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Life insurance tax benefits for NRIs

TeamAckoDec 20, 2024

"Protect your family and wealth—no matter where you are!" Life insurance provides an immediate safety net and several tax advantages for NRIs with a family in India. Read ahead to learn about life insurance tax benefits for NRIs.

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Contents

What are Term Life Insurance Tax Benefits for NRIs?
Pros and Cons of Term Life Insurance
How Do Life Insurance Tax Benefits for NRIs Work?
Steps to Tax Benefits for Life Insurance for NRIs
Why is a Life Insurance Plan crucial for NRIs?
Eligibility Criteria for NRIs to Purchase Life Insurance in India
Additional Riders for Life Insurance
Choosing the Perfect Life Insurance Coverage for NRIs
Term Insurance
Whole Life Insurance
Endowment Policies
Unit Linked Insurance Plans (ULIPs)
Steps to Choosing the Right Life Insurance Plan to Receive Tax Benefits for NRIs
Factors Affecting Life Insurance Tax Benefits for NRIs
Premium Payment Options for NRIs
Wrapping it up
Frequently Asked Questions

What are Term Life Insurance Tax Benefits for NRIs?

The Indian financial ecosystem offers various tax benefits to attract NRIs to invest in life insurance policies in India. The tax benefits of life insurance were introduced under the Income Tax Act of 1961, given that NRIs, too, have family responsibilities. Here are a few tax benefits NRIs could capitalise on.

Section 80C: Deduction of Life Insurance Premiums

Under Section 80C of the Income Tax Act, NRIs can claim a tax deduction on insurance premiums. The cap on deduction claims is one and a half lakh rupees.

Section 10(10D): Tax Exemptions on Policy Maturity or Death Benefits

Any sum received as a policy maturity or death benefit is tax-free under Section 10(10D) of the Income Tax Act as per applicable terms and conditions. Note that tax benefits are subject to amendments made by the government from time to time. Hence, to get a clear picture, please consult a tax advisor before buying any policies.

Double Taxation Avoidance Agreement (DTAA)

India has signed DTAA, or Double Taxation Avoidance Agreements, with several countries. Under the DTAA, NRIs can claim tax relief from their country of residence for the taxes they've paid in India. The agreement ensures that NRIs are not taxed twice on the same income and can benefit from lower withholding tax rates.

Pros and Cons of Term Life Insurance

Pros	Cons
Growth Benefits Tax-free growth, allowing for potentially higher returns over time	Premium Change There can be a possible rise in premiums
Property Tax options It offers benefits of property taxes, such as reducing or deferring tax liabilities	Risks There is scope for currency exchange risks
Reduction in Income Tax There can be possible reductions in income taxes	Complex The regulations are a bit complicated.
Wealth Transfer It offers the advantage of wealth transfer to beneficiaries	Non-Flexible There are limited possibilities for policies

Pros

Cons

Growth Benefits

Tax-free growth, allowing for potentially higher returns over time

Premium Change

There can be a possible rise in premiums

Property Tax options

It offers benefits of property taxes, such as reducing or deferring tax liabilities

Risks

There is scope for currency exchange risks

Reduction in Income Tax

There can be possible reductions in income taxes

Complex

The regulations are a bit complicated.

Wealth Transfer

It offers the advantage of wealth transfer to beneficiaries

Non-Flexible

There are limited possibilities for policies

How Do Life Insurance Tax Benefits for NRIs Work?

For Non-resident Indians, life insurance gives a structured approach towards tax-efficient building of wealth and financial security. The main benefits are as follows:

Tax-Deferred Growth: The cash value of the life insurance policies accrues tax-deferred growth to NRIs so that the investment will grow without the immediate consequence of taxation.
Estate Tax Benefits: Life insurance generally proves an effective means of tax-efficient asset transfer as it grants security to the beneficiaries.
Cross-border compliance: To fully enjoy the benefits of life insurance for NRIs, currency exchange risks and tax regulations must be managed.

Steps to Tax Benefits for Life Insurance for NRIs

For Non-Resident Indians (NRIs), these procedures will help you avail tax benefits from life insurance policies in India:

Select Appropriate Life Insurance Plan

Choose a life insurance scheme from an Indian insurance house that suits your financial plans and tax planning requirements.

Check NRI Eligibility for Tax Benefits

As an NRI, make sure you are eligible to avail of NRI-specific tax benefits under the Indian income tax laws.

Submit the necessary documents

Complete all the paperwork to get the policy as per regulatory requirements.

Pay Premiums through NRE/NRO Accounts

Pay premiums through foreign currency remittance or NRE/NRO accounts to ensure compliance.

Claim Deductions under Section 80C

Claim deductions on premiums under Section 80C of the Income Tax Act for eligible life insurance plans.

Understand Tax Implications on Benefits

Be aware of the tax treatment of death benefits, maturity proceeds, and withdrawals applicable to NRIs.

Report Life Insurance Policies in Tax Filings

Report your Indian life insurance policies correctly in annual tax returns for complete compliance.

Seek Tax Professionals

Consult financial advisors or cross-border taxation experts for custom advice.

By following these steps, NRIs can maximise their tax benefits from life insurance while securing financial protection for themselves and their families.

Why is a Life Insurance Plan crucial for NRIs?

Life Insurance is considered one of the most crucial aspects of financial planning. If an NRI invests in a life insurance plan, they can expect the following advantages.

Financial Security

Through the compensation received from the policy, the family members can pay off debts, cover day-to-day expenses and cope with the policyholder's loss.

Retirement Planning

Some policies offer retirement planning, like Endowment Policy and Whole Life Insurance. Such policies offer profitable returns through regular bonuses and investments. They contribute towards providing a stable recurring income post-retirement.

Tax Benefits

The Income Tax Act of 1961 introduced multiple benefits, such as premium deductions and tax exemptions on policy maturity or a death benefit. Moreover, the Double Taxation Avoidance Agreement (DTAA) can help NRIs avoid paying taxes on the same income in India and their country of residence.

Estate Planning

Passing on a fortune from generation to generation could often be challenging. Life Insurance policies could be practical estate planning tools for NRIs. Also Read: Life insurance Estate planning.

Currency Diversification

By investing in LI policies in India, NRIs can diversify their financial portfolios by holding assets in Indian Rupees (INR). This mitigates the risks associated with currency rate fluctuation, and financial investment diversification is always advisable.

Eligibility Criteria for NRIs to Purchase Life Insurance in India

To buy Life Insurance Policies in India, NRIs must satisfy specific eligibility criteria. Here are the details.

Age requirement: The age limit for buying a LI policy in India depends on the type of policy and the insurance company. Generally, the minimum age requirement is 18, and the maximum limit ranges between 60 and 75 years.
Documentation: Insurance companies generally have a stringent document verification process. The documents demanded may include the following.
Passport: A copy of the NRI applicant's passport is mandatory. The passport includes essential details such as a permanent address, personal information, and visa.
Address proof: An address proof must provide proof of residence in the residing country. A rental agreement or a utility bill could serve as proof of address.
Proof of income: An income proof document is mandatory for NRI applicants. Valid income proofs include salary slips, income tax returns, or bank statements. The evidence of income is used to determine whether the applicant is financially capable of paying the premium.
PAN Card: Every applicant must submit a copy of the PAN Card issued by the Indian government.
Photographs: Recent passport-size photographs are necessary.
Proposal form: Every applicant must submit a signed proposal form that provides personal information, health, family history, and other relevant information.

Additional Riders for Life Insurance

While availing of Life Insurance Tax Benefits, NRIs can select a few additional riders.

Accidental Death Benefit Rider: It improves beneficiaries' financial security by paying more money if an accident results in the insured's death.
Critical Illness Rider: It helps NRIs manage their finances during medical emergencies by providing a lump sum payment following the diagnosis of certain serious illnesses.
Waiver of Premium Rider: This policy provides coverage without putting NRIs at financial risk by waiving future premium payments if the insured is permanently handicapped.
Money Benefit Rider: This rider ensures a steady flow of money to the beneficiary in the event of the insured's death, giving dependents continuous financial support
Term Conversion Rider: This provides flexibility and long-term coverage by enabling the conversion of a Term Insurance policy into a permanent life insurance policy without medical underwriting.

Choosing the Perfect Life Insurance Coverage for NRIs

This section highlights the different types of life insurance policies available for NRIs.

Term Insurance

Term Insurance is a pure risk cover policy that offers financial protection to the policyholder's family in the event of their unexpected death during the policy term. These policies provide high coverage at relatively low premium rates. Term Insurance suits NRIs seeking affordable, straightforward life coverage without any investment component.

Whole Life Insurance

Whole Life Insurance policies cover the policyholder's lifetime, typically up to 100 years. Apart from offering death benefits, these policies also have a savings component that accumulates cash value over time. Whole Life Insurance is ideal for NRIs seeking long-term financial protection and wealth accumulation.

Endowment Policies

Here, a portion of the premium is allocated towards life coverage, while the remaining is invested in financial instruments, allowing policyholders to build a corpus over time. Endowment policies are suitable for NRIs seeking a combination of risk cover and savings for specific financial goals, such as retirement planning or children's education.

Unit Linked Insurance Plans (ULIPs)

ULIPs offer a mix of LI coverage and investment in market-linked instruments, such as equity and debt funds. Policyholders can choose their preferred investment options based on risk appetite and financial objectives. ULIPs provide the flexibility to switch between funds and offer the potential for higher returns. They are an appropriate choice for NRIs with a long-term investment horizon and a higher risk tolerance.

Steps to Choosing the Right Life Insurance Plan to Receive Tax Benefits for NRIs

Selecting the right policy to receive tax benefits as an NRI is important. Some key factors that should be considered during the selection process are:

Clear Objective: Be clear about your needs and what you seek from the plan.
Research Options: Look for the different options by doing proper research. Check reviews and ratings in this process.
Assess Choices: Compare the premiums offered by each available policy. Compare with your budget.
Check Features: Assess flexibility in terms of payout, coverage, etc. Plans like the ACKO Life Flexi Term Plan offer extensive flexibility and customisation. Evaluate policy features and the riders available.

Factors Affecting Life Insurance Tax Benefits for NRIs

The main factors that influence the life insurance tax benefits for NRIs are:

Residential Status: An NRI's ability to receive life insurance tax advantages largely depends on their residential status. Tax rules distinguish residents, non-residents, and non-resident Indians in several nations, including India. Under Section 80C of the Income Tax Act, NRIs may generally be eligible for tax benefits on life insurance premiums paid in India, subject to specific requirements.
Policy Type and Goals: The kind of life insurance policy and its goals may also affect the tax advantages available to non-resident Indians. Term Insurance policies usually qualify for tax benefits on premium payments because they offer pure risk coverage without any savings or investment component.
Tax Treaty Provisions: Tax treaties between India and other nations might influence the way life insurance payouts are treated tax-wise for non-resident Indians. These agreements seek to prevent double taxation and specify criteria for identifying which nation has the principal authority to tax particular income, such as insurance earnings.

Premium Payment Options for NRIs

Making international payments could often take a lot of work. However, NRIs planning to buy Indian LI need not worry. There are ample payment options they can use to pay the premium. Here are the most common methods.

Non-Resident External (NRE) or Non-Resident Ordinary (NRO) Bank Account

NREs and NROs are explicitly designed for NRIs to manage their finances. Through these bank accounts, NRIs can easily transact with Indian bank accounts in INR.

Foreign Currency Non-Resident (FCNR) Account

An FCNR account is a foreign bank account owned by an NRI. NRIs can pay their premium in foreign currency through these accounts.

Remittance from Overseas

NRIs can also pay their premiums through bank transfers directly to the insurance company. These transactions must, however, comply with regulatory guidelines and foreign exchange regulations.

Wrapping it up

Life Insurance tax benefits for NRIs present an opportunity to minimise tax obligations and provide financial security for loved ones. By being aware of India's tax laws and rules regulating life insurance contracts, NRIs can take advantage of several tax breaks and exclusions provided by the Income Tax Act. To conclude, NRIs can confidently accomplish their financial goals and provide complete safety for their families by successfully utilising the tax benefits associated with life insurance

Frequently Asked Questions

Below are some of the frequently asked questions on Life insurance tax benefits for NRIs

Can NRIs holding foreign nationality purchase an Indian life insurance policy?

Yes, NRIs with foreign nationality can buy Indian life insurance if they qualify. It provides life insurance tax benefits and flexibility in tax planning, including possible Term Insurance tax benefits.

What happens to an NRI's life insurance policy when he permanently returns to India?

The policy continues to be valid even after returning to India, and all the tax benefits of the life insurance can be continued.

Are there sum assured restrictions while purchasing life insurance policies from India for NRIs?

There are no specific sum assured restrictions for NRIs, allowing them to avail of maximum premium tax rate benefits and tailor-make their policy taxability.

Which life insurance is best suited for tax-exempt?

Policies qualifying under Section 80C and Section 10(10D) offer tax benefits. In particular, Term Insurance is tax-free, making it one of the best options, along with whole life and endowment plans.

Do NRI beneficiaries pay tax on death benefits in India?

Section 10D Income Tax Exemptions is available for NRIs to all death benefits paid, generally as tax-free income, except where premiums paid do not exceed a certain percentage of the sum assured.

How much coverage can I have with an Accidental Death Benefit rider?

As per the IRDAI, a person can avail an accidental death benefit rider with an added maximum coverage of up to three times the base sum assured, enhancing the term life insurance tax benefits.

Does Indian life insurance cover NRIs around the world?

Yes, many Indian life insurance policies offer worldwide coverage to NRIs.

What new options do I have for adjusting my premium?

IRDAI now allows premium or sum assured adjustments after three years, which helps NRIs align the premium tax rate benefits with their changing needs.

Is term insurance tax-free?

Yes, in most cases, the death benefit received from term insurance is tax-free for the beneficiaries. However, tax regulations may vary depending on the country, so it's best to consult local tax laws or a tax advisor for specific details.

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes.