Short answer: Life insurance premiums reduce your tax only if you choose the old tax regime. Under the Income-tax Act, 2025 (in force from 1 April 2026), premiums for yourself, your spouse and children qualify under section 123, the successor to old section 80C, within the combined ₹1.5 lakh limit and subject to the premium being within 10% of the sum assured. The new regime, which is the default, gives no deduction for life premiums, so for many salaried people the tax saving is now zero and insurance should be bought for protection, not tax.
Last updated: 13 October 2026.
For years, buying a life policy in March to “save tax” was a ritual. The rules have shifted: the new tax regime became the default, it offers zero tax up to ₹12 lakh of income (₹12.75 lakh for salaried people after the standard deduction), and the 1961 Act was replaced by the Income-tax Act, 2025 from 1 April 2026. This guide explains what still works, with worked ₹ examples.
What changed since 2022
| Item | Earlier (1961 Act) | Now (2025 Act, tax year 2026-27) |
|---|---|---|
| Deduction for life premium | Section 80C, up to ₹1.5 lakh | Section 123, up to ₹1.5 lakh combined; old regime only |
| Health insurance deduction | Section 80D | Section 126; old regime only |
| Default regime | Old regime was default until FY 2022-23 | New regime is the default; you must opt for the old regime |
| Maturity proceeds exemption | Section 10(10D) with premium conditions | Exemption carried forward with the same broad conditions; check the new section reference with your adviser |
| GST on individual life and health premiums | 18% on most policies | Exempt from 22 September 2025 |
How the deduction works under the old regime
- Who is covered: premiums paid for your own life, your spouse and your children. For a Hindu Undivided Family, premiums for any member.
- Combined limit: ₹1.5 lakh a year shared with EPF, PPF, ELSS, NSC, tuition fees, home loan principal and similar items. If your EPF and home loan principal already use up ₹1.5 lakh, an extra policy saves nothing.
- 10% rule: for policies issued after 1 April 2012, only premium up to 10% of the sum assured counts (15% for persons with specified disabilities or illnesses).
- Pay from your own taxable income through a bank channel and keep the premium receipt for your employer or return.
Example: the 10% rule
Ravi pays ₹60,000 a year for an endowment policy with a sum assured of ₹5,00,000. Only ₹50,000 (10% of ₹5 lakh) counts for the deduction, and because the premium exceeds 10% of the sum assured, the maturity amount may also lose its tax exemption. Low-cover, high-premium policies often fail this test.
Is the old regime still worth it? Two worked examples
The figures below use the published slabs for tax year 2026-27, including 4% cess, and ignore surcharge. They are illustrative; use the calculator on the Income Tax e-filing portal for your own case.
Example 1: salary ₹12 lakh
Under the new regime, taxable income is ₹11.25 lakh after the ₹75,000 standard deduction, and the rebate brings tax to nil. A life insurance premium cannot reduce tax below zero, so buying a policy for tax saves nothing here.
Example 2: salary ₹20 lakh
| New regime | Old regime (with deductions) | |
|---|---|---|
| Standard deduction | ₹75,000 | ₹50,000 |
| Section 123 (EPF, life premium, etc.) | Not allowed | ₹1,50,000 |
| Health insurance (section 126) | Not allowed | ₹25,000 |
| Home loan interest, self-occupied | Not allowed | ₹2,00,000 |
| Taxable income | ₹19,25,000 | ₹15,75,000 |
| Tax including 4% cess | about ₹1,92,400 | about ₹2,96,400 |
Even with ₹4.25 lakh of deductions, the new regime is cheaper by about ₹1 lakh in this example. The old regime tends to win only when someone has very large deductions, such as high house rent allowance plus a home loan plus full section 123 and health cover. Run both before deciding; our income tax hub and the guide on how employees can save tax explain the regimes.
When is the maturity amount tax-free?
Death benefits paid to the nominee are tax-free. Maturity proceeds of traditional policies are generally exempt if the yearly premium stayed within 10% of the sum assured (20% for policies issued between April 2003 and March 2012). Two newer limits matter:
- Non-ULIP policies issued on or after 1 April 2023: if the total annual premium across such policies exceeds ₹5 lakh, maturity proceeds are taxable.
- ULIPs issued on or after 1 February 2021: if the annual premium exceeds ₹2.5 lakh, gains are taxed like capital gains.
These conditions were carried into the 2025 Act. If you hold large policies, check the exact treatment with a tax professional before maturity. The Income Tax Department publishes guides and FAQs in its tax information and services section, which is the safest place to confirm current section references. Insurers also deduct TDS on the taxable part of maturity payouts, so keep the payout statement for your return.
Have a loan as well as a policy? Compare offers from RBI-regulated lenders and check if a cheaper rate frees up cash for proper cover.
Buy insurance for protection first, tax second
A pure term plan gives a large cover for a small premium. Endowment and money-back plans combine insurance and savings, which usually means lower cover and modest returns. A common rule of thumb is cover of 10 to 15 times your annual income, plus outstanding loans. Our guide to term insurance benefits and pitfalls goes deeper.
- If you have home or personal loans, make sure cover is enough to clear them; see what happens to loans if the borrower dies.
- Do not buy a policy only to use up section 123. If you are in the old regime and have room, compare it with ELSS, PPF or NSC for the savings part.
- Do not surrender early without checking costs. Early surrender of traditional plans can lose a large part of the premiums paid, and a deduction already claimed may be reversed if a policy ends within the minimum period.
- Health cover is separate. Life insurance does not pay hospital bills; see our insurance hub.
Checklist before the tax year ends
- Decide your regime by comparing both with your actual numbers.
- If old regime: total your section 123 items (EPF, home loan principal, tuition fees) before buying anything new.
- Check each policy meets the 10% premium-to-sum-assured test.
- Submit premium receipts to your employer on time, or claim in your return.
- Review cover every few years, especially after marriage, a child or a new loan.
Frequently asked questions
Can I claim life insurance premium in the new tax regime?
No. The new regime, which is the default under the Income-tax Act, 2025, does not allow the section 123 deduction for life insurance premiums.
What is section 123 of the Income-tax Act, 2025?
It is the successor to section 80C. It allows a combined deduction of up to ₹1.5 lakh for items such as life insurance premium, EPF, PPF, ELSS and home loan principal, for taxpayers in the old regime.
Can I claim premium paid for my parents’ life insurance?
Not under section 123, which covers self, spouse and children. Health insurance premiums for parents can be claimed under section 126 in the old regime.
Is GST still charged on my term insurance premium?
Individual life and health insurance premiums were exempted from GST from 22 September 2025. Check your renewal notice to confirm.
Is the maturity amount of my LIC policy taxable?
It is generally exempt if the premium stayed within the prescribed share of the sum assured and, for non-ULIP policies issued from April 2023, total premiums stayed within ₹5 lakh a year. Death benefits are always exempt.
Sources
Disclosure: FundsTiger (Gatimaan Finance Advisors Pvt. Ltd.) is a loan marketplace and lending service provider for RBI-regulated lenders. Aparampaar Finance Pvt. Ltd. (Omozing), one of those lenders, is a related party of FundsTiger. This article is general information, not financial advice. Read your loan agreement and KFS before you decide.