Factors To Consider When Purchasing Term Insurance For Maximum Tax Benefits

Term insurance is an affordable financial insurance product that protects and safeguards the policyholder’s family in case of the policyholder’s untimely demise. There are also term plans with return of premium option that ensure you get some return if you outlive your policy term.

Further, term plan also provides tax benefits to the policyholder, which is one of the crucial elements behind the popularity of term insurance plans.

However, before you buy a term insurance plan, it is essential to consider various factors to avail maximum term insurance benefits and ensure wise management of your finances.

Buying a Term Insurance Plan for Tax Benefits: Things to Know

1. Deduction under 80C of Income Tax Act 1961

Income Tax Act, 1961 Deduction for Term Insurance Premium
Section 80C
Deduction allowed Premium paid for the policy
Maximum limit ₹1.5 lakhs

2. Deduction under 10(10D) of the Income Tax Act 1961

Policy Issuance Date Premium Limit for Tax Exemption Section of Exemption
On or before 31 Mar 2012 The annual premium should not be over 20% of the Sum Assured Section 10(10D)
After 1st  April  2012 The monthly amount should not be over 10% of the Sum Assured Section 10(10D)

The 2023 Finance Bill added two new provisions to Article 10 of the Act (10D).

  1. The first provision indicates that income from term insurance policies issued on or after April 1, 2023, will not be tax-exempt if the previous year’s premium is paid during the policy period. Suppose the premium payable for any previous year during the policy term exceeds ₹5 lakhs. In that case, the premium amount will not be tax-exempt.
  2. The second requirement is that if a person pays premiums for multiple term insurance policies issued on or after April 1, 2023, the exemption clause will only apply to those policies where the total premium amount does not exceed ₹5 lakhs in any year during the term of the policy.

Note: Death benefit amount is still tax-exempt, but income from insurance policies that exceed the premium cap (₹5 lakhs) is taxable as “income from other sources”.

3. Deduction under 80D of the Income Tax Act 1961

Age Deduction Limit under Section 80D for Premium Paid for Critical Illness/Surgical Care Rider
Below 60 years ₹25,000
60 years and above ₹50,000

4. Eligibility Criteria for term insurance tax benefits

Taxpayer Category Eligible for Deduction
Individual taxpayers and Hindu Undivided Families Yes
Non-Resident Indian Yes


  • You can pay a premium for yourself, your spouse, dependent children, and your parents.
  • The respective deduction and exemption can be claimed in the same financial year when you pay the due premium or when you receive the term insurance policy benefits.

If you find all this information overwhelming, choose a popular plan like the Tata AIA term policy. They have a team of experts who will guide you through the entire process.

5. Tax Benefits you get on the term insurance rider

Optional Term Plan Tax Benefits
Critical Illness Rider Premium allowed as deduction under Section 80D up to ₹25,000 if below 60 and up to ₹50,000 if a senior citizen
Surgical Care Rider Premium allowed as deduction under Section 80D up to ₹25,000 if below 60 and up to ₹50,000 if a senior citizen
Term Rider Premium allowed as an income tax deduction up to ₹1.5 lakhs u/s 80C of the Income Tax Act, 1961

6. Tax Refund

Premium and Maturity Benefit Taxation and TDS

  • Premium paid should not exceed 10% of the sum assured
  • Maturity benefit becomes taxable if the premium paid exceeds 10% of the sum assured.
  • TDS of 5% is deducted by the insurance company on maturity benefit exceeding ₹1 lakh if PAN is provided
  • TDS rate is 20% if PAN is not provided
  • TDS is deducted on the gain from policy only
  • Taxable income below the taxable limit allows a claim for a refund of TDS deducted from the maturity proceeds.
  • If the maturity benefit is the only income during the financial year and is below the threshold limit of ₹5 lakhs, the individual is not liable to pay tax and can file for a tax refund on the TDS deducted from the maturity benefit.

Term insurance plans offer a host of tax benefits, so it is one of the popular insurance plans. But if you are following the new income tax regime, you may not be able to avail of some of the term insurance tax benefits. To avoid any confusion while buying a term policy, we suggest you consult a financial advisor.

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