Does Term Insurance help in Saving Income Tax?

by Phume Mdluli
Saving Income Tax

To provide a better financial safety net for one’s family, one needs to invest in good life insurance. However, many people are skeptical when it comes to life insurance. There are two reasons for this. One is the misconception about the policy being pricey. However, life insurance is quite affordable and cost-effective. You can learn about it on this website:

The second reason is about having to pay taxes on different aspects of the life insurance policy. However, you, as a policyholder, get to enjoy various tax benefits in this policy. If you own or are planning to purchase a policy for yourself, read more to understand the different tax benefits you can enjoy with this policy.

What is a life insurance?

A life insurance policy is a type of policy in which the insurer agrees to compensate the policyholder’s family. This compensation is given in the event of the policyholder’s untimely demise during the policy term and is known as the sum assured or death benefit. The amount that the dependents of the policyholder receive is based on the type of plan purchased. This amount can help the dependents manage vital expenses and stay financially protected from various life risks.

What are the tax benefits in this policy?

There is a general misconception that there are no tax benefits in a term insurance plan. However, listed below are the tax benefits that you can avail as a policyholder with your term insurance:

1. Tax benefit on premium payment

The premium of your life insurance is what keeps the policy operational. Failure to pay the premium on time could cause your policy to lapse after a certain period. Therefore, it is important to pay the premiums on time. The premiums paid towards the policy are eligible for deductions in your return of income under Section 80C of the Income Tax Act.

The limit to avail this tax deduction is for premiums of up to Rs.1.5 Lakhs. This means that tax deduction will be capped at ₹1.5 lakhs. There are certain conditions under Section 80C that need to be fulfilled to avail this tax deduction:

  1. The premiums that you pay on annual basis should not exceed 10% of the sum assured under your policy.
  2. If your policy was purchased before 31st March 2012, this limit is set at 20% of the sum assured.
  3. If you surrendered your policy, or if it was terminated within two years of its purchase, under Section 80C (5), you will not be able to avail any kind of tax deductions on the premium payments.

2. Tax benefit on policy pay-out

When you purchase a life insurance policy, you get a life protection cover which is known as the sum assured or death benefit. If this amount is paid to your family in the event of your demise during the policy term, it is termed as death benefit. If it is paid after you have surrendered the policy, it is known as sum assured.

This life cover pay-out is eligible for tax deduction under Section 10(10D) of the Income Tax Act. The criteria to avail this tax deduction under Section 10(10D) is:

  1. The pay out from the policy is at least 10 times that of the policy premium, or if the premium is just 10% of the sum assured.

A tax deducted at source, i.e., TDS of 1% is applicable on the pay-out in the event it exceeds Rs.1 Lakh, and your insurer has your PAN.

The other tax benefits under this policy are:

  1. Under Section 80D of the Income Tax Act, if you happen to have riders in your policy such as critical illness benefit rider, accident disability rider, etc, you can avail certain tax deductions. The conditions to avail these tax deductions under Section 80D are:
  2. The amount received from the riders should not exceed Rs.25,000
  3. If the policy is for your parents, there is a tax deduction limit of Rs.25,000
  4. This limit goes up to Rs.50,000 if you or your parents happen to be senior citizens.


These are the tax benefits that you can enjoy with your life insurance. If you are interested in purchasing a policy for yourself, you can advantage of the life insurance calculator to get an idea about the cost of your policy.

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