cut down on your income tax, depending on which tax bracket you're in. 

Take this example: if your net income is above Rs 10 lakh, landing you in the highest 30% tax bracket under the old regime, then choosing term insurance could trim your tax by as much as Rs 46,800 under Section 80C, and that's including the 4% cess (Rs. 45,000 1,800). 

No matter what tax slab you're in, if you plan wisely and align your strategies, term insurance under Section 80C can be a neat fit in your financial toolkit. It's not just about saving taxes; it's also about steering your financial goals in a way that's savvy and tax smart.

 

Tax rates

Tax saved for every ₹ 10,000 earned under Section 80C

Maximum tax saving under Section 80C with 4% cess

5%

500

7,800

20%

2,000

31,200

30%

3,000

46,800

Since there are a few months left in the current financial year, you might not be able to maximise the deductions under Section 80C with just your term plan premiums. You can check what your premiums will be using a term insurance calculator. Find out how much premium you can pay before the financial year ends to get the most out of Section 80C deductions. Optionally, to maximise the deduction limit for this year, you can also put some money in other 80C instruments like PPF, ELSS funds, or Tax Saving FDs.

So, should you go for a Term Plan at this time of the year?

The short answer is, yes. Even with a few months to go in the financial year, it is a good decision to go for a term plan. A term plan’s premiums will help you get last minute tax deductions through Section 80C, and you will also be setting up a strong financial safety net for your loved ones. Remember that you need to pay your premiums regularly and hold the policy for at least two years, else you lose all the benefits that you have availed in the form of deductions. 

As your income grows, your tax planning needs have to be adjusted accordingly. The investments you choose to make today will likely help you save taxes in the long run, and with each year, you will only need minor tweaks to your financial portfolio. So, begin by adding a term plan to your portfolio to enjoy tax benefits for the entire premium-paying term. Plus, the life coverage provided ensures your family's financial security in case of your unfortunate demise. Explore comprehensive term plans by Edelweiss Tokio Life Insurance to begin your tax planning journey today. 

How to Calculate How Much Term Life Insurance You Actually Need: A Simple Step-by-Step Guide

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