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When people look for tax benefits on term insurance, the most important point is this: the deduction is now claimed under Section 123 of the Income Tax Act, 2025, which came into force on 1 April 2026. Under the official Income Tax Department framework, deductions for life insurance premiums fall under Section 123, read with Schedule XV. This is the renumbered version of the earlier Section 80C of the Income Tax Act, 1961, and the substance of the benefit is largely retained.
That distinction matters because many taxpayers still search under the older section name and end up confused about what can be claimed, how much can be claimed, and in whose name the policy should be purchased. If you are paying for a term insurance policy, the tax treatment now depends on Section 123, the policyholder relationship, the premium amount, the tax regime you choose, and the rules that apply to the policy’s maturity benefits.
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What the law actually allows
Under Section 123, an individual or a Hindu Undivided Family can claim a deduction for premiums paid toward a life insurance policy taken on the life of the assessee, the spouse, or any child. The eligible investments and payments are listed in Schedule XV of the Act. The overall ceiling remains ₹1,50,000 per tax year and is shared with other eligible payments, such as provident fund contributions, PPF, ELSS, tuition fees, and home loan principal repayment.
This means your term insurance premium can help reduce taxable income, but only up to the overall Section 123 ceiling. If you already use most of that limit through PF, PPF, home loan principal, or other qualifying investments, the remaining room for life insurance premium deduction may be smaller. The deduction is therefore valuable, but it should be viewed as one part of a broader tax-planning strategy.
The tax regime you choose matters
Since the new tax regime is now the default under Section 202 of the Income Tax Act, 2025, Section 123 deductions are available only if you specifically opt for the old regime while filing your return. If you continue with the default new regime, the deduction for life insurance premiums is not available. This is an important planning input, and you should compare your tax outflow under both regimes before deciding.
Whose policy qualifies
Section 123, read with Schedule XV, allows the deduction where the premium is paid for the policyholder’s own life, the spouse’s life, or a child’s life. It does not extend to premiums paid for parents, siblings, or other relatives. In other words, if you buy a term plan for your spouse or child and pay the premium yourself, the payment can still be eligible, subject to the overall limit and other conditions.
A key practical point is that the premium should be paid out of income chargeable to tax and within the relevant tax year. Timing and payment method both matter when you are planning your claim.
For policies issued on or after 1 April 2012, the tax treatment of maturity proceeds depends on the premium relative to the actual capital sum assured. The exemption under Section 11 read with Schedule II (Sr. No. 2) of the Income Tax Act, 2025 (earlier Section 10(10D) of the 1961 Act) generally applies, except where the premium payable in any year exceeds 10% of the actual capital sum assured, subject to the stated conditions. Death benefits received by the nominee remain protected.
For term insurance, this is important because most buyers expect the policy to protect dependents rather than generate a maturity payout. Even so, policyholders should read the actual policy wording and tax provisions carefully, because the exemption rules depend on when the policy was issued and what kind of benefit is paid.
When the deduction can be reversed
Schedule XV also carries a clawback condition. If the life insurance policy is terminated before premiums have been paid for two years, the deduction claimed earlier in respect of those premiums may be withdrawn in the year of termination and added back to taxable income. This is a useful reminder that tax benefits should be viewed alongside policy continuity. A policy bought only for a short term tax advantage may not deliver the intended outcome if it lapses too early.
How to think about term insurance and tax planning together
Term insurance is primarily a protection product, and the tax benefit should be treated as a secondary advantage rather than the main reason for purchase. A good plan starts with adequate cover, a policy term that matches your liabilities, and a premium that fits your budget comfortably over time. Once that is in place, the Section 123 deduction can improve post tax efficiency.
The most practical way to use the benefit is to review all your Section 123 eligible outflows together, such as PF, PPF, tuition fees, ELSS, home loan principal, and life insurance premium, so that the combined amount does not exceed the statutory ceiling of ₹1,50,000. Since the deduction is available only under the old tax regime, the choice of regime itself becomes part of the planning decision.
Final takeaway
If you are looking for the tax deduction on your term insurance premium, Section 123 of the Income Tax Act, 2025 read with Schedule XV is the relevant provision, effective from FY 2026-27. The current rules allow an individual to claim a deduction for premium paid for self, spouse, or children, within the overall ₹1,50,000 limit, subject to the policy meeting the prescribed conditions and the taxpayer opting for the old regime. The maturity proceeds are generally exempt under Section 11 read with Schedule II (Sr. No. 2), except in the specific situations called out by the law.
For anyone buying term insurance, the best approach is simple: choose the right cover first, then use the tax benefit as an added advantage. That way, the policy works both as a financial safety net and as an efficient part of your overall tax planning.
Sir,
Elaborate the term “Group life insurance policies”.
CA Omprakash Jain s/o J.K.Jain, Jaipur
Tel:9414300730/9462749040/0141-3584043