How to Claim Tax Deductions for Term Insurance Premiums?

Investing in a term life insurance policy not only secures your family’s financial future but also provides significant tax-saving opportunities. The Indian Income Tax Act, 1961, includes provisions that allow policyholders to claim deductions on premiums paid for term insurance, making it a dual-purpose financial tool. Understanding how to maximise these term insurance tax benefits ensures that you save money while protecting your loved ones.

This guide explains the steps to claim tax deductions for term insurance premiums, the relevant sections of the Income Tax Act, and key considerations to make the most of these benefits.

Why Buy Term Life Insurance for Tax Savings?

When you buy term life insurance, you gain access to tax benefits that reduce your taxable income and, in turn, your overall tax liability. These benefits are applicable under Sections 80C, 80D, and 10(10D) of the Income Tax Act. By utilising these provisions, you can safeguard your family while saving significantly on taxes.

Tax Benefits Available for Term Insurance

Section 80C: Deduction on Premiums Paid

Under Section 80C, premiums paid for term insurance are eligible for a tax deduction of up to ₹1.5 lakh per financial year.

Key Highlights:

• The policyholder can claim this deduction for premiums paid for their own policy, their spouse’s policy, or their children’s policy (dependent or independent).
• The premium amount should not exceed 10% of the sum assured for policies issued after April 1, 2012. For policies issued earlier, this limit is 20%.

Example:
If you pay an annual premium of ₹30,000 for a term plan with a sum assured of ₹50 lakh, the entire premium qualifies for deduction under Section 80C.

Section 80D: Deduction on Health-Related Riders

Premiums paid for health-related riders, such as a Critical Illness Rider, attached to your term insurance policy, are eligible for deductions under Section 80D.

Key Highlights:

• The maximum deduction is ₹25,000 per financial year for individuals below 60 years of age and ₹50,000 for senior citizens.
• This deduction is applicable in addition to the benefits under Section 80C.

Example:
If you pay ₹5,000 annually for a Critical Illness Rider, this amount can be deducted under Section 80D, providing additional tax savings.

Section 10(10D): Exemption on Death Benefits

The death benefit received by the nominee under a term insurance policy is entirely tax-free under Section 10(10D).

Key Highlights:

• There is no upper limit on the amount exempted under this section.
• This ensures that your family receives the full payout without any tax deductions.

Steps to Claim Tax Deductions for Term Insurance Premiums

Step 1: Verify Policy Eligibility

Ensure that your term insurance policy complies with the conditions specified under Sections 80C and 80D:

• The premium should not exceed the prescribed percentage of the sum assured.
• The policy should be issued in your name, your spouse’s name, or your children’s name.

Step 2: Collect Premium Payment Receipts

Maintain all receipts and documentation related to premium payments as proof for tax filing. These include:

• Premium payment receipts or online payment confirmations.
• Policy schedule showing the sum assured, policyholder details, and riders (if any).

Step 3: Calculate Total Deductible Amount

Sum up the premiums paid for all eligible policies, including any health-related riders, to determine the total amount you can claim under Sections 80C and 80D.

Example:

• Premium for your term plan: ₹30,000
• Premium for Critical Illness Rider: ₹5,000
• Total deduction: ₹35,000 (₹30,000 under Section 80C and ₹5,000 under Section 80D).

Step 4: Fill in the Tax Declaration Form

If you are a salaried employee, declare your term insurance premiums to your employer by filling out the tax declaration form at the beginning of the financial year. This ensures that your tax-saving investments are considered while calculating TDS (Tax Deducted at Source).

Step 5: File Your Income Tax Return

When filing your income tax return, mention the premiums paid under the relevant sections in the deductions column. Use the following forms based on your income:

• ITR-1: For salaried individuals.
• ITR-2: For individuals with additional income sources, such as rental or capital gains.

Attach the necessary documents if required, although most e-filing platforms do not require physical submission of receipts.

Step 6: Submit Supporting Documents (if needed)

In case the tax authorities request verification, submit the following:

• Policy schedule or agreement.
• Premium payment receipts.
• Bank statements showing premium payments.

Important Considerations for Claiming Tax Deductions

Understand the Limits

Ensure that your total deduction under Section 80C does not exceed ₹1.5 lakh, as this is the maximum permissible limit for all investments covered under this section (including PPF, ELSS, and home loan principal repayment).

Opt for Online Policies

When you buy term life insurance online, you often receive lower premiums due to reduced operational costs. This can maximise your savings while still qualifying for tax deductions.

Include Health Riders Strategically

If you attach health-related riders to your term policy, ensure that you claim the additional deduction under Section 80D, separate from your Section 80C claim.

Track Policy Tenure

Tax benefits are only applicable for active policies. If your policy lapses due to non-payment of premiums, you lose the right to claim deductions.

Keep Updated on Tax Laws

Stay informed about changes in tax laws and regulations to ensure you’re taking full advantage of the benefits available for term insurance.

Common Mistakes to Avoid

• Missing Documentation: Failing to keep receipts and policy documents can lead to issues during tax filing.
• Exceeding Premium Limits: Ensure your premium does not exceed the percentage of the sum assured specified under the relevant sections.
• Neglecting Health Riders: Overlooking the deduction available under Section 80D for rider premiums can result in missed savings.
• Not Declaring to Employer: Forgetting to declare premiums to your employer can lead to higher TDS deductions.

Conclusion

Claiming tax deductions for term insurance premiums is a simple yet effective way to save money while securing your family’s future. By understanding the provisions under Sections 80C, 80D, and 10(10D), you can make the most of your term insurance tax benefits.

Whether you are a salaried employee or self-employed, ensure that you maintain proper documentation, calculate your deductible amount accurately, and file your returns on time. When you buy term life insurance, it’s not just about protecting your loved ones—it’s also a smart financial decision that helps you optimise your tax planning.