Understanding the Tax Implications of Term Insurance: A Comprehensive Guide

Term Insurance

Term insurance is a popular way to financially protect your loved ones in the unfortunate event of your death, and it also offers tax benefits that can help you to save money. However, the tax implications of term insurance can be complex, and it’s essential to understand how they work to make the most of your policy. You should know these things when you venture to buy term insurance online. There are two kinds of implications to be noted in this regard, i.e. tax deductions and exemptions. 

Tax Deductions Under Section 80C

The most significant tax benefit that you get on your term insurance policy is provided under Section 80C. This section offers deductions up to Rs. 1,50,000 on the premiums that you pay for your term insurance policy. Note that it is a deduction, which is subtracted from your actual taxable income, and hence it lowers your tax liabilities considerably, thereby ensuring higher savings in turn. 

However, you should also remember that this deduction under Section 80C also covers your investments in other avenues like PPF, ULIPs, EPF, ELSS, and more. Hence, you should adopt the right strategy to maximize your tax deductions with a term insurance policy. Coming to the premium, you can use a term insurance premium calculator online. This will help you calculate the premium payable for a particular coverage amount. You can thus work out your possible tax deductions from the outset. 

Tax Deductions Under Section 80D

Are you surprised by the inclusion of Section 80D for term insurance plans? Yes, it is common knowledge that Section 80D offers tax deductions on health insurance coverage. Yet, there are always riders like critical illness that you can add to your term insurance policy. This will help you get tax deductions of up to Rs. 25,000 per year on the premiums paid for the rider and up to Rs. 50,000 per year if you are a senior citizen. This is another deduction that is subtracted from your taxable income and lowers your overall tax liabilities accordingly. 

Exemptions Under Section 10 (10D)

Before getting into the exemptions, you should note that pure-term insurance does not come with any death or maturity benefits. Instead, it only offers the sum assured as a guaranteed payout to the nominees of the policyholder upon the policyholder’s demise within the policy tenure. 

Hence, it should be mentioned that the sum assured paid out by the insurance company to the nominees of the policyholder will be exempted from taxation as specified under Section 10 (10D) of the Income Tax Act. 

Maturity benefits or returns are only possible with a term plan that comes with the return of premium provision. In such plans, the premium paid by the policyholder throughout the tenure is refunded after deducting applicable charges. There is a simple tax implication that should be understood in this case.

There are some other conditions for policies which have maturity benefits. For those bought between 1st April 2003 and 31st March 2012, the premiums paid in any year throughout the tenure should not cross 20% of the insured sum. For policies purchased on 1st April 2012 or after that, the premium should not cross 10% of the sum assured amount. In addition, if the policyholder has any severe disability, the annual premium for life insurance for any year in the policy tenure should not exceed 15% of its sum assured for policies bought on 1st April 2013 or afterwards. 

In case these conditions are not met, then the entire maturity amount is liable to be taxed as per your tax slab. Furthermore, if this amount surpasses Rs. 1,00,000, the insurer will deduct a TDS (tax deducted at source) of 1%. If not, then no TDS will be deducted from the amount. 


These are some of the tax implications that are linked to term insurance policies. These plans are integral to tax-saving strategies for many individuals and come with several advantages. They also ensure much-needed financial security for the policyholder’s family in case of any unforeseen event. Hence, choosing a term insurance plan is highly recommended for any portfolio. 

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