Can a Term Plan Help You Lower Your Tax Liability?


Term plans are designated to provide financial security to your family during your unexpected demise. It is one of the most preferred life insurance products as it offers a huge sum assured at an affordable rate while saving on tax! So, how does a term policy provide tax saving options to lower your tax liability?

Before we get started, let us understand what a term plan means.

What is a Term Plan?

A term plan is a traditional life insurance plan that provides a death benefit to your family when you meet with an unexpected demise during the policy term. It offers flexible premium payment and payout options to customise the solution for your financial requirements.

For example, you can pay your premium monthly or annually and help your family receive the death benefit as a lump sum or regular income. You can also enhance the financial benefit by including riders to manage unexpected scenarios in life, such as when you get affected due to a critical illness or partial and total disability, etc.

Insurers also provide online features to ease the process of purchasing the term plan and claiming the death benefit. For example, you can utilise the online premium calculator provided by Tata AIA on their web page to determine the Tata AIA term plan premium based on the sum assured and policy term to manage your finances effectively.

How Does Investing In Term Plans Reduce Tax Liability?

While a term plan offers such financial benefits, it helps you reduce the tax liability based on Section 80C, Section 10(10D), and Section 80D of the Income Tax Act, 1961. Here is a detail about life insurance tax relief for term plans.

Section 80C

Section 80C provides a tax deduction on the taxable income for the investments made in financial products such as a term life insurance plan, pension plan, Equity Linked Savings Scheme, etc., upto ₹1,50,000. Therefore, the premium amount paid for your term plan will qualify for the tax deduction benefit.

However, to avail of the life insurance tax rebate on term policy:

  • The premium paid annually should not exceed 10% of the sum assured for term policies issued on or after 1st April 2012.
  • The premium paid annually should not exceed 20% of the sum assured for the policies issued on or before 31st March 2012.

And, if you suffer from a disability or illness, the tax benefit gets qualified when the premium does not exceed 15% or more of the sum assured.

Also, if you have surrendered or terminated the term plan within two years, the tax benefit for the term plan under Section 80C stands nil.

Section 80D

Section 80D applies to premium payments for health insurance plans for yourself, spouse, children, or parents. However, it is also applicable when choosing health riders, such as the rider for critical illness, terminal illness, etc., with the term plans.

Here are a few pointers to note while availing of income tax rebate on term insurance under Section 80D.

  • The maximum applicable benefit is ₹25,000 for yourself and another ₹25,000 for your parents.
  • If you or your parents are senior citizens, you can avail of ₹50,000 individually.

Section 10(10D)

Section 10(10D) of the Income Tax Act, 1961 exempts the term insurance payout benefit and any applicable bonuses from the tax liability.

Here are a few pointers to consider for benefits under Section 10(10D).

  • If any amount is received under Section 80DD or Section 80DDA, the exemption will not apply.
  • It is also not applicable if the fund is received as part of a Keyman Insurance Policy.
  • The annual premium should not exceed 20% of the sum assured issued on or before 31st March 2012 and 10% of the sum assured of the term insurance plan issued on or after 1st April 2012.


Investing in term plans helps you ensure financial support for your family in your unexpected demise during the policy term. However, it is important to note that these benefits are applicable while saving on tax. Therefore, when you invest in term plans, understand the tax provisions and make the investments accordingly to avail maximum protection and tax benefits.

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