Tax Benefits of Life Insurance : A Smart Way to Save

Life insurance is one of your family’s most practical financial tools in case of an untimely demise. Beyond offering financial protection, life insurance policies in India also provide attractive tax benefits. Whether you’re paying premiums for a term life policy or investing in a whole life or Unit Linked Insurance Plan (ULIP), life insurance can help you save a significant amount on taxes while safeguarding your family’s future.

In this blog, we will explore the tax advantages of life insurance in 2024, focusing on key sections of the Income Tax Act under which policyholders can benefit. Let’s dive in.

Tax Breaks for Paid Premiums: part 80C: One of the best things about life insurance when it comes to taxes is the deduction you can get under Section 80C of the Income Tax Act. This part lets you claim deductions for premiums paid for many financial products, including life insurance.

• Eligibility: Premiums paid for life insurance policies for yourself, your spouse, children, or parents are eligible for deduction under Section 80C.
• Limit: The maximum deduction available under this section is up to ₹1.5 lakh per year. This limit applies to the total of all eligible investments combined, which includes life insurance premiums, Employee Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificates (NSC), and more.
• What qualifies: You can claim deductions for premiums paid on term life insurance, whole life policies, endowment policies, ULIPs, and more, as long as the policy is in the name of the taxpayer or their immediate family members.

Example: If you pay ₹50,000 annually toward a life insurance premium for your policy, you can claim that ₹50,000 under Section 80C, reducing your taxable income by that amount.

1. Tax-Free Death Benefit: Section 10(10D)

Another significant life insurance tax benefit is the tax-free death benefit under Section 10(10D) of the Income Tax Act. The proceeds your family receives after your death are usually wholly exempt from income tax, subject to certain conditions.

• Eligibility: The death benefit, which includes the sum assured and any bonuses or additional payouts, is generally tax-free.
• Conditions: The key condition for this tax exemption is that the premium paid for the policy should not exceed 10% of the sum assured for policies issued after April 1, 2012 (for policies issued before this date, the limit is 20%). If the premium exceeds this threshold, the death benefit will be taxable.

Example: If your life insurance policy’s death benefit is ₹10 lakh, and your family receives the full amount after your death, ₹10 lakh will be exempt from income tax under Section 10(10D).

1. Tax Benefits on Surrender Value and Maturity Benefits: Section 10(10D)

Life insurance policies with a savings or investment component, such as endowment plans or ULIPs, also offer tax benefits on the surrender value or maturity benefits.

• Surrender Value: If you decide to surrender your life insurance policy before the maturity date, the surrender value (which includes the amount you get back on terminating the policy) is usually exempt from tax under Section 10(10D), provided the policy meets the premium limit requirements mentioned earlier.
• Maturity Benefits: If the policy matures and you receive the maturity benefit (the sum assured plus any bonuses or accrued benefits), it is typically tax-free under Section 10(10D), again subject to the same premium conditions.

Example: If you’ve invested in a ULIP and it matures after 15 years with a payout of ₹5 lakh, the maturity benefit you receive will be tax-free, assuming the premiums align with the conditions set by the tax authorities.

1. Tax Benefits on Critical Illness and Accidental Death Benefit Riders

Many life insurance policies offer riders additional benefits attached to the base policy. Some popular riders include critical illness riders and accidental death benefit riders. These riders provide extra coverage in case of significant health issues or accidents and may also come with tax benefits.

• Critical Illness Rider: If you purchase a critical illness rider with your life insurance policy, the premiums paid toward this rider are eligible for a deduction under Section 80D of the Income Tax Act, which covers premiums paid for health insurance.
• Accidental Death Benefit Rider: Similar to the critical illness rider, the premiums for an accidental death benefit rider can also be deducted under Section 80D if the rider is part of your life insurance policy.

Example: If you pay ₹10,000 annually for a critical illness rider attached to your life insurance policy, you can claim that ₹10,000 as a deduction under Section 80D and the deductions available under Section 80C.

1. Tax Savings on Loans Against Life Insurance Policies

Another indirect benefit of life insurance is the ability to take loans against your policy’s surrender value, which can be used for personal or financial needs.

• Tax-Free Loans: Loans against life insurance policies are typically not taxable, as they are considered a liability, not income. The funds are also not subject to tax when borrowed, unlike income received from other sources.
• Interest Paid on Loans: You can’t reduce the interest you pay on these loans, though. It is important to repay the loan and interest in order to keep the policy’s benefits.

Example: The loan amount is not taxed if you’ve taken a loan against your life insurance policy to fund a business or education. However, any interest payments on the loan do not qualify for tax benefits.

1. Tax Benefits for HUFs (Hindu Undivided Families)

Under Section 80C, Hindu Undivided Families (HUFs) can also claim deductions for life insurance premiums paid. The HUF can take out a life insurance policy for the family’s benefit, and the premium paid will be eligible for a tax deduction of up to ₹1.5 lakh per year.

• Eligibility: The life insurance policy should be taken for the benefit of the family members of the HUF. The policyholder can be the Karta (head of the HUF) or another family member.

Example: If the Karta of a HUF pays ₹50,000 as a premium for a life insurance policy covering the family, the HUF can claim a ₹50,000 deduction under Section 80C, reducing the overall taxable income.

1. Tax Benefits for NRI Policyholders

For Non-Resident Indians (NRIs), life insurance policies purchased in India also offer tax benefits under the Income Tax Act. The premium paid toward life insurance policies, including term insurance, ULIPs, or endowment plans, is eligible for deductions under Section 80C.

• Eligibility: NRIs can claim the same deductions as resident Indians, provided the premiums are paid in India.

Example: An NRI paying premiums for a life insurance policy in India can claim the tax benefits under Section 80C for the premiums paid, just as any other Indian resident can.

Conclusion: Under different parts of the Income Tax Act, life insurance can help you save a lot of money on taxes. You can save money and protect your family’s finances in 2024 by taking advantage of these tax breaks. Life insurance is a great way to protect yourself and lower your tax bills. Under Section 80C, you can get a tax break on your payments, and under Section 10(10D), you can get tax-free death and maturity benefits.

Make sure that the life insurance policies you choose meet your needs for financial safety and give you the biggest tax breaks. Talk to a financial expert all the time to make sure you get the most out of your tax breaks and make good plans for the future.