Life Insurance Tax Benefits u/s 80C, 80CCD & 10 (10D)

While a term/life insurance plan is an important safeguard against unforeseen circumstances, it also serves as an effective tax-saving instrument, allowing you to reduce your taxable income if you have opted for the Old Tax Regime. 

Under the Income Tax Act 1961, life insurance policyholders can claim tax deductions on premiums paid and tax exemptions on the benefits received. This makes understanding the life insurance tax benefits crucial. In this article, let’s take a look at exactly how much you can deduct by understanding the applicable tax provisions.

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Overview of Tax Benefits for Life Insurance

Two main tax provisions govern life insurance tax benefits in India: Section 80C and Section 10(10D). Under Section 80C, the premiums you pay on life insurance policies are eligible for a tax deduction, while Section 10(10D) ensures that the maturity and death benefits of your life insurance policies are exempt from tax. Here are the differences between Section 80C and Section 10(10D):

Tax Benefits Under Section 80C on Life Insurance Premiums

Under Section 80C, you can claim a deduction on the premiums paid for life insurance policies, reducing your taxable income by up to ₹1.5 lakh in a financial year. This is available for policies covering you – the taxpayer, your spouse, and your children. Apart from life insurance premiums, there are a few other financial instruments for which you can avail yourself of a deduction u/s 80C. Here’s a quick look at them:

Since we’re focusing on term-life insurance premiums, let’s go through it’s fine print:

• Premium payments must not exceed 10% of the cover amount for policies issued after April 1, 2012.
• For policies issued before April 1, 2012, the premium must not exceed 20% of the cover amount.
• Only Hindu Undivided Families (HUFs) and individual taxpayers are eligible for this deduction.
• Premiums paid for your spouse and children are eligible for tax benefits, but not for your parents or siblings.

Note: Under Section 80C, there’s another subsection – 80 CCD – where you can increase the ₹1.5 lakhs to ₹2 lakhs. However, this is applicable only if you invest in the National Pension Scheme (Tier 1) account. This increases your deduction by another ₹50,000.

Tax-Free Maturity and Death Benefit Under Section 10(10D)

Section 10(10D) governs the tax treatment of the maturity, survival, or death benefits you receive from your life insurance policy. Under this provision, both maturity proceeds and death benefits you receive from a life insurance policy are eligible for tax exemptions, provided certain conditions are met. This represents another significant life insurance tax benefit. Let’s take a close look at it now:

1. Maturity Benefit: 

The maturity proceeds of a life insurance policy are completely tax-free under Section 10(10D) as long as the premium-to-coverage ratio meets certain limits. The conditions vary depending on when the policy was issued:

• After April 1, 2012: The annual premium paid should not exceed 10% of the cover amount for the maturity payout to be tax-exempt.
• Before April 1, 2012: The annual premium should not exceed 20% of the cover amount to qualify for a tax-free payout.
• After April 1, 2013: If you are disabled or have a severe disease that is listed u/s 80DDB or 80U, your premium-to-coverage ratio must not exceed 15%.

The government introduced these rules to ensure that life insurance tax benefits are for insurance policies designed for protection rather than investment-heavy plans that carry high premiums relative to the cover amount.

2. Death Benefit:

Unlike maturity benefits, the entire death benefit paid to your nominee is completely exempt from tax, irrespective of the premium amount. Even if your annual premium exceeds the 10% or 20% threshold, your nominee will still receive the full cover amount with no tax. This provision ensures that your dependents and family members are not burdened with a hefty tax liability when they receive the payout.

3. ULIP Maturity & Death Benefit:

Unit Linked Insurance Plans (ULIPs) offer a mix of insurance and investment. The government changed the tax treatment for this in 2021, and they are as follows:

• ULIP maturity proceeds remain tax-free only if the total annual premium for all ULIPs held by you does not exceed ₹2.5 lakh.
• If the total ULIP premiums exceed ₹2.5 lakh per year, the entire maturity amount is taxable as capital gains instead of being tax-exempt under Section 10(10D). This will be taxable at 12.5% if held for more than a year, and 20% if held for less than a year.

This amendment was introduced to ensure that ULIPs are not used as tax-free investment vehicles by people with a high income. However, death benefits from ULIPs remain completely tax-free, regardless of the premium amount.

Tax Deductions for Life Insurance Purchased for Family Members

Under Section 80C, you can claim deductions for life insurance premiums paid for your family. The maximum deduction allowed under Section 80C remains the same ₹1.5 lakh per year, which includes other eligible investments such as PPF, EPF, and ELSS. However, note that you can only claim deductions for premiums paid for yourself, your spouse, and your children. Parents and siblings are not eligible for this benefit under Section 80C. This rule remains the same whether your parents or siblings are financially dependent on you or not. 

If you are looking to secure coverage for your parents, Section 80D provides tax benefits for premiums paid on health insurance, but you will not receive a similar deduction for life insurance.

Note: To claim these life insurance tax benefits, the policyholder must make the premium payments. If someone like a parent, spouse, or employer — pays the premium on your behalf, you will not be eligible to claim the deduction under Section 80C.

How to Claim Life Insurance Tax Benefits?

To claim tax deductions and exemptions, you need to follow these steps when filing Income Tax Returns (ITR):

1. Include premium payments under the “Deductions under Section 80C” category in your ITR.
2. Make sure you make only digital or cheque payments — cash payments do not qualify for deductions.
3. Maintain premium receipts and policy documents as proof for tax filings. You don’t require it when filing but need it later if asked.
4. Check Form 26AS (available on the Income Tax portal) to verify tax deductions.
5. For maturity benefits under Section 10(10D), ensure compliance with the premium-to-coverage ratio to keep payouts tax-free.
6. If you have a critical illness rider in your term insurance policy, you can reduce this rider’s premium alone u/s 80D, with a total deduction up to ₹25,000.

Note: Always check with a qualified chartered accountant when filing your ITR. This prevents unnecessary scrutiny from the tax authorities.

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Conclusion

Term-life insurance serves as both a financial safety net and a tax-saving tool. While Section 80C helps reduce taxable income through premium deductions, Section 10(10D) ensures you or your nominees get tax-free maturity or death benefits. To maximize your life insurance tax benefits, ensure that your aggregate payment under section 80C does not exceed ₹1.5 lakhs (or ₹2 lakhs if you contribute to NPS) and that your premium-to-coverage ratio does not exceed the allowed limit.

Note: Section 80C deductions are available only if you have opted for the old tax regime.