Tax Rules Related to Term Insurance in 2024: Challenges and Advantages

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The insurance sector in India has undergone massive changes over the past few years. With increasing awareness about the importance of insurance, the demand for various insurance products has surged. Term insurance is among the most popular products, especially among working professionals.

This blog will discuss the essential tax rules regarding term insurance policies in India as of 2024. We will also discuss the challenges these changing tax rules pose and how one can still enjoy the term insurance tax benefit.

Tax Treatment on Term Insurance Premiums

Premiums paid towards term insurance policies are eligible for tax benefits under Section 80C of the Income Tax Act, up to Rs. 1.5 lakh in a financial year. This limit of Rs. 1.5 lakh is not exclusive to insurance premiums and is shared among other tax-saving investments like PPF, ELSS, NSC, etc.

An individual can avail of this benefit for the premiums paid for self, spouse, and children. There is no maximum limit imposed in terms of the amount of premium. The higher the coverage amount, the higher the premium amount and the higher the amount of savings under Section 80C.

Tax Treatment on Death Benefit

One of the most significant advantages of term insurance is that the death benefit is entirely tax-free for the beneficiary or nominee as per Section 10(10D) of the Income Tax Act. This rule holds irrespective of the cause of death or term of the policy (as long as it satisfies the regulatory norms).

So if an individual has a life insurance of Rs. 1 crore and in case of his untimely death during the policy term, the entire amount of Rs. 1 crore paid by the insurance company to the beneficiary would be tax-exempt. The death benefit amount is not added to the beneficiary’s income, and no tax must be paid.

Tax Treatment on Maturity Benefit

Term insurance policies do not offer any maturity benefit as they offer life cover only for a specified term. These pure protection plans expire after the completion of the term and do not pay out if the insured person survives the policy term.

However, certain variants of term insurance offer a premium return on survival until maturity. 

The maturity benefit from a term insurance policy is tax-free under Section 10(10D) of the Income Tax Act, provided certain conditions are met. 

TDS on Term Insurance Payouts

As per Section 194DA of the Income Tax Act, the insurance company will deduct TDS @ 5% on term insurance payouts exceeding Rs. 1 lakh. There will be no TDS on payouts below this amount.

The requirement for TDS holds even if the recipient of the claim amount is exempt as per Section 10(10D). So even though the death claim received by a nominee is tax-free, TDS shall be deducted if the amount exceeds Rs. 1 lakh.

Advantages of Buying Term Insurance Despite New Tax Rules

While the tax rules related to some payouts and maturity benefits related to term insurance have seen revisions lately, term insurance remains a handy way to secure your family’s financial future after your demise. Here are some of the key advantages of buying term insurance:

• Extremely cost-effective: Term insurance provides very high coverage at relatively low premiums. For a healthy individual, the annual premium for a Rs. 1 crore sum insured may be Rs. 15,000.

• Pure protection with no strings attached: Unlike market-linked or participating plans, term insurance provides a guaranteed lump sum payout in case tragedy strikes without any clauses.

• Secure your child’s future: Term plans allow you to nominate children as beneficiaries to ensure their financial security is not compromised due to your untimely death.

• Facilitates loan eligibility: High insurance coverage allows families to repay outstanding loans if the loan taker dies quickly. This facilitates easier loan approval with better terms.

Conclusion

Term insurance has always been one of India’s most popular forms of life insurance due to its affordability and transparent structure. However, the recently introduced tax rules may pose some challenges related to certain payouts and benefits for specific term plans. However, term insurance retains its essence and appeal due to its unmatched financial protection for families in the most adverse situations and the tax benefits on premiums.

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