Who This Guide Is For
If you pay for income protection insurance in Australia, you may be able to claim the premiums as a tax deduction. This guide explains the ATO's rules for deducting income protection premiums in FY2025–26 — what qualifies, what doesn't, how much you can claim, and the critical difference between policies held inside and outside superannuation (ATO guidelines).
Income Protection Insurance: What's Tax Deductible?
1. Income Protection Held Outside Super — Fully Deductible
Premiums you pay directly for income protection insurance (also called salary continuance insurance) are generally fully tax deductible in the year you pay them. This applies whether you pay monthly, quarterly, or annually.
According to the ATO, income protection premiums are deductible because the policy replaces your assessable income if you can't work due to illness or injury. The benefit payments you later receive are then taxed as income — this is the key trade-off.
Calculation example: Emma pays $85/month for income protection insurance outside her super fund:
$85 × 12 months = $1,020 fully deductible in FY2025–26
At the 30% marginal tax rate (plus 2% Medicare Levy), this reduces her tax bill by approximately $326.
2. Income Protection Through Super — NOT Deductible by You
If your income protection is held inside your super fund and premiums are deducted from your super balance, you cannot claim a personal deduction. The super fund claims the deduction internally — it does not appear on your personal tax return.
This is the most common source of confusion. The insurance policy is the same type, but because the premium is paid with pre-tax super contributions or from your existing super balance, the tax benefit happens inside the fund, not on your personal return.
Check your super statement: if premiums are listed under "Insurance deductions" or similar, you cannot claim them personally. Only premiums you pay directly from your bank account to an insurer qualify.
3. What's NOT Deductible: Life, TPD, and Trauma Insurance
The ATO draws a clear line:
| Insurance Type | Deductible? | Reason |
|---|---|---|
| Income protection / salary continuance | ✅ Yes (if paid personally) | Replaces assessable income |
| Life insurance (death cover) | ❌ No | Lump sum benefit is capital, not income |
| Total and Permanent Disability (TPD) | ❌ No | Lump sum — capital in nature |
| Trauma / critical illness | ❌ No | Lump sum — capital in nature |
| Business overheads insurance | ✅ Yes (for business owners) | Protects business income |
Premiums for bundled policies (e.g. life + TPD + income protection in one package) must be split. Only the income protection component is deductible. Your insurer's annual statement should break this down — if it doesn't, contact them and ask for a component breakdown.
4. How to Claim the Deduction on Your Tax Return
On your individual tax return, claim income protection premiums under D15 — Other deductions. You don't need a separate schedule — enter the total deductible premium amount directly.
If you use myTax:
5. Receiving Benefits: Tax Implications
When you receive income protection benefit payments (e.g. after an injury or illness prevents you from working), those payments are treated as assessable income and taxed at your marginal rate — the same as your regular salary or wages.
Example: If you receive $4,000/month in income protection benefits, this $48,000 annual income is added to any other income you earn and taxed at your marginal rate.
Note: If your employer pays the premiums directly (not salary-sacrificed), the premiums are deductible to the employer and any benefit payments you receive are taxable to you personally.
Common Mistakes
| Mistake | Why It's Wrong | What to Do Instead |
|---|---|---|
| Claiming all insurance premiums including life and TPD | Only income protection is deductible | Request a component breakdown from your insurer and claim only the income protection portion |
| Claiming super-held income protection premiums personally | Deduction is claimed inside the super fund, not by you | Check your super statement — only claim policies you pay directly |
| Claiming premiums paid by your employer | No personal out-of-pocket cost means no deduction | Only claim premiums you paid yourself from your own bank account |
| Forgetting to declare benefit payments as income | Income protection benefits are assessable income | Include all benefit payments received in your tax return |
| Not keeping annual premium statements | ATO may request proof of the deduction | Keep insurer annual statements for 5 years |
Records to Keep
- Annual premium statement from your insurer (showing income protection component separately from life/TPD)
- Bank statements showing direct premium payments to the insurer
- Policy documents proving the cover is income protection (not life/TPD/trauma)
- Correspondence with your insurer about premium breakdowns for bundled policies
- Any letters confirming the tax-deductible portion of your premiums
Quick Checklist
- Confirm your policy is income protection (not life, TPD, or trauma)
- Check whether premiums are paid by you directly or deducted from super
- Request an annual premium breakdown from your insurer if you have a bundled policy
- Enter the deductible amount under D15 — Other deductions in your tax return
- Keep premium statements and bank records for 5 years
- If receiving benefit payments, include them as assessable income
- For bundled policies, only claim the income protection component
*Disclaimer: This is general information only. Individual circumstances vary — consult a registered tax agent for advice specific to your situation. a registered tax agent (see the directory) Not sure if your insurance premiums are deductible? See our full decision guide.*