How to get Tax Benefits on Life Insurance Premium?

A term insurance plan is one of the most sought-after life insurance and investment options in India. One of the reasons why getting a life insurance term plan is on everyone's list is because it aids in tax planning and deductions. A term plan serves a dual purpose—it offers life benefits and tax benefits.

Dual Benefits from Term Insurance Plans

All insurance policies are contracts signed between you and the insurer, whereby the insurer promises to pay you for any financial losses you incur due to the occurrence of an insured event. A health insurance policy, for example, covers you against certain illnesses. If you do fall ill with a disease you are insured against, the insurer compensates you for the financial loss incurred in the form of medical expenses, hospital stays, and other illness-related expenditures.

In a life insurance term plan, your insurer agrees to compensate your nominee/beneficiary in the event of your untimely demise while the term insurance policy is still in force. In general, the amount you are insured for in a pure protection term insurance plan is as high as 10 times your annual income. In exchange for this assurance, you agree to pay a predefined amount of money known as a term plan premium for a fixed number of years.
Besides the life protection and financial benefits you and your loved ones stand to derive from a term life insurance plan, you also stand to gain tax benefits on the term insurance premiums you pay.

While the government collects indirect tax (GST) and direct tax (income tax), it is also dutybound to make certain types of savings plans and life insurance plans viable to you. The Income Tax Department of India has made provisions for availing of tax benefits in the form of deductions and exemptions on the life insurance premiums of term insurance plans, life insurance plans, and health insurance plans. These tax benefits are devised to encourage the purchase of term insurance for your family's financial security.

What are the Tax Deductions and Exemptions on Life Term Plan Options?

A tax exemption reflects the amount by which your tax liability reduces because you have invested in a tax-saving instrument that has been deemed appropriate by the government. Salaried professionals are well-versed with tax exemptions that can be availed of under Section 80C of the Income Tax Act of 1961. However, several tax exemptions can be applied to life insurance premium payments.

Section 80C Deduction Benefits

Section 80C of the Income Tax Act of 1961 makes provision for tax saving if you have invested in one of the approved investment instruments. Such a tax deduction is typically applied on the amounts you have invested in life insurance term plans, PPF or Public Provident Fund, ULIP or Unit-linked Insurance Plans, ELSS or Equity-linked Savings Scheme, EPF or Employee Provident Fund, NPS or National Pension Scheme, SCSS or Senior Citizens Savings Scheme, and NSC or National Savings Certificate, to name a few.

Under Section 80C of the Indian tax law, you can claim deductions to the tune of up to Rs. 1.5 lakhs for investments made in any of the approved instruments within that financial year.

You can claim deductions for life insurance premiums paid to insure your life as well as the life of your spouse and children. This deduction is applicable irrespective of the age, dependency status, and marital status of your child.
As per the Insurance Regulatory and Development Authority of India (IRDAI), all premium amounts paid towards term life insurance plan cover with any IRDAI-approved insurer can be claimed under Section 80C of the Income Tax law.

To claim deductions on a life insurance term plan:

• Life term plan premium should not be more than 10% of the sum assured (for policies issued after April 1, 2012).
• Life term plan premium should not be more than 20% of the sum assured (for policies issued before April 1, 2012).
• If the life covered is that of a person with a disability (as defined under Section 80U) or disease (as defined under Section 80DDB), then the life term plan premium should not exceed 15% of the sum assured (for policies issued after April 1, 2013).
• In case of voluntary surrender or policy termination within two years from the date of policy commencement, the policyholder does not stand to receive any tax benefits on the life term plan premiums paid as defined under Section 80C (5) of the Income Tax Act of 1961.

Section 80CCC Deduction Benefits

Section 80CCC of the Income Tax Act creates a provision for tax deductions for any premiums paid or the amount deposited in a life insurance annuity plan that will pay out an annuity in the future. Such a life insurance annuity plan could be availed of from LIC as well as any other IRDAI-approved insurer in India.
You can claim a deduction for the premiums deposits for the life insurance annuity plan only if the pension to be received comes from a fund listed under Section 10(23AAB) of the IT Act.

Keep in mind that the annuity received, any bonuses accrued, and the amount received upon voluntary surrender of the policy are all taxable in the financial year of their receipt.

Section 10(10D) Exemption Benefits

As a further incentive for taxpayers to invest in life insurance term plan policies, the Government of India also offers Income Tax exemptions on the maturity proceeds or payment of sum assured to the nominee/beneficiary listed in the policy. This tax exemption on the life insurance amount received falls under Section 10(10D) of the Income Tax Act of 1961.

Saving Tax on GST Paid

As described in the Income Tax Act sections listed above, the IT Department of India allows you to avail of tax benefits on the premiums paid towards term life insurance plans, other life insurance products, and health insurance plans.

Every time you make a life insurance term plan premium payment, a certain percentage of that premium goes towards payment of indirect tax or GST (Goods and Service Tax). This indirect tax has to be paid while availing of services offered by suppliers in addition to the actual cost of the supplied purchased.
So, according to the IT Act and the GST rules, the premiums paid towards term plan life insurance policies are valid for claiming exemptions. This includes the entire premium amount with GST.

The GST rate levied on insurance products depends on the type of plan being purchased and paid for. For instance, if your purchase a traditional endowment life insurance plan, you are typically charged GST at the rates of 4.5% (1st year) and 2.25% (2nd year). In the case of pure protection term plan life insurance policies, a flat rate of 18% is charged as GST on the term plan's premium.

Let's illustrate this with an example:
Suppose Mr. Kumar purchases a term plan life insurance policy for a premium payment of Rs. 20,000 per year. On this amount, GST at the rate of 18% is applied. So, in effect, Mr. Kumar pays Rs. 20,000 + Rs. 3,600 (GST@18%). According to Section 80C of the IT Act, the entire sum paid towards keeping a term plan life insurance policy running can be claimed for deduction. This means that Mr. Kumar can claim a term plan life insurance premium tax benefit on the total premium amount of Rs. 23,600.

Changes under the New Tax Regime (2020-2021)

The following table shows simple comparison of the different tax slabs under both regimes:

If you fall under a lower tax bracket and have little to no qualifying investments (term plan, life insurance, PPF, EPF, ULIP, ELSS, etc.), then the new tax regime is likely to be more beneficial for you. However, if you have been tax planning every year and have several investments that can earn you deductions and exemptions under the old tax regime, the existing system might work better for you.
After Budget 2020, you have the advantage of choosing the regime that best suits your interests. You are also allowed to switch from one regime to the other in the next financial year.

Conclusion

While weighing the benefits derived from term insurance plans, give weightage to the life benefits as well as the potential tax benefits. A term insurance plan gives you the peace of mind of knowing that your loved ones will have financial security even in your absence.

Any investment made towards your life is an essential one. Any investment made to protect your family is a pivotal investment. When you invest in a term insurance plan, you receive comprehensive financial security and protection that covers your family in the event of your untimely demise. The tax benefit that you gain on such a term insurance investment is the icing on the cake.

With IndiaFirst Life Insurance's term insurance plans, you can claim deductions under multiple sections of the Income Tax Act of 1961. Along with these tax deductions, you also get the benefits of purchasing a hassle-free term insurance plan and life insurance policy online. You can choose the coverage you want with IndiaFirst Life's term insurance options. You get customizable coverage for specified durations, flexibility in term insurance variants and annuity options, and the opportunity to add additional term plan riders to suit your needs.

Tax benefits on term insurance and life insurance products are offered because Indians remain woefully under-insured. The life benefits provided by IndiaFirst Life Insurance term plan products are what you need to secure your family's financial future irrespective of how uncertain life is.