A life cover insurance policy can provide financial protection for your loved ones while also offering tax benefits on eligible premium payments. Under the Income Tax Act, 2025, Section 123 allows eligible taxpayers to claim a deduction for specified payments, including qualifying life insurance premiums, subject to prescribed conditions. The benefit depends on factors such as eligibility and the applicable tax regime. Understanding how these provisions work can help you plan your finances while keeping your life insurance and tax planning needs in perspective.
What Is Section 123 And How Does It Apply To Life Insurance?
Section 123 of the Income-tax Act, 2025 provides a deduction for specified payments made by individuals and Hindu Undivided Families (HUFs). The eligible payments are listed in Schedule XV and include qualifying life insurance premiums. The aggregate deduction available under this provision is up to ₹1.5 lakh in a tax year, subject to the conditions specified in Schedule XV.
The provision broadly carries forward the specified-savings deduction that was available under Section 80C for life insurance and read with Section 80CCE of the Income-tax Act, 1961. The Income Tax Department confirms that the ₹1.5 lakh limit and the nature of qualifying payments, including life insurance, remain unchanged in substance under the new Act.
How Does A Life Cover Insurance Policy Help You Save Tax?
Premiums paid towards an eligible life insurance policy can qualify for a deduction under Section 123, subject to the applicable conditions. The deduction reduces your taxable income rather than directly reducing the tax payable. The total deduction under Section 123 is capped at ₹1.5 lakh across all eligible payments listed in Schedule XV, so the entire amount is not exclusively available for life insurance premiums.
For example, if your taxable income is ₹9 lakh and you pay ₹1 lakh towards an eligible life insurance premium, your taxable income may reduce to ₹8 lakh, provided the premium qualifies for the deduction and you have sufficient limit available under Section 123. The actual tax benefit will depend on your taxable income and the applicable tax provisions.
A life cover insurance policy should primarily be selected based on your financial protection needs. Any eligible tax benefit can complement your broader financial planning.
Who Can Claim Tax Benefits Under Section 123?
Section 123 allows eligible individuals and Hindu Undivided Families (HUFs) to claim deductions for specified payments listed in Schedule XV, subject to the prescribed conditions. For individuals, eligible life insurance premiums paid for policies covering themselves, their spouse, or their children may qualify for the deduction.
- Individual: May claim eligible life insurance premiums paid for a policy covering themselves, their spouse, or their children.
- HUF: May claim eligible payments for life insurance policies covering its members, subject to the applicable conditions.
- Tax Regime: The Section 123 deduction is not available under the new concessional tax regime.
The deduction can be claimed only when the applicable conditions under Section 123 and Schedule XV are satisfied.
What Conditions Must Be Met To Claim The Deduction?
To claim a deduction under Section 123, the life insurance policy and premium payments must meet the conditions specified in Schedule XV.
- Deduction Limit: The aggregate deduction is limited to ₹1.5 lakh in a tax year across eligible payments.
- Eligible Premium: Premiums paid for eligible policies covering the individual, spouse, or children may qualify. HUFs may claim eligible premiums for policies covering their members.
- Premium Limit: The eligible premium is generally limited to 10% of the actual capital sum assured for policies issued on or after 1 April 2012. Specific exceptions may apply.
- Payment and Records: You must pay the premium during the relevant tax year, and you should retain supporting policy documents and payment records.
- Policy Continuity: Discontinuing a policy within the prescribed period may affect deductions claimed in earlier years.
Meeting these conditions helps ensure you claim eligible deductions correctly.
What Should You Consider Before Buying A Life Cover Insurance Policy?
Tax benefits can complement your financial planning, but they should not be the main reason for buying life insurance. When considering a life cover insurance policy from insurers such as Aviva India, consider the following factors:
- Coverage Amount: Choose a sum assured that reflects your family’s financial responsibilities and future needs.
- Policy Term: Select a term that aligns with your long-term financial commitments.
- Premium Affordability: Choose a premium that fits comfortably within your budget.
- Financial Responsibilities: Consider existing loans, household expenses, and future financial goals.
- Policy Features: Compare the benefits, exclusions, premium obligations, and policy conditions before making a decision.
Choosing life insurance based on your protection needs first can help ensure that any eligible tax benefit complements your financial planning.
Conclusion
A life cover insurance policy can provide financial protection, and eligible premiums may also qualify for a deduction under Section 123. The aggregate deduction is limited to ₹1.5 lakh, subject to the applicable conditions and tax regime. Knowing the eligibility requirements and policy terms can help you choose the right cover. Tax benefits can complement your financial planning, but your coverage should primarily be based on your family’s financial protection needs.
