Term Insurance As A Favourable Tax-Saving Instrument Post GST

Have you ever wondered about the term ‘GST’ on your bills when you eat at restaurants or buy clothes? Well, GST stands for Goods and Services Tax (GST) and it applies to pretty much everything you buy in India. It was introduced in 2017 and with its implementation, several significant changes have been introduced in the Indian taxation system.

In light of these changes, you might be wondering, “Can I save some of the taxes I’ve paid?”

Well, with the cost of goods and services on the rise, finding ways to save on taxes can be quite appealing. And, that's where term insurance comes in! It is a type of life insurance that not only provides financial protection to your loved ones if something unfortunate were to happen to you, but it also helps you save on taxes in the post-GST era.

In this article, let us explore how term insurance is a tax-saving instrument.

What Is Term Insurance?

A term insurance plan is an efficient and affordable way to protect your family against financial hardships in the event of your unfortunate demise during the policy term. The insurance company provides them with a sum of money, known as the sum assured, that helps in replacing your income and fulfilling their financial responsibilities, such as day-to-day expenses, rent, healthcare expenses, outstanding debts, etc. Your family receives this amount as per the payout option you choose while buying the policy.

Note: Term insurance is a pure risk cover. If you outlive the policy duration, you will not be entitled to receive any benefits.

Let’s Understand GST

Goods and Service Tax (GST) is an indirect tax that is applied to the things we buy and the services we use. It was implemented in India on 1st July 2017 to replace several complex and confusing taxes like excise duty, VAT, and service tax, which were unnecessary and burdensome for the consumers.

Before GST, there were different taxes for different goods and services, which made things complicated. But with GST, all these taxes were combined into one single tax system. This means that the same tax rules apply to everyone all over the country.

It has made things much easier and simpler to understand.

The implementation of GST has had a positive impact on the insurance sector, making it easier for individuals to understand and plan their tax-saving strategies. One significant benefit is that it has made the insurance sector more transparent by removing the domino effect of taxes.

Before GST, there were multiple layers of taxes on insurance products, which increased their cost. However, with the introduction of GST, these layers have been removed, making insurance products more affordable and accessible to a wider population. Let’s understand ‘how’ -

Previously, a service tax of 15% was imposed on the premiums of life insurance policies. However, under the new norms, GST on term insurance premiums has increased to 18%. This change affected the pricing of all life insurance products; therefore, insurance companies are required to compete with each other on pricing. As a result, they offer life insurance policies at lower prices, thus attracting more customers to purchase insurance. Moreover, the benefits provided by these Ife insurance plans, including buying term plans, outweigh their cost. It is advantageous to buy a term policy, as it will allow you to enjoy tax benefits at affordable prices even after GST on term plans.

Tax Benefits Of Term Insurance

Here’s a list of reasons why term insurance is an appealing option for people looking for tax benefits^$ -

1. Premium Payments

If you have a term insurance policy and pay premiums for it, you can get a tax benefit under the Income Tax Act, 1961. You can avail a maximum deduction of up to Rs. 1.5 lakh per year for the premiums you pay under your plan. This deduction can lower your taxable income, potentially reducing the amount of tax you owe.

2. Claim Payout

In the unfortunate event of your demise during the policy term, your nominee will receive a sum of money, as mentioned above. But the good news is that this money is completely exempt from taxation under Section 10(10D)^ of the Income Tax Act. It means that the entire amount received by your nominee, which is the sum assured, will not be subject to any taxes. This provides holistic financial security to your family, ensuring they receive the full amount they need in your absence.

3. Riders

There's another way you can save on taxes apart from your base term insurance policy premiums under Section 80D of the Income Tax Act, 1961. This section lays down tax deduction rules for health insurance premiums. Further, if you buy a health-related rider, such as a critical illness rider, hospital care rider, surgical care rider, etc. to enhance the base coverage of your term insurance policy, the premiums you pay for these riders are also eligible for tax deductions.

Conclusion

In the post-GST era, term insurance emerges as a powerful tax-saving instrument beyond its role of providing life insurance cover. It is one of the most cost-effective and efficient strategies to save taxes to a certain extent. This dual advantage makes term insurance a good choice for people who want financial security while optimising their taxable income.