Return of Premium Term Insurance and Tax Benefits

When it comes to life insurance, Return of Premium (ROP) Term Insurance Plans offer a unique combination of protection and savings. But beyond the obvious perks of getting your premiums back if you outlive the policy period, there’s another significant advantage many people tend to overlook — tax benefits. Read on to learn all the tax benefits tied specifically to ROP term insurance: what they are, how they work, and what you should keep in mind to fully take advantage of them.

When it comes to life insurance, Return of Premium (ROP) Term Insurance Plans...

What is Return of Premium Term Insurance?

ROP term insurance is a type of term plan that returns all the base premiums paid (this excludes taxes and rider charges) if the policyholder survives the policy period. It’s ideal for individuals who want the protection of life cover but don’t want to feel like they've "lost" their hard-earned money if no claim is made.

How it works:

You buy the policy and start paying premiums regularly.
In case of your demise, the death benefit is paid to your family.
If you survive or outlive the policy period, all your base premiums are paid back to you.

Return of Premium Term Insurance Tax Benefits

If you want a term plan that not only secures your family’s future but also helps you save on taxes along the way, a Return of Premium (ROP) plan might be just what you need. Let’s look at the types of tax benefits of ROP term plans and how they can actually work in your favour.

Tax Benefit on Premiums Paid – Section 80C

One of the best and biggest advantages of ROP plans is that you can claim a tax deduction on the premiums you pay under Section 80C of the Income Tax Act.

You can claim a deduction of up to ₹1.5 lakhs per financial year for the premiums you’ve paid toward an ROP term plan.
This deduction applies whether you buy the policy for yourself, your spouse, or your children.
The policy must comply with the rule that the annual premium should not exceed 10% of the sum assured, for
policies issued after 1st April 2012, to be fully eligible for the deduction. Otherwise, the deduction may be limited.
For example, if your sum assured is ₹20 lakhs, your annual premium should not exceed ₹2 lakhs, which is 10% of ₹20 lakhs, to claim the full deduction under Section 80C. If the premium is higher, you may only get a partial deduction, and the maturity benefit could also become taxable.
Pro Tip: Even if you're already claiming deductions under Section 80C for ELSS, PPF, or home loan principal, your ROP premiums can help you reach the ₹1.5 lakh limit or diversify your tax-saving investments.

Tax-Free Maturity Benefit – Section 10(10D)

Perhaps the most attractive part of ROP plans is that the maturity amounts are completely tax-free under Section 10(10D).
If you outlive the policy term, the entire premium amount returned to you is exempt from income tax.
There is no upper cap or limit on the amount you can receive tax-free.
There’s no TDS (Tax Deducted at Source) if the policy meets eligibility criteria, again, ensuring the premium-to-sum assured ratio is within 10%.

Keep in mind: If the premium paid exceeds 10% of the sum assured, the maturity proceeds may become taxable under “income from other sources.”

Tax Implications for Death Benefit

If the policyholder passes away during the policy term:

The death benefit paid to the nominee is fully exempt from tax under Section 10(10D).]
This exemption applies regardless of the amount received, which means there is no upper limit.
This ensures your family not only gets a financial safety net but also doesn’t have to worry about tax liabilities on the money you receive from the death benefit.

Tax Treatment of Riders (If Applicable)

ROP plans often come with optional riders like critical illness, accidental death, or waiver of premium.

Premiums paid for health-related riders like critical illness can qualify for additional deductions under Section 80D, up to ₹25,000, and ₹50,000 for senior citizens.
However, other non-health riders may not be eligible for separate deductions. Make sure to check the policy brochure or ask your insurance provider which components fall under Section 80C vs. 80D

New Tax Regime vs. Old Tax Regime

Under the old tax regime, you can avail of all the benefits mentioned above, such as deductions under Sections 80C and 80D, and exemptions under Section 10(10D).

But if you’ve opted for the new tax regime (introduced from FY 2020-21), you won’t be able to claim deductions under 80C or 80D. However, the maturity and death benefits under Section 10(10D) remain tax-free in both regimes, provided the ROP term policy qualifies for it.

Benefit	Old Tax Regime	New Tax Regime

Section 80C Deduction	Yes	No
Section 80D Deduction on Riders	Yes	No
Section 10(10D) Exemption	Yes	Yes

Real-Life Example Scenario

Rohan, a 35-year-old salaried professional, buys a Return of Premium (ROP) term insurance plan with a ₹50 lakh sum assured for 25 years, paying an annual premium of ₹20,000.

Tax benefits he gets:

Section 80C – Premium Deduction

Every year, Rohan claims a deduction of ₹20,000 under Section 80C of the Income Tax Act. Over 25 years, this adds up to:

₹20,000 × 25 years = ₹5,00,000 in total deductions
These deductions reduce his taxable income, potentially saving him around ₹1.5–2 lakh in taxes, depending on his tax slab.

Section 10(10D) – Maturity Proceeds Are Tax-Free

If Rohan survives the policy period, he will receive his total premiums back:

₹20,000 × 25 = ₹5,00,000 (excluding taxes/rider charges)
And thanks to Section 10(10D), this ₹5 lakh is completely tax-free, as long as:
The annual premium doesn’t exceed 10% of the sum assured, which it doesn’t in this case, as ₹20,000 is just 4% of ₹50 lakhs.

Section 10(10D) – Death Benefit (If Applicable)

If something were to happen to Rohan during the policy period, his nominee would receive the full ₹50 lakh death benefit, which is also 100% tax-free.

Benefit Type	Section	Amount	Tax Impact

Premium deduction	Section 80C	₹20,000 per year	Reduces taxable income
Maturity payout	Section 10(10D)	₹5,00,000	Tax-free
Death benefit	Section 10(10D)	₹50,00,000	Tax-free

How ROP Term Insurance Can Maximise Your Tax Savings and Secure Your Future

Understanding the tax benefits of a Return of Premium (ROP) term insurance plan isn’t just about saving a little money each year; it’s about making smarter, more informed financial decisions that have a long-term impact. It matters because it lets you:

Maximise your tax savings

By knowing which sections of the Income Tax Act apply, like 80C, you can plan your insurance investments to reduce your annual tax burden.

Better financial planning

An ROP plan offers guaranteed returns, and when those returns are tax-free, it boosts the actual value of your savings. This makes it easier to plan for future expenses like your child’s education, retirement, etc.

Frequently Asked Questions

What are the tax benefits of ROP plans?

ROP plans offer tax deductions up to ₹1.5 lakh per year under Section 80C on premiums paid, and the maturity amount and death benefit are tax-free under Section 10(10D), provided certain conditions are met.

Do I have to pay tax on the refunded premiums?

Not usually. If the premium is within the prescribed limits, the maturity amount is exempt under Section 10(10D) of the Income Tax Act.

What if my premium is more than 10% of the sum assured?

If your annual premium exceeds 10% of the sum assured, you may not get the full tax deduction under Section 80C, and the maturity benefit could become taxable under “Income from Other Sources.”

Will I get the tax benefit if I buy the policy for my spouse or children?

Yes. You can claim the Section 80C deduction for premiums paid for your spouse or children.

Will I get the same tax benefits if I switch to the new regime?

No. Under the new tax regime, deductions under Sections 80C and 80D are not available. However, Section 10(10D) benefits, such as maturity and death benefit amount, remain tax-free under both regimes.

Is there TDS on the maturity amount?

No. There is no TDS if your policy complies with Section 10(10D) conditions, i.e., the premium is within 10% of the sum assured. If not, then TDS may apply.