Term Insurance Tax Benefits: How to Save More This Year

Managing your finances effectively is not merely a matter of earning more, but also about making smarter saving and investment choices. One of the best methods to minimise your tax liability while providing financial security to your dependents is term insurance. Not only is it a cushion against risk, but it also has several tax benefits under the current tax regimes in India. Familiarity with the various term insurance tax benefit provisions can enable you to plan better and save more this financial year.

What is Term Insurance?

Term insurance is a life insurance policy that provides coverage for a definite time duration or "term." On the death of the policyholder within the policy term, the insurer pays the nominee a fixed sum assured. The ease, affordability, and extensive coverage values make it a perfect option for people looking to secure their family’s future.

Section 80C: Deduction on Term Insurance Premiums

The most prevalent tax benefit related to term insurance falls under Section 80C of the Income Tax Act of 1961. The rule is to enable tax deductions of up to ₹1.5 lakh per year for life insurance premiums, including term insurance.

To be eligible for this benefit:

●        The premium should not exceed 10% of the sum assured in cases where the policy is taken after April 1, 2012.

●        For policies taken before this date, the limit is 20% of the sum assured.

●        The policy should remain active and not be surrendered prematurely.

By investing in term insurance, you can reduce your taxable income and possibly shift to a lower tax slab.

Section 10(10D): Tax-Free Payout to Nominees

Another useful tax benefit on term insurance is available under Section 10(10D). Under this section, the nominee gets the death benefit tax-free under the Income Tax Act.

This will help your family secure the entire amount, tax-free, at a time when they will need it the most. For those who wish to provide their dependents with a secure financial future, this tax-free payout offers additional peace of mind.

Section 80D: Tax Benefit on Critical Illness Riders

Some term insurance policies allow you to add optional riders for enhanced protection. If your term plan includes a critical illness rider, the premium paid toward it can be claimed as a deduction under Section 80D of the Income Tax Act, provided the rider specifically covers defined medical conditions.

Deduction limits are:

●        ₹25,000 for individuals below 60

●        ₹50,000 for senior citizens

How to Maximise Your Tax Savings with Term Insurance

The following are a few ways in which you can maximise your tax savings using term insurance:

●     Begin Early: Premiums are lower when you're young, allowing you to start claiming tax deductions early in your career.

●     Take Higher Coverage: If premium limits are regulated, a higher sum assured provides greater financial security and yet is eligible for the tax advantage.

●     Use Riders Judiciously: Select health-related riders that contribute to both cover and tax-saving capacity under Section 80D.

●     Pay Premiums Yearly: Annual premiums, if affordable, are more cost-effective and convenient for tax purposes.

Typical Errors to Avoid

In order to get the most out of your term insurance tax benefit, avoid the following typical mistakes:

●     Allowing the Policy to Lapse: Failure to pay or policy lapse makes you ineligible for claiming deductions.

●     Not Keeping a Record of Payments: Always save receipts or proof of payment for premiums to support tax returns.

●     Ignoring Rider Details: Not all riders are eligible for deductions. Check what's eligible under 80D prior to adding them.

●     Mistaken Choice of Tax Regime: Selecting the new regime can disallow you from claiming any of these advantages.

Is Term Insurance Worth It Just for Tax Benefits?

Although the term insurance tax benefit is an important aspect, the core purpose of a term plan remains the financial security it offers your family. Tax savings must be considered as a supplementary benefit and not the main reason to invest.

Conclusion

Saving more during this financial year need not be such a complex exercise. A well-selected term insurance policy can ensure you secure your loved ones' future and minimise your tax liability at the same time. By using the tax benefits of term insurance under Sections 80C, 10(10D), and even 80D (with riders), you can reap substantial deductions and exemptions.

However, make sure to align your choice of policy with both your financial goals and long-term security needs. With the financial year underway, this is an ideal time to review your tax-saving strategies. Term insurance included in your plan further strengthens financial protection for your loved ones and makes it more tax-efficient.