During tax season, majority of people turn to insurance service providers. Term insurance is designed to give life coverage and it still remains one of the most preferred ways just to avail tax benefits. But, it is not surprising at all because term plan is the only product apart from Public Provident Fund and Employee Provident Fund which offers tax exemption while investing.
Under Section 80C, the premiums paid are exempted and the advantages gained on maturity or policyholder’s demise are exempted under Section 10(10D) of the Income Tax Act. In certain conditions, such exemptions may not be available. In case of online term insurance policies, if the death benefit is around tern times the annual premium, and then it will not be eligible for any tax exemption as per Section 10(10D).
In 2012 budget, this rule was presented. Until the guidelines were modified, the terms sum assured and death benefit were often used interchangeably. Now, insurance companies in India strictly mention these two terms differently.
Today, most term insurance plans India do follow these guidelines. There could be high-ticket policies, single premium plans where the death benefit is not ten times the life insurance premium . Generally, the target segment for such plans is NRIs (Non-Resident Indians), for whom taxation does not really matter.
These plans are not suitable for senior citizens because they may find it very expensive. When it comes to Unit Linked Insurance Policies, the insured person can select the sum assured and make sure that it can be between 4-40 times the premiums.
Insurance professionals advice buyers to consider tax saving benefit in a holistic way before rushing in to purchase a policy for tax-saving purposes. Under retirement plans, insured can receive tax benefits on the premiums paid under Section 80(c), but policyholder will be taxed on the maturity advantages.
At the time of maturity, around one third of the benefit is allowed to be commuted without any tax implication and the remaining maturity advantage is used to purchase annuity which is taxed as income.
Under Section 80(D), health insurance premiums are eligible for tax exemption. But, this benefit is not available if the premium is paid in cash mode.