Protecting your family’s future is one of the wisest decisions you can make. When delving into the world of life insurance, you’re bound to come across two very familiar options: standard term insurance and term insurance with return of premium.
Both options safeguard your family’s financial future while differing when it comes to maturity benefits and tax deductions.
In this article, we look at both options’ working mechanism, the applicability of term insurance tax benefits to each, and how you can choose the most suited option for your budget and goals.
Standard Term Insurance Definition
Standard term insurance is an economical life cover policy with a fixed premium payment term of your choosing (i.e., 20/30 years).
By paying the premium, the insured avails of a significant life cover (sum assured) that’s payable to the nominee upon the policyholder’s demise during the policy term.
With nothing to return upon maturity, standard term insurance offers a high sum assured at a low cost.
Term Insurance with Return of Premium Definition
Some individuals hesitate in choosing term insurance with a return of premium because of their perception that in case of survival, their payments will be lost to thin air. Term insurance with return of premium, however, comes to the rescue.
This policy operates in the similar vein as standard term insurance but with a twist – the policyholder receives a return of all the premiums paid in case of survival till maturity.
Generally, return of premium plans (ROPs) are subject to the condition that the total GST and rider charges payable during the term do not go beyond the rider benefits, as specified by the applicable terms and conditions of the insurer.
Term insurance with return of premium, therefore, is more expensive than standard term insurance for the same sum assured.
Term Insurance Tax Rules in New Income Tax Act, 2025
Income tax laws are constantly updated and revised to make calculation and filing simpler. Under the provisions of the New Income Tax Act, 2025, the provisions governing term insurance tax benefits are applicable only when choosing the old tax regime.
Here’s how term insurance tax deductions work:
1. Premium Tax Deductions
- Old Tax Regime: Deduction is available for the premiums paid for your term policy under Section 123 of the New Income Tax Act, 2025, with an overall limit of ₹1.5 lakh per year.
- New Tax Regime: In the case of the new tax regime, section-wise individual deductions for insurance are not available.
- Condition on Premium Amount: To be eligible for full tax deduction, the premium amount should not exceed 10% of the actual sum assured for policies issued after April 1, 2012.
2. Tax Deductions on Health Riders
- Adding health-related riders like a critical illness rider or hospitalization rider to your base term policy allows you to claim an additional deduction under Section 126 of the New Income Tax Act, 2025.
- Individuals can claim as much as ₹25,000 for premiums paid for self, spouse, and dependent children.
- For senior citizen parents, the limit is ₹50,000.
- The above benefits on health riders are subject to the regime and policy terms.
3. Payout Exemptions
- Under Section 10(10D) of the New Income Tax Act, 2025, the nominee’s receipt of a death benefit payout is exempt from income tax, subject to conditions.
- The maturity payout for TROP plans might also qualify for exemption under Section 10(10D) of the new tax act if the annual premium does not exceed 10% of the sum assured during the term of the policy.
Important Note: The applicability of tax law and benefits largely rests upon the choice of tax regime, income bracket, and policy terms. Always ensure to check the latest tax guidelines or consult with a certified tax professional before filing your taxes.
Term Insurance Tax Benefits Applicability for Both Plans:
Both standard term plans and Return of Premium plans enjoy the benefits of term insurance tax deductions under Section 123 of the New Income Tax Act, 2025, on the condition that the old tax regime is opted for.
However, there is a catch regarding ROP:
- Higher Premium Utilization: The higher annual premium under ROPs fills up the ₹1.5 lakh deduction limit under Section 123 faster.
- 10% Sum Assured Rule: To maintain the eligibility for maturity payout to be tax-exempt under Section 10(10D), the annual ROP premium should not exceed 10% of the sum assured. In other words, if the annual premium under ROP exceeds 10% of the sum assured, the maturity payout shall be subject to tax.
Example Scenario (Old Tax Regime):
- Annual Premium: ₹30,000
- Sum Assured: ₹50,000,000 (₹50 Lakhs)
- 10% Limit Check: ₹30,000 is well below 10% of ₹50 Lakhs (₹5 Lakhs)
- Result: Eligible for Section 123 deduction & tax-exempt payout under Section 10(10D).
Which Plan Should You Choose?
There are numerous considerations to keep in mind when making the choice between standard term insurance and a return of premium plan.
Choose Standard Term Insurance If:
- You wish to get the maximum life coverage for your family at the minimum premium.
- You prefer to invest the extra money elsewhere (e.g., mutual funds, public provident funds).
- You perceive life insurance to be an additional safety layer for your family, as opposed to being an investment tool.
Choose Term Insurance with Return of Premium If:
- You wish to ensure that your money will return to your family or nominee in case of survival till maturity.
- You’re willing to pay more annually for added security.
- You find it challenging to save money and prefer to have savings embedded in your life insurance plan.
Step-by-Step Guide to Buying the Right Plan:
1. Calculate your family’s coverage needs:
Estimate the amount of money required to cover the daily expenses, children’s education, and any existing debts/loans of your family. As a rule of thumb, choose a sum assured equal to 10 to 15 times your annual income.
2. Compare standard vs. return of premium quotes:
Obtain quotes for both standard term insurance and term insurance with return of premium. Compare the monthly or yearly price difference to see if the higher TROP cost fits comfortably in your household budget.
3. Check rider options:
Check out the options for extra benefits that you may wish to embed in your policy, such as accidental death benefit or critical illness cover. Remember, the eligible premium for health riders may qualify for deductions under Section 126 of the New Income Tax Act, 2025.
4. Review tax regime alignment:
Check out whether you’re going to file your taxes under the old tax regime or the new tax regime. If tax deductions are a major cornerstone of your planning, be sure to verify your eligibility under Section 123 before finalizing the purchase of the policy.
5. Disclose all medical and personal details accurately:
Fill out your proposal form meticulously and disclose your pre-existing medical conditions, habits, and occupational risks. Honest disclosures are essential to ensure seamless claim processing for your family in the future.
Conclusion
Both standard term insurance and term insurance with return of premium provide your loved ones with a sense of financial security. Standard term insurance, on the other hand, is the cheapest way to ensure a high sum assured for your family. On the contrary, TROP plans offer a convenient safety net as your base premiums get returned to your nominee upon survival till maturity.
When assessing term insurance tax benefits, remember that deductions under Sections 123 and 126 of the New Income Tax Act, 2025 apply only under the old tax regime. It is always a good idea to compare and contrast the differences between various policies and their costs before selecting the best option for your family’s future.
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