Tax benefits you can reap from a term plan

Investment in term plans is a blessing in disguise with its two-pronged benefits – providing a life cover to the policyholder and offering tax benefits both on the payment of premium as well as with the proceeds on maturity. The Indian Income Tax Act, 1961 governs the term plan tax benefits. In this Act, there are numerous sections that assist the policyholder in getting tax deductions and reducing the taxable income.

The specified sections under the Income Tax Act for Term Insurance tax benefits are Sections 80C and Section 10(10D). Here are details under these sections that can help you in your tax planning.

Term Insurance under Section 80C
Under this section, you can take advantage of the tax deductions on the premiums that you have paid for yourself and your dependents that include your spouse as well as your children. There is a maximum limit of Rs 1.5 lakh set for this kind of investment, wherein you can enjoy tax deductions.

There are specific clauses for deduction under this section. These include:

1. If and when the premium amount is more than 10% of the ‘sum assured amount’, you can claim a maximum amount as a tax deduction up to 10% of the assured sum. However, this is applicable only to those plans that issued on or after 1st of April 2012.
2. You can claim a tax deduction on the total premium paid up to a limit of 20% if you have purchased a term plan on or before the 31st of March 2012.
3. In case you are suffering from any ailment that is mentioned in the section 80DDB or has a disability that is specified in the Section 80U, you can extend your existing limit from 10% to 15%. Nonetheless, this clause is only applicable to those term plans that were issued on or before the 1st of April 2012.

All the above-mentioned term plan benefits under this section can be availed by members of Hindu Undivided Family (HUF) as well as individuals.

Term Insurance under Section 10(10D)
In addition to the term plan tax benefits for the premium paid under Section 80, death benefit under term insurance gets tax benefits under Section 10(10D).
In term plans, there is a specific amount promised that is offered to the policyholder’s family/nominee in case of death of the policyholder before the term period expires. This amount assured as a death benefit gets complete tax exemption under Section 10(10D).  Moreover, this tax exemption under Section 10(10D) has no upper amount limit.

There are certain conditions attached to it, where it will not be applicable:

1. In case the amount is being offered under Section 80DD (3), which includes those deposits that are made for maintenance such as the medical treatment of handicapped dependent.
2. When the amount is being offered under the Keyman Insurance Policy
3. In case when the amount is not a component of the death benefit for a policy that is issued on or before the 1st of April 2003, rather in the period on or after 31st of March 2012. In addition, this benefit will not be applied for those premiums paid during the policy term that exceeds the limit of 20% of the sum assured.
4. If and when the term plan is issued on or after the 1st of April 2012, you can avail the benefit of tax exemption only if the total premium paid is not more than 10% of the sum assured amount.

Therefore, it is vital that while paying premiums for your term insurance, you must be careful that it does not fall under any of the aforementioned conditions so that you are able to get the maximum benefit of Section 10(10D).

Best Term Plan: Financial Stability, Not Tax Benefit
It is essential to understand that even though there are numerous tax benefits with a plan, the prime criteria should for choosing any term plan should be the conditions including the exclusions and inclusion, rather only using it as a tax benefit instrument. The tax benefits for most of the term plans are similar. Therefore, here the determining factor should be strictly limited to term plan component, its premium charges, claim settlement ration so on and so forth. Browse the website to know more about Life Insurance, Long Term Savings  and the various Term Plans offered by PNB MetLife.