A term insurance policy gives you two distinct tax benefits under the Income Tax Act: the premiums you pay qualify for a deduction of up to ₹1.5 lakh a year under Section 80C, and the death benefit your nominees receive is fully exempt from income tax under Section 10(10D). There is one important catch. The 80C deduction is available only if you file under the old tax regime, so a term insurance policy held by someone on the default new regime provides no premium deduction at all. The death benefit exemption, on the other hand, applies regardless of which regime you choose.
Premium Deduction Under Section 80C
Premiums paid on a term life insurance policy count as an eligible expense under Section 80C, which allows a combined deduction of up to ₹1,50,000 per financial year across all qualifying investments and expenses.1Income Tax Department. Deductions That ceiling is shared with items like PPF contributions, ELSS mutual funds, tuition fees, and housing loan principal repayment, so your insurance premium competes for room inside the same ₹1.5 lakh bucket.
The deduction is available for premiums paid on policies covering yourself, your spouse, or your children. Premiums paid for parents or in-laws do not qualify under Section 80C.
For policies issued on or after April 1, 2012, the 80C deduction on life insurance premiums is capped at 10% of the sum assured. If your policy has a sum assured of ₹50 lakh and you pay ₹6 lakh a year in premium, only ₹5 lakh of that premium is eligible under 80C, and only ₹1.5 lakh will actually reduce your taxable income given the overall cap. For most standard term plans, where cover runs into crores against modest premiums, this 10% ratio is easily met.
Old Regime Versus New Regime
This is where most policyholders lose the benefit without realising it. Since Assessment Year 2024-25, the new tax regime under Section 115BAC is the default for individuals and Hindu Undivided Families. Under the new regime, Section 80C deductions cannot be claimed at all.2Income Tax Department. FAQs on New Tax vs Old Tax Regime If you stay on the default, your term insurance premium delivers no deduction benefit.
To claim the deduction you must actively opt for the old regime while filing your return. Whether that opt-out is worth it depends on your total deductions across sections, not just 80C. If your combined claims under 80C, 80D, HRA and other heads are substantial, the old regime may still save you more tax despite its higher slab rates. If they are modest, the new regime’s lower rates can come out ahead even with no deduction on your premium.
The Section 10(10D) exemption on the death benefit sits under Section 10 rather than in the deductions chapter. It survives the regime choice. Your family’s payout stays tax-free either way.
Tax-Free Death Benefit Under Section 10(10D)
When the insured person dies during the policy term, the entire death benefit paid to nominees is exempt from income tax under Section 10(10D).3Income Tax Department. Income Tax Act Section 10 The statute is explicit: the premium-to-sum-assured ratio conditions that can make maturity proceeds taxable do not apply to any sum received on the death of the insured.4Indian Kanoon. Income Tax Act 1961 – Section 10(10D) The death benefit is tax-free regardless of premium size, policy issue date, or payout amount.
The 2023 amendment that made maturity and surrender proceeds taxable for non-ULIP policies with aggregate annual premiums above ₹5 lakh preserved the death benefit carve-out. Nominees still receive the full sum assured without any income tax liability.
One exclusion is worth flagging. Keyman insurance policies, where an employer insures an employee’s life, are explicitly kept out of Section 10(10D). Proceeds from a keyman policy are fully taxable.4Indian Kanoon. Income Tax Act 1961 – Section 10(10D)
Interest on a Delayed Claim
If the insurer settles the death claim late and pays interest for the delay, only the principal payout is exempt. The interest component is taxable as income from other sources at the recipient’s slab rate. Nominees sometimes miss this while filing the return for the year they receive the money.
The Premium-to-Sum-Assured Ratio
The premium ratio governs the tax treatment of maturity and survival benefits, not death benefits. It only matters if your policy has some kind of survival payout, such as a return-of-premium term plan.
- Policies issued between April 1, 2003 and March 31, 2012: the annual premium must not exceed 20% of the sum assured in any year of the term.4Indian Kanoon. Income Tax Act 1961 – Section 10(10D)
- Policies issued on or after April 1, 2012: the annual premium must not exceed 10% of the sum assured in any year.3Income Tax Department. Income Tax Act Section 10
- Policies for persons with disabilities under Section 80U or specified diseases under Section 80DDB, issued on or after April 1, 2013: the threshold is relaxed to 15% of the sum assured.4Indian Kanoon. Income Tax Act 1961 – Section 10(10D)
For a plain term plan there is no survival benefit, so this rule is not something you need to track. It becomes relevant if you buy a Term Return of Premium (TROP) variant. If your annual premium on a TROP policy stayed within the applicable ratio through the whole term, the returned premium at the end is tax-free. If the ratio was breached in any year, the entire maturity refund is taxable and the net gain (payout minus total premiums paid) is added to income under “Income from Other Sources.”
The ₹5 Lakh Aggregate Premium Cap
The Finance Act 2023 added another restriction for non-ULIP life insurance policies issued on or after April 1, 2023. If the aggregate annual premium across all such policies exceeds ₹5 lakh in any year of the term, the maturity or surrender proceeds lose the Section 10(10D) exemption.3Income Tax Department. Income Tax Act Section 10 The limit is aggregate, meaning it is measured across all qualifying policies you hold, not per policy.
A standard term plan with a ₹10,000 to ₹30,000 annual premium will not trigger this threshold. It mainly affects individuals holding several large endowment or whole-life policies. Death benefits stay fully exempt even for policies that cross the threshold.
Deduction for Health Riders Under Section 80D
Many term policies come with optional health-related riders like critical illness cover, hospital cash, or surgical care benefits. The premium paid specifically for these health riders qualifies for a separate deduction under Section 80D, which is distinct from the ₹1.5 lakh ceiling under 80C. That effectively gives you two deduction buckets from a single policy: the base life premium under 80C and the rider premium under 80D.
The rider has to be health-related for 80D to apply. Accidental death benefit riders and waiver-of-premium riders are life cover add-ons and do not qualify. When buying a policy with riders, ask the insurer for a premium breakup showing the base cover and each rider separately, since you cannot allocate the amounts correctly at filing time without it. Section 80D, like 80C, is only available under the old tax regime.2Income Tax Department. FAQs on New Tax vs Old Tax Regime
Lapsing or Surrendering Within Two Years
If you claimed 80C deductions on your term insurance premiums and then let the policy lapse or surrender it within two years of purchase, those earlier deductions are reversed. The deducted amounts get added back to your taxable income in the year of surrender or lapse, which creates a tax bill you did not plan for.
Standard term insurance carries no surrender value, so the direct financial hit is limited to that reversal. TROP plans, which may have some surrender value, can attract both the reversal and tax on the partial payout. If you are claiming 80C on a term plan, keep it running for at least two years. Past that window, dropping the policy costs you your cover but does not disturb past deductions.
TDS on Taxable Payouts
If a policy payout is taxable because it fails the Section 10(10D) conditions, the insurer does not release the full amount. Under Section 194DA, the company deducts TDS at 2% on the net taxable portion, calculated as the payout minus total premiums paid, before releasing the money.
The TDS is not the end of the calculation. It is an advance against your slab-rate liability. If your effective rate is higher, the balance is due when you file. If it is lower, or if the total income sits below the taxable threshold, you can claim a refund. Hold on to the TDS certificate the insurer issues, since you will need it at filing.