Nobody in our world enjoys paying taxes. There is no way to avoid paying taxes if you have taxable income. Yet, you may lower your tax burden by doing tax planning ahead of time from the start of the fiscal year. Income tax regulations in India have exempted some costs and investments from taxation, or if you make certain investments or incur certain expenses, you would be entitled to a tax deduction and exemption. As a result, by making such investments and costs, you can lower your tax liability. Here’s the most effective strategy to lower your tax liability: Term Life Insurance.
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What is Term Life Insurance?
Term life insurance, sometimes called pure life insurance, is a form of life insurance that assures payment of a certain death benefit if the insured individual dies during a predetermined term. When the term expires, the policyholder has the option of renewing the policy for another term, converting the plan to permanent protection, or allowing the term life insurance policy to lapse.
If you’re a person or the breadwinner of your family, a dependable term insurance plan will give much-needed financial security to your dependents in your absence. Meanwhile, there is another explanation why term insurance must be included in every investing strategy. Aside from providing financial security and pleasure of heart, term insurance will also assist you in significantly reducing your tax burden. Here’s how term insurance may assist you to save money on taxes:
Term Insurance tax benefits
To motivate individuals to get term insurance in order to protect their dependents economically, the Indian government has included numerous clauses in the Income Tax Act of 1961 that allow us to get term insurance tax benefits. These deductions significantly lower your tax burden, allowing you to minimize your tax payment every year your term plan is active. Tax deductions are available for term policies for yourself, your spouse, and any dependants.
Tax-saving benefits under Section 80C
- Section 80C of the Income Tax Act of 1961 provides one of the most important tax exclusions provided by term insurance policies. This clause allows you to claim a tax exemption of up to 1.5 lakh for term insurance plan insurance premiums in a fiscal year.
- Term insurance payments are deducted from your taxable earnings, lowering your tax obligation. This tax break applies to term plan premiums paid for the self, spouse, and dependent children.
- The tax savings under Section 80C are only available if the yearly premiums for the term insurance do not exceed 10% of the sum guaranteed.
- The tax exclusion is only eligible for term plans previously issued in 2012 if the yearly payments are less than 20percent of the total amount of the sum guaranteed. If the term plan premiums surpass the set level, the reductions will be applied proportionally rather than in full.
- If the term insurance policy is surrendered or canceled before the two-year period from the date of purchase, no tax advantages would be available.
- If the tax savings were already imposed, they would be undone, and the earnings would remain taxable in the next fiscal year.
Tax-saving benefits under Section 10(10D)
As one of the best tax-saving life insurance plans, term insurance provides future tax advantages to your beneficiaries. In the case of your early death within the term plan’s duration, the insurance provider will offer a predetermined amount to the beneficiaries. The recipient is excluded from paying taxes on the sum earned under Section 10(10D) of the Income Tax Act of 1961. This implies that if your dependents get any monetary gain from your term insurance policy in the future, the full amount will be tax-free.
As a result, term plans are an excellent investment for securing the family’s economic future you care about the most. If you possess a term insurance policy with a money-back option, the sum paid at maturity is likewise tax-free under Section 10(10D). Such term insurance tax benefits apply to both the main insurance policy and any extra riders purchased to supplement your insurance coverage.
What is the maximum tax savings available with a term insurance plan?
Taxpayers can benefit from tax breaks under numerous sections and subgroups of the Income Tax Act, including Sections 80C, 80CCD (1B), 80D, and 24. (4). The taxpayers may invest the most and save the most tax if they stay within their income bracket. The table below summarises the maximum tax advantages available under various income tax provisions.
| Deductions | Maximum Amount (Rs.) |
| Standard deduction | 50,000 |
| Section 80C* | 150,000 |
| Section 80D | 25,000 |
| Section 80CCD (1B) NPS | 50,000 |
| Section 24 (b) | 200,000 |
| Total | 4,75,000 |
What is Convertible Term Life Insurance?
The convertible term life insurance plan is a term life policy with a conversion rider. The rider gives the right to convert existing term insurance or one that is about to expire to a permanent policy without having to go through underwriting or demonstrating insurability. The conversion rider must enable you to change to any permanent plan offered by the insurance provider without limits.
The key benefits of the rider are that it keeps the original health rating of the term insurance plan after conversion, even if you subsequently have health difficulties or become underinsured, and that you may choose when and how much insurance to convert. Your age determines the payment for the new permanent insurance at the time of conversion.
While whole life insurance coverage is more costly than term life insurance, total premiums would rise dramatically. The benefit is that you are assured permission without having to take a medical test. Medical issues that arise within the term life tenure cannot be used to increase premiums. Yet, if you wish to add extra riders to the new plan, the firm may need limited or full underwriting like a long-term care rider.
Bottom Line
Providing protection for your family members in the event of an emergency delivers an exceptional sense of security. You may protect your family’s financial well-being by purchasing term life insurance. However, in order to make the greatest use of this financial tool, you must first understand how term plans function. Then you may compare alternative plans and comprehend the numerous restrictions and exclusions. You may then choose the one that provides the most advantages at the lowest prices.
Also read: IRS Tax Debt Relief Program: How to Resolve Your Debt with The IRS?
