TAXATION FOR NRIs

Life insurance is a financial instrument that can secure your family's future in the event of your unexpected death during the policy term. It also applies to you if you are a Non-Resident Indian(NRI). While life insurance plans safeguard your family in your absence, it also helps you save on tax* during the policy term and, later, your family when they receive the benefit. Here is a detail about the tax benefits for NRIs purchasing life insurance plans in India. 

 Before we understand NRI tax benefits, let us understand who is referred to as an NRI.

Who is a Non-Resident Indian? 
  

For the tax calculation, the relevant authorities will determine your residential status for the particular financial year. You are an Indian Resident based on the following conditions: 
  

Present in India for at 182 days during that financial year. 

• Present in India for 3 months in the previous year and one whole year in the 4 years preceding the previous year.  

You are referred to as a Non-Resident Indian when you do not meet the stated conditions.

Tax Benefits on Life Insurance for NRIs 

The Foreign Exchange Management Act(FEMA) decided to extend the benefits of life insurance for NRIs, considering their family responsibilities. Therefore, insurance providers have introduced customisable life insurance plans for their benefit. 

The government also introduced the insurance tax* benefit to encourage people to purchase and benefit from the financial advantage to secure their families. Here is a detail about the deductions and exemptions on life insurance plans considering NRI taxation in India. 

 Section 80C 

Section 80C provides a tax deduction on the total gross income for savings in life insurance. Therefore, the annual premium for life insurance qualifies for the tax deduction for the NRIs. However, the maximum limit for the tax deduction under Section 80C is ₹1,50,000. 

• If you are planning to purchase term insurance, you can save on tax under Section 80C based on the following conditions:
• 
  
•  For policies purchased on or after 1st April 2012, the annual premium should not exceed 10% of the sum assured. 
• 
  
• For the policies issued on or before 31st March 2012, the premium should not exceed 20% of the sum assured. 
• 
  
• And, if you suffer from a disability or illness, the premium will qualify for the tax benefit if it does not exceed 15% or more of the sum assured. 

Section 80D  

NRI taxation rules for tax deduction under Section 80D are applicable if you have chosen health riders as part of your life insurance plan. 

In addition, you will qualify for a tax deduction based on the following conditions: 
  

• Tax deduction upto ₹25,000 for yourself, spouse and family, and additionally ₹25,000 for your parents. 
• Deduction amount is allowed upto ₹50,000 if you are a senior citizen. 
• If your parents are senior citizens, the maximum applicable tax deduction is ₹50,000 for them. 

Section 10(10D) 

 Under Section 10(10D) of the Income Tax Act, you will receive a tax exemption benefit on the death payout, maturity benefit or any accrued bonuses. However, it is subject to certain terms and conditions and the NRI tax slab. For example, when you purchase a term insurance plan, the tax deduction benefit is applicable based on the following conditions: 
  

• The annual premium should not exceed 20% of the sum assured on the term policy issued on or before 31st March 2012 and 10% for the policies issued on or after 1st April 2012. 
• The exemption is not applicable if the payout is received as part of a Keyman Insurance Policy. 

The income tax for NRI and the tax benefits can vary based on the type of life insurance plan. For example, if you invest in a ULIP plan, the tax exemption benefits vary based on the following conditions: 
  

• For ULIP policies purchased before 1st February 2021, the payout will qualify for tax exemption if the premium does not exceed 10% of the sum assured. 
• For ULIP plans purchased after 1st February 2021, the payout will qualify for tax exemption when the premium does not exceed ₹2,50,000. 
• If you have purchased multiple ULIP policies, the aggregate premium paid should not exceed ₹2,50,000. 

Therefore, before calculating income tax, you should be aware of the specific tax benefits of the product and the NRI tax rate. Furthermore, here are a few more points to consider. 

Points to Consider 

 The Central Board of Direct Taxes has published the rules regarding the due diligence, maintenance of personal information, and accounts for the NRIs covered under the Foreign Account Tax Compliance Act (FATCA) or the Common Reporting Standard (CRS). Country of birth, country of residence based on the tax law and tax identification number are important FATCA details required when opening an account. 

As an NRI, before purchasing a life insurance plan, consider the following points to make well-informed decisions for the necessary financial and tax benefits.  
  

• Eligibility is based on your residential status. 
• Medical examination rules depend on the insurer. You can either come to India and give the medical tests or take the medical tests wherever you are present and send the reports. 
• Premiums can be paid using the Non-Resident Ordinary (NRO) Account, Non-Resident External (NRE) Account and the Foreign Currency Non-Resident (FCNR) Account based on the type of life insurance plan. For example, if you have purchased the life insurance plan in foreign currency, then the premium can be made in an NRE or FCNR account. 

Conclusion 

 Life insurance tax benefits apply irrespective of your residential status. However, it is subject to certain terms and conditions for the NRI. There are tax deduction and exemption benefits under Section 80C, Section 80D and Section 10(10D) of the Income Tax Act, 1961. Therefore, understand the tax provisions and get the doubts clarified regarding the applicability before you take a decision. Life insurance can always be the best way to secure your family's financial future. So, enquire about the different products, compare them based on the features and cost, calculate the premium and safeguard your family while saving on tax.