How to Maximise Tax Savings with Insurance This Year

How to Maximise Tax Savings with Insurance This Year

Insurance isn’t just about protection—it’s also a powerful way to optimise your taxes. In 2025, several policies will continue to offer deductions and exemptions under sections such as 80C, 80D, and 10(10D), helping you reduce your taxable income and plan more effectively.

Whether you’re investing in life, health, or term insurance, knowing what qualifies for tax benefits can make a real difference. This blog breaks it down, so you can make informed choices and get more out of every premium you pay.

Key Tax Benefits of Insurance Policies in 2025

 

Insurance policies continue to offer several tax-saving opportunities under the Income Tax Act, making them a valuable part of financial planning in 2025. Here are the key benefits you should know:

• Section 80C (Life Insurance Premiums): Premiums paid towards life insurance policies for self, spouse, or children are eligible for deductions up to ₹1.5 lakh per year.
• Section 80D (Health Insurance): Premiums for health insurance qualify for deductions up to ₹25,000 (₹50,000 for senior citizens). Additional benefits apply if you’re also paying for your parents’ policies.
• Section 10(10D) (Maturity Proceeds): Life insurance maturity benefit amounts are tax-free, provided the annual premium does not exceed 10% of the sum assured for policies issued after April 1, 2012.
• ULIPs (Unit Linked Insurance Plans): The maturity proceeds from ULIPs remain tax-exempt under Section 10(10D) if the annual premiums are under ₹2.5 lakh and the policy is not surrendered prematurely.
• Critical Illness and Riders: Premiums paid for critical illness or specific riders may qualify for additional deductions under Section 80D.

Understanding these benefits can help you reduce your tax burden while securing your financial future.

Impact of Union Budget 2025 on Insurance Tax Benefits

 

The Union Budget 2025 introduced key reforms that directly impact how insurance products are taxed and positioned as tax-saving tools. These changes reflect a push towards transparency, global investment, and a simplified tax structure, but also reduce the traditional tax-saving appeal of insurance for some taxpayers.

One of the major updates is the reclassification of ULIPs (Unit Linked Insurance Plans). Suppose the policy doesn't meet the Section 10(10D) conditions, such as annual premiums exceeding ₹2.5 lakh—the maturity proceeds will now be taxed as capital gains, similar to equity mutual funds. Long-term capital gains will be subject to a 12.5% tax, while short-term gains will be taxed at 20%.

The FDI cap in insurance has been raised from 74% to 100%, opening the door to increased global investment and more competitive, customer-centric insurance offerings.

Another shift has occurred with the introduction of the expanded new tax regime. While it offers a higher tax-free income limit (up to ₹12 lakh), it disallows deductions under Sections 80C, 80D, etc. This makes insurance less useful as a tax-saving instrument for those choosing the new regime.

Policyholders will need to review their insurance portfolios and assess their tax regime choice to stay aligned with the new landscape.

Comparative Analysis: Old vs. New Tax Regime for Insurance Benefits

 

When it comes to claiming tax benefits on insurance, your choice of tax regime matters. The old tax regime continues to reward policyholders with deductions on premiums, while the new regime offers a simplified structure with higher exemptions but no deductions. Here’s how the two stack up:

Aspect	Old Tax Regime	New Tax Regime
Section 80C (Life Insurance)	Deduction up to ₹1.5 lakh	Not available
Section 80D (Health)	Up to ₹25,000/₹50,000 for senior citizens	Not available
Section 10(10D)	Maturity proceeds tax-free if conditions are met	Still applicable if Section 10(10D) criteria met
ULIP Maturity	Tax-free if premium ≤ ₹2.5 lakh/year	Taxable as capital gains if premium > ₹2.5 lakh
Suitability	Ideal for deduction-heavy taxpayers	Ideal for those with fewer deductions and high income

While the old regime favours those using insurance for tax savings, the new regime may benefit individuals with minimal deductions and higher taxable income. Carefully assessing your income structure and insurance contributions can help you choose the right path.

Missed Opportunities: Unaddressed Tax Benefits in Budget 2025

 

• No revision in the Section 80C deduction limit—despite rising costs, the cap stays at ₹1.5 lakh, limiting insurance-linked savings potential.
• Term insurance continues to lack targeted tax benefits, despite playing a critical role in financial security.
• No incentives for digital insurance adoption—the Budget didn’t promote online purchases or digital policy servicing through tax perks.
• Preventive healthcare add-ons, like annual check-ups or wellness benefits, remain outside the deduction scope under Section 80D.
• Senior citizens see no change in existing deductions. The ₹50,000 cap under Section 80D remains unchanged, offering no enhanced benefits.

Strategies to Maximise Insurance Tax Benefits Post-Budget 2025

 

• Stick with the old tax regime if you claim deductions under 80C, 80D, or 10(10D). It offers more savings for those with multiple policies.
• Split premium payments across family members to unlock separate deduction caps—for example, covering parents under your health policy to claim additional 80D benefits.
• Keep ULIP premiums below ₹2.5 lakh per year to ensure maturity proceeds remain tax-free. Any amount above this threshold may be subject to capital gains tax.
• Use add-ons smartly. Riders like critical illness, personal accident, or hospital cash may be eligible under Section 80D if health related.
• Review policy documents annually to track sum assured, premium amounts, and tax eligibility, especially for older or high-value plans.
• Use HUF or separate PANs to spread insurance coverage legally while maximising available deductions within the family unit.
• Combine tax-saving instruments strategically—such as insurance, PPF, and ELSS—under 80C to maximise the deduction cap without exceeding premium limits.

FAQs on Insurance Tax Benefits and Budget 2025 Implications

 

Q1. What are the insurance tax benefits available under Budget 2025?

You can claim deductions under Section 80C for life insurance premiums (up to ₹1.5 lakh), and under 80D for health insurance premiums (up to ₹25,000, or ₹50,000 for senior citizens). Maturity proceeds under eligible policies remain tax-exempt under Section 10(10D), provided specific conditions are met.

Q2. Has Budget 2025 changed the tax exemptions for life insurance maturity proceeds?

No significant changes were made to life insurance exemptions under Section 10(10D). However, the rules continue to apply strictly—if annual premiums exceed 10% of the sum assured (or ₹2.5 lakh for ULIPs), the maturity proceeds may become taxable under capital gains.

Q3. What is the maximum deduction I can claim on health insurance under Budget 2025?

Under Section 80D, you can claim up to ₹25,000 for health insurance premiums for yourself, spouse, and children. If you’re covering senior citizen parents, the limit increases to ₹50,000 for their premiums, allowing a maximum combined deduction of ₹75,000 per year.

Q4. Are maturity proceeds from ULIPs taxable under Budget 2025?

Yes, if the total premium paid exceeds ₹2.5 lakh per year, the maturity proceeds from ULIPs issued after February 1, 2021, may be taxed as capital gains. ULIPs within the ₹2.5 lakh limit, and that meet Section 10(10D) conditions, will continue to enjoy tax-free maturity benefits.

AN Aug 25/25