The premium payable amount and tax savings have historically been important considerations for Indians looking to purchase a life and health insurance policy. Do you know when you purchase a term plan and a health insurance plan, you can take advantage of multiple insurance tax benefits? These benefits allow you to save money on taxes while protecting your loved one’s financial future. Let us take a detailed look at the term and health insurance tax benefits.
Section 80C
This is the most basic and popular tax benefit that any Indian taxpayer can avail of on their term insurance. It is important to note that the upper limit of tax deductions available under this Section includes tax benefits on investments in PPF (Public Provident Fund), tax-saving Fixed Deposits, and a variety of other tax-saving instruments. You can maximize term life insurance tax benefits by purchasing a substantial life insurance policy for yourself, which will benefit your family in the long run.
Significant Facts About Term Insurance Tax Benefits U/S 80C
Under Section 80Cof the Income Tax Act, 1961, one can get tax benefits of up to ₹1.5 lakh on term insurance premiums. The annual premiums for a term insurance plan cannot exceed 10% of the chosen sum assured. If it exceeds the threshold, term insurance tax benefits under Section 80C will be applied proportionally.
For the term insurance plans that are issued before 31st March, 2012, the tax benefits on term plans are applicable if the annual premium is less than 20% of the sum assured.
Section 80D
It allows tax deductions on the premiums payable for health insurance plans. However, it additionally provides tax benefits on term insurance plans, though in an indirect manner. You can receive term insurance tax benefits under 80D if you have opted for health-related riders, such as Critical Illness coverage, Surgical Care coverage, and similar ones. In other words, you can maximize tax savings with your term insurance plans by opting for these riders while also getting health insurance cover.
Payments Eligible for Deductions Under Section 80D
As already stated before, term insurance tax benefits extend to certain riders and the critical illness rider offers tax benefits under Section 80D of the Income Tax Act. However, the tax benefits under Section 80D are not limited to only this. This provision of the Income Tax Act offers tax benefits on the premium paid for a range of policies such as mediclaim, cancer insurance plans as well as various health insurance plans.
However, it should be kept in mind that the tax benefit under Section 80D has limitations to the actual amount made as well as limits that are defined under the Income Tax Act. In this case, it is applicable not only for standalone health plans but also for term insurance plan that have riders offering defined benefits be it cancer cover or financial protection against a list of critical illnesses.
Exclusions Under Section 80D of the Income Tax Act
Section 80D benefits are currently limited to the portion of the premium that is allocated towards maintaining riders offering health benefits or eligible health insurance. So, in the case of a term insurance plan, a major portion of the tax deduction is actually offered under Section 80C i.e. the premium payment made towards maintaining the life insurance plan. Whereas, only the percentage of the premium that is dedicated towards specified riders like critical illness riders and cancer plan riders are eligible for Section 80D benefit.
One should also keep in mind that all term insurance riders do not give tax benefits. In particular, a personal accident rider, while a smart alternative to increase your life cover, does not actually qualify for tax benefits under Section 80C or Section 80D of the Income Tax Act.
Another major Section 80D exclusion are expenses made for medical treatment. In such circumstances, tax benefits can be claimed under Section 80DD or Section 80U depending on the disease being treated and the taxpayer type.
Section 10(10D)
Other than the aforementioned tax benefits that an life assured can avail, the s/he and their family members can also avail tax exemptions that are covered in Section 10 (10D).
Simply put, the death or maturity benefit received under a term insurance plan is tax-exempted. This is also subject to the different conditions specified therein. In general, the tax benefits of term insurance plans have no maximum limit. It means that the entire money you or your loved ones will get through the term plan is tax-exempt.
As a term insurance policyholder, you should be aware that the tax benefits under Section 10(10D) are subject to certain limitations. It specifies that the maturity or death benefits of a term plan are tax-free if the premium paid during the policy duration does not exceed 20% of the pre-determined sum assured.
How to Claim Tax Benefits on Term Insurance?
The procedure for obtaining tax benefits on term insurance premiums differs slightly depending on whether you are salaried or self-employed.
Salaried Individuals: Salaried individuals can use the IT Form 12BB to claim tax benefits on term insurance premiums paid under sections 80C and 80D, if applicable riders such as the Critical Illness rider are included. Form 12BB is an investment declaration form used by salaried employees to declare their investments and tax-deductible expenses. Only after submitting this form will you be able to claim deductions on your term insurance premium.
You must fill out and submit this form at the start of the financial year, specifying the investments you intend to make. This manner, it will be included on your Form 16.
Along with Form 12BB, you must save the premium payment receipt and certificate for security. Although these documents are not required to claim a potential tax deduction on term insurance premiums, they may be requested if the tax department wants additional information.
Self-employed individuals: To receive tax benefits from term plan premiums, self-employed individuals must file their ITRs. You can use the ITR form to report your term insurance premium payments and claim the appropriate tax deductions under Sections 80C and 80D.
Keep in mind that you can claim a tax deduction on your term insurance premiums of up to Rs 25,000 under Section 80D if you have added an accidental benefit rider and/or a critical illness rider.
Another point to consider is that when claiming tax deductions, only the actual amount can be claimed, not the maximum limit. For example, under Section 80D, you can claim tax deductions of up to Rs 25,000 each year. However, if your annual premiums total Rs 12,000, you will be able to claim that deduction rather than Rs 25,000.
In addition, any GST spent on it, if not already included in the premium, will be eligible for deduction.