Maximize Your Savings: Life Insurance Tax Benefits in India

Life insurance isn’t just about protecting your family—it’s also a smart way to save on taxes. In India, the government encourages individuals to invest in tax-saving insurance by offering deductions and exemptions under various sections of the ‘Income Tax Act. Whether you own a term plan, ULIP, or endowment policy, life insurance can significantly lower your taxable income while securing your loved ones.

In this blog, we’ll break down how life insurance helps you save taxes, the key tax benefits under different sections, and how you can make the most of them.

Old vs. New Tax Regime: Which One Should You Choose?

Before we delve into the details of the tax benefits, we must understand the two tax regimes in India.  

When filing your income tax returns, you have two options: the old tax regime and the new tax regime. If you want to claim tax benefits on life insurance premiums, you must opt for the old tax regime, as the new regime does not allow deductions under Sections 80C.

Who Should Choose the Old Tax Regime?

• Individuals with multiple tax-saving investments such as life insurance, PPF, EPF, and home loans.
• Salaried employees who claim House Rent Allowance (HRA), Leave and Travel Allowance (LTA), and deductions under Section 80C.
• People with dependents, as deductions on life and health insurance premiums help lower taxable income. E.g. You get a tax benefit on the tuition fees of your children under Section 80C.

Who Should Choose the New Tax Regime?

• Individuals with minimal deductions who prefer lower tax rates over exemptions.
• High-income earners with fewer investments in tax-saving instruments.
• Freelancers or self-employed individuals who do not benefit much from deductions under 80C, 80D, or 80E.

If tax savings through life insurance and other deductions are important to you, it makes sense to stay in the old tax regime and maximize your benefits. Now, let’s explore how life insurance helps you save taxes!

What are the Life Insurance Tax Benefits?

Life insurance policies offer multiple tax-saving opportunities, allowing you to:

• Claim deductions on premiums paid under Section 80C (up to ₹1.5 lakh per year).
• Claim exemptions on maturity benefits under Section 10(10D)*.
• Reduce tax liability on health-related riders under Section 80D.

This means that, in addition to providing financial security, a life insurance policy also helps you reduce your tax burden and boost savings.

How to Reduce Income Tax with Life Insurance Policies?

Life insurance provides tax benefits at different stages of the policy. Here’s how:

• Entry Benefit: When you buy a life insurance policy, you can claim a deduction on the premiums paid under Section 80C (up to ₹1.5 lakh per year).
• Earnings Benefit: Some life insurance plans, such as ULIPs and endowment policies, generate returns over time. The earnings from these plans are tax-free under Section 10(10D)* (subject to conditions).
• Exit Benefit: The maturity payout of a life insurance policy is tax-free under Section 10(10D)*, provided the annual premium does not exceed 10% of the sum assured.

Life Insurance Tax Benefits Explained

Let’s take a closer look at key tax benefits under different sections of the Income Tax Act:

1. Tax Benefits Under Section 80C

• You can claim a deduction of up to ₹1.5 lakh on premiums paid for life insurance policies.
• Applies to self, spouse, and children.

2. Tax Benefits Under Section 80D

• If your policy includes a health-related rider (e.g., critical illness cover), you can claim an additional deduction of up to ₹25,000.
• For senior citizens, this limit increases to ₹50,000.

3. Tax-Free Payouts Under Section 10(10D)*

• Maturity benefits, death benefits, and bonuses received from a life insurance policy are fully tax-free, provided:
  • The annual premium is less than 10% of the sum assured.
  • The policy is active for at least 5 years.

There are additional conditions as per the Income Tax Act of 1961

4. Section 80CCC

• Allows deductions for pension or annuity plans under life insurance schemes (up to ₹1.5 lakh).

5. Section 10(10A)*

• If you receive a commuted pension from a life insurance pension plan, a portion of it is tax-free.

6. Section 80CCE

• The total deductions under Sections 80C, 80CCC, and 80CCD(1) cannot exceed ₹1.5 lakh per year.

Tax Benefits on Life Insurance Riders Explained

Life insurance riders like accidental death benefit, critical illness cover, and waiver of premium offer additional tax benefits under Section 80D:

• Critical Illness Rider: Premiums paid for this rider are eligible for tax deductions up to ₹25,000 (₹50,000 for senior citizens).
• Accidental Death Benefit: The payout is tax-free under Section 10(10D)*.

By adding these riders, you not only enhance your insurance coverage but also get extra tax savings!

Selecting the Best Life Insurance Plan for Tax Savings

When choosing a tax-saving insurance policy, consider:

A Term Plan: Offers maximum coverage at affordable premiums and full tax deductions under Section 80C.

ULIPs: Ideal for wealth creation, tax-free switching between funds, and long-term investment goals.

Endowment Plans: Good for low-risk savings, providing maturity benefits that are tax-free under Section 10(10D)*.

Pro Tip: Always check policy tenure and premium limits to maximize your tax benefits.

Scenarios Where You can Claim Tax Benefits on Life Insurance

You can claim tax benefits on life insurance policies for:

• Yourself: If you pay premiums for your own policy, you can claim Section 80C deductions.
• Your Spouse: If you are paying the premiums for your spouse’s life insurance policy, you can claim tax benefits.
• Your Parents: Premiums paid for parents’ health-related riders (e.g., critical illness cover) can be claimed under Section 80D.
• Your Children: Premiums paid for your dependent children’s life insurance policies are tax-deductible.

TDS on Life Insurance Policies

Tax Deducted at Source (TDS) is applicable if the payout does not qualify for Section 10(10D)* tax exemptions.

• If the total payout exceeds ₹1 lakh, TDS of 2% is deducted from the amount.
• If PAN is not provided/ inoperative, TDS increases to 20%.
• If you haven’t filed your tax returns in the previous year (as per section 206 AB and 206 CCA), a TDS of 4% will be deducted
• Policies where the premium is more than 10% of the sum assured are taxable.

GST on Life Insurance Policies

Life insurance policies attract GST (Goods and Services Tax) on premiums:

• Term Insurance: 18% GST applies to premiums.
• ULIPs & Endowment Plans: In ULIPs and endowment plans, your premiums are divided into two portions. One portion goes into providing you a life cover, while the other is invested.  The investment portion is tax-exempt, while 18% GST applies to the risk cover portion (taxable value will be derived as per rules defined under the GST Act of 2017).

While GST increases the cost, the tax deductions under Section 80C help balance the expense.

Final Thoughts

Life insurance is one of the best tax-saving investments in India. By choosing the right policy, you can reduce your tax liability, grow your wealth, and secure your family’s future. Just make sure to check your policy’s eligibility for tax benefits under Sections 80C, 80D, and 10(10D)*, and maximize your savings while staying financially protected. Consult a personal finance expert to seek help.

FAQs on Life Insurance Tax Benefits in India

1. What is the maximum tax deduction I can claim on life insurance?

You can claim up to ₹1.5 lakh per year under Section 80C and 80 CCC. Additional deductions apply under Sections 80D.

2. Are maturity benefits from life insurance tax-free?

Yes, under Section 10(10D)*, maturity benefits are tax-free if the annual premium is less than 10% of the sum assured. The section has several other conditions to comply with. Consult your finance advisor for more information.

3. Is TDS applicable to life insurance payouts?

Yes, 2% TDS is deducted if the total payout exceeds ₹1 lakh and does not qualify under Section 10(10D).

Disclaimer:

*There are several other conditions attached to Section 10 (10D). Applicability will vary accordingly.  

[%] Tax benefits under the policy are subject to conditions under Sections 80C, 10(10D), 115BAC and other provisions of the Income Tax Act,1961. Goods and Services tax and Cesses, if any will be charged extra as per prevailing rates. Tax laws are subject to amendments made thereto from time to time. The Company does not assume responsibility on tax implication mentioned anywhere in this page. It is recommended to obtain professional advice for applicability of tax benefits.