Is income protection tax deductible in Australia? Rules and worked examples

Yes: if you pay premiums yourself for an income protection policy held outside super that replaces income you would otherwise earn, you can generally claim the premium as a deduction in your tax return for the year you paid it. You cannot claim premiums deducted from your super balance, premiums for life, TPD or trauma cover, or the part of a bundled premium that pays for those covers. Because the premium is deductible, the monthly benefits you receive on a claim are taxable income.

This guide is part of the costs and rules overview. Premiums and incomes below are illustrative. Tax rates are the published resident rates; check the ATO for the year you are lodging.

What is and is not deductible

Premium	Deductible to you?	Why
Income protection, retail policy, paid by you	Yes	Insures assessable income, so the premium is an expense of earning it
Income protection inside super	No	The super fund pays it and claims the deduction
Income protection paid by your employer	No (to you)	Your employer may claim it; it may be a fringe benefit
Life (death) cover	No	Benefits are a capital amount, not income
TPD cover	No	Lump-sum capital benefit
Trauma cover	No	Lump-sum capital benefit
Bundled policy	Only the income protection part	Use the split shown on the insurer's annual statement
Business expenses insurance	Generally yes, for the business	Covers business running costs

The ATO treats a policy as income protection for this purpose when it compensates you for lost income. If a policy pays a lump sum for a disability, that part is generally not deductible.

Linked and split policies

With a super-linked arrangement, the part of the income protection held outside super, such as extra benefit options, may be deductible to you, while the part inside super is the fund's. Your insurer's statement should show the amount you paid personally.

How to claim

Keep the annual premium statement the insurer sends after 30 June. It shows the deductible amount.
Claim it in the other deductions part of your tax return for the financial year in which you paid the premium. Pre-filled data does not always include it.
If you prepay up to 12 months in advance, the prepayment rules generally still let you claim in the year paid, as long as the period covered is 12 months or less and ends by the end of the next income year.
Keep the statement for five years.

Worked example 1: employee on the 30% bracket

Illustrative: Mel earns $92,000 as a nurse and pays $2,400 a year for income protection with a 60-day wait and benefit to age 65.

Marginal rate 30% plus Medicare levy 2% = 32%.
Tax saved = $2,400 × 32% = $768.
After-tax cost = $2,400 − $768 = $1,632, or about $31 a week.

Run your own numbers in the premium tax deduction calculator.

Worked example 2: higher earner with a bundled policy

Illustrative: Daniel earns $210,000, above the $190,000 threshold for the top rate. He has a retail policy bundling life cover ($1,100 a year), TPD ($900) and income protection ($4,200).

Deductible part: $4,200 only.
Rate: 45% + 2% = 47%.
Tax saved = $4,200 × 47% = $1,974.
After-tax cost of the income protection = $4,200 − $1,974 = $2,226.
The life and TPD premiums of $2,000 are not deductible.

Total after-tax cost of the bundle = $2,226 + $2,000 = $4,226, compared with the $6,200 headline premium.

The other side: benefits are taxed

If Mel claims and receives $5,000 a month, that benefit is assessable income. Insurers usually withhold tax under PAYG withholding if you ask, or you pay it at tax time. Over a six-month claim she receives $30,000 of taxable income. If that is her only income for the year, it falls mostly in the lower brackets; if she was earning a salary for part of the year, it is taxed at her marginal rate. Budget for tax on benefits rather than spending the gross amount.

Tax rates to use

For the 2026–27 income year, resident tax rates (excluding the Medicare levy) are:

Taxable income	Rate on income in this band
$0 – $18,200	0%
$18,201 – $45,000	15%
$45,001 – $135,000	30%
$135,001 – $190,000	37%
$190,001 and over	45%

The 15% rate applies from 1 July 2026; for 2025–26 that band was taxed at 16%, and it is legislated to fall to 14% from 1 July 2027. Add the 2% Medicare levy, unless you qualify for a reduction or exemption. Check the ATO's current tax rates page before relying on these.

Common mistakes

Claiming super premiums. If the fund deducts the premium, you cannot claim it again.
Claiming the whole bundle. Only the income protection part is deductible.
Forgetting the deduction. It is not always pre-filled.
Ignoring tax on benefits. Benefits are taxable whether the policy is inside or outside super.
Choosing on the after-tax price alone. The deduction makes retail income protection cheaper than its headline, but the definitions still matter more than the price. See the 2021 income protection changes and what drives premiums.

Frequently asked questions

Can a self-employed person claim income protection premiums?

Yes, in the same way, if they pay the premium personally for a policy that replaces their personal exertion income. If a company pays the premium for its director, the treatment depends on the arrangement; ask a tax agent.

Can I deduct income protection if I am not working?

The premium must relate to earning assessable income. If you are not earning, the deduction may not apply. Ask a registered tax agent for your situation.

Is income protection in super cheaper after tax?

Sometimes. The fund pays from pre-tax money and claims the deduction, which can be efficient for lower and middle earners. For high earners, a personal deduction at 47% can make retail cover competitive. Compare after-tax costs. See cover inside super versus retail.

Sources

ATO — income protection insurance deductions and individual income tax rates
Tax Practitioners Board — check that a tax agent is registered
Moneysmart — income protection insurance