An adequate term insurance policy is an essential insurance cover for every earning member of a family with financial dependents. Children, spouses, and parents who are reliant on you, can enjoy economic security with the death benefits from a term plan, in case of any unforeseen eventualities. The main aim of purchasing a term plan is to provide financial protection to your loved ones.
Traditional insurance plans do not score high on the list of tax-saving instruments. High premiums and comparatively low returns discourage people from using these as tax-saving tools. Term insurance plans, on the other hand, are protection plans, generally preferred for their low cost. These plans provide only death benefits. Any premium you pay is an investment towards providing financial security to your family in the future. This life insurance product is the lynchpin of financial planning because it helps meet several financial goals. The best term plan also offers you substantial tax benefits. When you are buying a term insurance plan, keep the dual aim of protecting your family and saving tax in mind to reap maximum benefits.
Using term insurance as a tax-saving tool
Here are some notable tax benefits that come with some of the best term insurance plans.
- Tax exemption on premium invested up to INR 1.5 lakh per annum under Section 80C
As per the Indian Income Tax Act of 1961, you can get tax benefits on the premium you have paid for a term insurance plan every year. Under Section 80C, premium up to Rs 1.5 lakh qualifies for tax benefits. The exemption is available for any policy bought by an individual for themselves, their spouse, children, or parent. Here are some clauses that you need to remember while calculating deductions:
- If the policy was issued on or before 31st March 2012, the eligible tax deduction is limited to 20% of the sum assured.
- If the policy was issued on or after 1st April 2012, the eligible tax deduction would be 10% of the sum assured.
- As per Section 80U, if the policyholder sustains disabilities or suffers from ailments listed as per Section 80DDB, the deductions will be 15%.
- Section 10(10)D tax exemption on maturity
As per Section 10(10)D of the Income Tax Act of 1961, the maturity benefit of a life insurance plan is tax-free for the policyholder if the premium is at least 10% of the sum assured. Please note that there are only a few term insurance plans in the market with maturity benefits for the policyholder. There are some term insurance plans that come with an option of ‘return of premiums.’ These plans also enjoy tax exemption.
- Tax-free payment to the beneficiaries in case of death
Term insurance provides a huge lump sum amount to the recipient in case the policyholder passes away during the policy period. The entire sum assured is tax-free in the hands of the beneficiaries.
- Tax exemptions on health riders Under Section 80D
There are options to choose health riders with a term insurance plan. Critical illness, accidental demise, or other health riders provide an additional layer of financial security to the policyholder. If you have paid for such riders, you can avail tax deductions, as mentioned in Section 80D of the Income Tax Act of 1961. The maximum cap for such deduction is limited to Rs 25,000 per year.
Terms insurance plans not only to provide an array of financial benefits for your dependents, but they can also help in substantial tax savings. Based on the deductions obtained from the best term insurance plans, you can manage your other investments to get maximum tax benefits. If you have not purchased a term plan yet, 2020 should be the year to invest in one.
Find the best term plan with optimum coverage and add-on riders, taking into account the deductions that you can avail on the premium and the riders. It will help you plan effectively for the tax you need to pay in 2020.