Maximizing Tax Savings Through Term Insurance Across Various Tax Brackets
For the Assessment Year (AY) 2024-2025, the tax benefits of term insurance in India differ significantly between the old and new tax regimes. Understanding these differences is crucial when implementing a tax-saving strategy.
### Under the Old Tax Regime:
Premiums paid for term insurance qualify for a tax deduction of up to ₹1.5 lakh under Section 80C. This means you can reduce your taxable income by the amount of premium paid, subject to the overall limit of ₹1.5 lakh on eligible investments/deductions under 80C. Additionally, the death benefit or claim amount received by the nominee is completely tax-free under Section 10(10D). If you add health-related riders, you can also claim additional deductions under Section 80D. This regime allows you to leverage term insurance not only for financial protection but also as a powerful tax-saving tool.
### Under the New Tax Regime:
No deduction is available for premiums paid on term insurance or other tax-saving investments under Section 80C or 80D, as the new regime has removed most exemptions and deductions to simplify taxation. However, the payouts (death benefit or maturity amount) from life insurance policies remain tax-exempt under Section 10(10D), provided the premiums paid in any year do not exceed 10% of the sum assured. If the premiums exceed Rs 5 lakh annually, the amount received becomes taxable, a measure to curb misuse of exemptions.
### Key Points:
- Choosing the old regime is beneficial if you want to utilize the tax deduction benefits on term insurance premiums. - The new tax regime offers lower tax rates but does not provide deductions on insurance premiums. - Regardless of the regime, the insurance payout is tax-free unless premium limits are breached.
Term insurance offers tax-saving advantages only under the old tax regime on the premium side, while the payout remains generally tax-exempt under both regimes with conditions on premium limits. Under the old tax regime, the claim amount received by the nominee is also tax-free.
Mid-level earners with an annual income of ₹10-12.5 lakh can benefit from term insurance by getting coverage at a reasonable cost, with a tax deduction, without impacting their budget monthly. Some insurance plans offer return of premium, flexible payout options, riders to enhance protection, and the option to choose policy term and premium payment term separately.
Term insurance helps achieve maximum tax benefits across different tax slabs, whether one is starting their career or at its height. It is the only Section 80C option that is purely protective in nature, ensuring financial coverage for loved ones and reducing taxes.
High earners (Income: Above ₹15 lakh) can benefit from a term policy not just as protection but also as a long-term tax planning instrument. Adding riders like critical illness or premium waivers to a term policy can help high earners manage financial risks smartly.
Term insurance can be a powerful estate planning tool as the payout is tax-free. A well-chosen term plan provides peace of mind and a financial dividend. If an individual chooses the old tax regime, term insurance becomes a valuable tax-saving tool, offering significant tax savings, especially for individuals in the 20% or 30% tax brackets, as the deduction reduces the taxable income.
[1] [Source 1] [2] [Source 2] [3] [Source 3] [4] [Source 4] [5] [Source 5]
In the context of personal-finance and finance, individuals who choose the old tax regime can take advantage of tax deductions on term insurance premiums up to ₹1.5 lakh under Section 80C, while under the new tax regime, there are no deductions allowed for term insurance or other tax-saving investments under Section 80C or 80D. However, in both regimes, death benefits or claims from term insurance remain tax-free under Section 10(10D) with certain conditions on premium limits. Therefore, term insurance functions as a tax-saving tool under the old tax regime, particularly beneficial for individuals in the 20% or 30% tax brackets, due to the significant tax savings that can be achieved.
