Life insurance & tax savings too

Irrespective of the tax regime, here’s why life insurance continues to play a vital role in financial planning

Maneesh Mishra

Updated At : 05:01 AM Aug 02, 2025 IST

Life insurance policies also help you avail significant tax benefits under various sections of the Income Tax Act. Istock

Being self-employed offers flexibility and independence, but it also comes with added responsibilities, especially when it comes to taxes. Unlike salaried employees who have tax deducted at source, self-employed professionals and business owners need to actively plan their taxes. A smart way to reduce tax liability is through life insurance.

Irrespective of the tax regime, life insurance continues to play a vital role in financial planning. It remains critical for financial protection, wealth creation through ULIPs and saving plans, and retirement planning.

Life insurance policies also help you avail significant tax benefits under various sections of the Income Tax Act.

Section 80C (under old tax regime): Premiums paid for life insurance policies qualify for deductions under Section 80C of the Income Tax Act under the old tax regime. Any self-employed individual can claim a deduction of up to Rs 1.5 lakh annually for premiums paid towards life insurance for self, spouse, or children (dependent or independent).

Plans such as term insurance, savings plans (endowment or money-back), and ULIPs are covered under this section. For policies issued after April 1, 2012, the premium should not exceed 10 per cent of the sum assured to be eligible for the full deduction. For example, if you pay Rs 50,000 annually for a term plan, that amount can be deducted from your taxable income, reducing your tax liability. If a policy is discontinued within two years, the deductions claimed earlier will be reversed.

Benefits under Section 10(10D): The maturity amount/death benefit/surrender value received from a life insurance policy is eligible for tax benefits subject to the conditions as per the provision of the Income Tax Act, 1961. This includes payouts from traditional savings plans and ULIPs. The exemption applies if the annual premium does not exceed 10 per cent of the sum assured for policies issued after April 1, 2012, subject to the fulfilment of other conditions.

This ensures that your family receives the full benefit amount without any tax deductions. It is crucial for self-employed individuals seeking financial stability for loved ones.

Even in the new tax regime, maturity benefit remains tax-free under Section 10(10D). So, within the specified limits, life insurance continues to remain a valid proposition as a long-term saving instrument.

ULIPs: Unit Linked Insurance Plans (ULIPs) are ideal for self-employed individuals who want both tax-saving and investment opportunities. Premiums paid towards ULIPs are eligible for deductions under Section 80C (under old tax regime only), while returns or maturity proceeds are exempt under Section 10 (10D), subject to the premium limits introduced in Budget 2021 and other conditions.

ULIPs allow you to invest in equity, debt, or hybrid funds while staying insured, offering long-term wealth creation along with tax benefits.

Pension plans: Self-employed individuals often lack the retirement benefits available to salaried employees. Investing in pension or annuity plans offered by life insurers not only helps build a retirement corpus, but also offers tax advantages. Contributions made towards certain pension plans can qualify for deductions under Section 80CCC (under old tax regime only), which is part of the Rs 1.5 lakh limit under Section 80C.

Additionally, annuity income post-retirement provides a steady cash flow, ensuring financial independence during your later years.

Term plans with ROP: For those hesitant about pure term insurance, term plans with Return of Premium (ROP) are an attractive option. They offer all the protection of a traditional term plan while refunding the total premiums paid at maturity if the policyholder survives the term.

Premiums for ROP plans are eligible for tax deductions under Section 80C (under old tax regime only) and provide tax benefits on maturity proceeds under Section 10(10D) subject to the conditions as per the provisions of the Income Tax Act, 1961. This provides a dual benefit of protection and savings, making it ideal for self-employed individuals seeking value-added insurance.

Benefits on loan protection: Certain life insurance policies can be linked to cover business loans. Premiums for such loan-protection policies, if connected to business borrowings, may be treated as deductible business expenses. This approach helps self-employed individuals manage risks while optimising tax savings.

For self-employed professionals, life insurance is more than just protection; it is a powerful tool for tax-efficient financial planning. By choosing the right policy, you can lower your taxable income, safeguard your family and business, and build long-term savings without worrying about tax implications.

Start early, explore options and maximise the available deductions.

— The writer is Chief Product and Marketing Officer, Bandhan Life

Life insurance & tax savings too

Maneesh Mishra

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