Term Life Insurance Under Section 80D & Its Role in Tax Planning By Vishal Pathak, Content Writer

Term Life Insurance Under Section 80D & Its Role in Tax Planning

Vishal Pathak, Content Writer | Wednesday, 11 December 2024, 08:53 IST

Term Life Insurance Under Section 80D & Its Role in Tax Planning Term life insurance is a necessary aspect of financial planning. The policyholder's family does not only get financial security but also gets the convenience of signi- ficant tax benefits from the insurance. Term insurance may not be limited to section 80C of the Income Tax Act only. This is the section wherein term insurance is mainly connected with but of course, it can still have similar relevance under section 80D, the provision of critical illness rider. In this blog, we focus on term insurance under Section 80D, its signi- ficant role, and its inclusion in tax planning. We will also talk about the tax planning strategy through term insurance less than 80C.

Understanding Term Insurance and Tax Benefits

Term insurance plans are designed to support the family of the insured in case of an untimely death of the policyholder. It is simple, inexpensive, and very necessary for securing the future of your family.

Deductibility of tax on the premium paid for term insurance 80C is one big advantage, wherein premiums are deductible in a year up to ?1.5 lakh of your taxable income. Benefits received on maturity or deaths are exempted under Section 10(10D) of the Income Tax Act. This is an excellent saving tool for tax.

However, that term insurance also comes under section 80D, so long as the policy purchased includes a health-related rider such as a critical illness cover. This rider gives yet another additional deduction which alone can make a huge positive difference to your tax savings.

Term Insurance and Section 80D

The deductions under Section 80D generally relate to health insurance policy premium paid, but this extends to critical illness riders attached to term insurance policies as well. Here's how that goes:

Critical Illness Rider: If a critical illness rider is attached to your term insurance, then the premium attributable to that rider can be claimed under Section 80D. This is in addition to the ?1.5 lakh limit for term insurance 80C.
Eligibility: The deduction under Section 80D is up to ?25,000 per year for people aged less than 60 years, and ?50,000 for senior citizens. An additional ?25,000 can be claimed under a family (self, spouse, and dependent children) who pay premiums for their parents' health cover.
Enhanced Coverage: This rider provides financial support in case of serious medical conditions, which would otherwise drain your savings. The benefit of health and tax combined with term insurance increases the value of term insurance.

Health-related coverage along with incremental tax savings can be obtained by policyholders through the utilization of term insurance under 80D.

Role of Term Insurance in Tax Planning

Term insurance benefits have become an imperative component of tax planning for optimizing your finances. So, let's see what it has to do with tax planning

Maximizing Tax Deductions: The premium paid to term insurance can be further deducted under Section 80C. For example, if you invest ?1.5 lakh in term insurance comes under 80C; this will be completely available under the deduction. Once added with a critical illness rider, the extra paid also comes under Section 80D, which helps to yield more tax benefits.
Diversifying Tax-Saving Investments: Adding term insurance plans diversifies your tax-saving investments while securing your family's financial future. Section 80C offers various avenues like Public Provident Fund (PPF), Equity-Linked Savings Schemes (ELSS), and National Savings Certificates (NSC).
Comprehensive Protection with Tax Savings: When you bundle life cover with health cover under term insurance, it comes under both 80C and Section 80D, thereby bringing comprehensive protection for your family and reducing tax liabilities.
Tax-Free Payouts: Payouts under term insurance policies, be it in case of death or maturity, are completely tax-free as provided by Section 10(10D). So the beneficiary will receive all the payout amounts without any reductions. Therefore, the benefits of term insurance increase as well.

Difference Between Section 80C and Section 80D

There is also a need to distinguish the tax benefits under Sections 80C and 80D concerning term insurance plans:

Section 80C: Is available for the basic premium paid for term insurance policies. Deductions up to ?1.5 lakh can be availed.
Section 80D: This applies only to the percentage of the premium paid towards health-related riders like critical illness. It provides an additional exemption, within the limits allowed.

You can benefit from each section simultaneously to maximize your tax savings as term insurance is a pretty versatile tool in your tax planning.

Choosing the Right Term Insurance Plan

Selecting the right term insurance is critical for optimizing both protection and tax benefits. Here are some considerations:

Understand Your Needs: Choose a sum assured that adequately covers your family’s financial needs in your absence. Include riders like critical illness for added protection.
Compare Policies: Different insurers offer varied features and premium rates. Compare policies to find one that balances cost, benefits, and tax efficiency.
Timely Investment: The earlier you purchase term insurance, the lower the premium. This ensures cost savings along with consistent tax benefits throughout the policy term.
Utilize Tax Advantages: Ensure you claim deductions under both Sections 80C and 80D where applicable. Be meticulous in segregating the premium paid towards the base policy and riders to maximize your deductions.

Conclusion

Term insurance is a vital financial instrument offering dual benefits of protection and tax savings. While its inclusion under term insurance 80C is well-known, term insurance under 80D broadens its scope, especially for those seeking health-related coverage through riders. Understanding the interplay of term insurance 80C and Section 80D is essential for effective tax planning. By leveraging these provisions, you can secure your family’s future, mitigate health risks, and optimize your tax liabilities. Remember, term insurance benefits extend beyond financial security—they are a cornerstone of a well-rounded financial strategy.