Updated 15:06 IST, January 31st 2025
A Guide to Tax Benefits on Term Insurance
If your annual taxable income is ₹10 lakh and you claim the full ₹1.5 lakh deduction, your taxable income reduces to ₹8.5 lakh

Tax season is here, and as Indians rush to meet their financial goals, one investment continues to stand out—term insurance. Known for its unmatched ability to secure your family's future, this simple yet powerful tool also offers tax benefits that can ease your financial burden.
Beyond pure protection, term plans double up as a smart tax-saving avenue, making them a win-win solution for every household. Understanding its tax advantages is essential when considering term insurance. Here's a detailed look at how term plans can benefit your savings under Indian tax laws.
Tax benefits under Section 80C
Section 80C of the Income Tax Act, 1961, allows deductions for various investments, including term insurance premiums. The premiums paid up to ₹1.5 lakh per financial year are eligible for a deduction. This deduction reduces your taxable income, potentially lowering your tax liability.
For example, if your annual taxable income is ₹10 lakh and you claim the full ₹1.5 lakh deduction, your taxable income reduces to ₹8.5 lakh. This means you can save significantly on taxes.
Crucial conditions to note
When claiming tax benefits on term life insurance, understanding the fine print is crucial. Specific conditions determine eligibility under Sections 80C, 80D, and 10(10D) of the Income Tax Act.
Premium limits: To claim tax deductions under term insurance, the annual premium paid should not exceed 10% of the sum assured. For instance, if your policy's sum assured is ₹20 lakh, your annual premium should be ₹2 lakh or less to qualify for a deduction. If the premium surpasses this limit, the deduction will only apply to the permissible portion, reducing tax-saving potential.
Older policies: Term policies purchased before 31st March 2012 offer slightly relaxed terms for tax deductions. For these older policies, the permissible annual premium can go up to 20% of the sum assured. For example, if the sum assured is ₹10 lakh, you can claim deductions on premiums up to ₹2 lakh. However, this benefit applies only to qualifying older plans, so it’s essential to verify your policy date.
Policy continuity: Running the policy is key to retaining your tax benefits. If you voluntarily surrender or terminate the policy within two years of purchase, any tax benefits claimed under Sections 80C or 10(10D) will be invalidated. This means you may need to repay the claimed deductions as taxes, negating the financial advantages of the plan.
Enjoy tax-free payouts
In term insurance, the death benefit received by the nominee is tax-free under Section 10(10D). However, this stands if certain conditions are met. One, the premium must be less than 10% of the sum assured. Two, the sum assured must be at least ten times the annual premium.
For instance, if the premium for your policy is ₹25,000 annually and the sum assured is ₹3 lakh (12 times annual premium in this case), the payout qualifies for tax exemption.
Keep in mind that changes have been made to tax exemption available under Section 10(10D) with respect to limits and clauses over the years. These pertain to the type of policy, the annual premium amount, sum assured among other factors. It is, therefore, important to be aware of the rules to ensure that your family receives the full benefit amount without any tax deductions when within limits.
Tax benefits on optional riders
While term insurance primarily covers life, some term insurance policies include critical illness riders. The good news is, premiums for these riders are eligible for deductions under Section 80D.
Here’s how it works. If you are under 60, you can claim deductions on premiums paid up to ₹25,000 for yourself, your spouse, and your children. If you purchase a policy for parents under 60, an additional ₹25,000 deduction applies. For senior citizens, the deduction limit rises to ₹50,000. So, by combining these deductions, a family with senior citizen parents can potentially claim up to ₹1 lakh per financial year through term insurance and critical illness riders.
Smart moves to maximise tax benefits
When it comes to term insurance, strategic planning ensures you not only secure your family’s future but also optimize your tax benefits. Here are five smart moves to consider.
- Leverage both Sections 80C and 80D - You can claim deductions under both Sections 80C and 80D in the same financial year. For instance, if you pay ₹1.5 lakh in term insurance premiums and ₹25,000 for a critical illness rider, you are eligible for deductions under both sections. This reduces your taxable income significantly, allowing you to save more.
- Ensure timely premium payments - Missing premium payments may lead to policy lapse, which not only ends your coverage but also makes you ineligible for tax benefits. Setting up automated reminders or choosing auto-debit options can help avoid lapses and ensure uninterrupted protection and deductions.
- Know tax-free payout exceptions - Most payouts under term insurance policies are tax-free, which means your family can receive the full benefit without deductions. However, it’s essential to know the exceptions. For example, payouts from Keyman insurance policies or if premium-to-sum-assured ratios exceed specified limits might be taxable.
- Plan early, lock in benefits - Starting a term plan early in life comes with multiple advantages—lower premiums, higher coverage, and the ability to maximise tax benefits over the years. Additionally, sticking with the policy for the long term ensures you avoid lapses and reaping the full benefits of Sections 80C, 80D, and 10(10D).
To conclude
Term insurance offers dual benefits—financial protection and tax savings. By carefully selecting a plan and keeping up with premium payments, you can maximise these advantages. For Indian taxpayers, these benefits provide significant relief, making term insurance a smart choice. Secure your family’s future and save on taxes—it is a win-win.
Published 15:06 IST, January 31st 2025