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Life insurance tax benefits for NRIs

TeamAckoSept 25, 2024

Life Insurance is crucial to ensure the financial security of your loved ones. It applies to Non-resident Indians as well, especially those who have dependent family members back home in India. A life insurance policy can offer certain tax benefits while ensuring financial stability in your absence

Life

Contents

Read ahead to learn about life insurance tax benefits for NRIs.

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

What are 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 exemption 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.

How Do Life Insurance Tax Benefits for NRIs Work?

The tax benefits associated with life insurance for Non-Resident Indians (NRIs) are governed by a framework combining national and international tax legislation.

Tax-deferred growth on the cash value of life insurance plans is generally available to non-resident individuals (NRIs), enabling their assets to increase without immediate tax consequences.

These policies frequently provide estate tax advantages, offering recipients a tax-effective way to receive wealth transfers.

Navigating potential currency exchange risks and regulatory complications is crucial for cross-border financial planning.

NRIs must comprehend these dynamics to maximise their life insurance tax benefits properly.

Steps to Tax Benefits for Life Insurance for NRIs

NRIs can opt for life insurance tax benefits by following the given steps.

Select a life insurance plan from an insurance provider (Indian company) that aligns with your financial goals.

Check your eligibility as an NRI under Indian tax laws.

Acquire the policy and send in the necessary paperwork.

Use foreign currency remittance or NRE/NRO accounts to pay premiums.

According to Income Tax Act Section 80C, you can claim a tax deduction for premiums.

Recognise how death benefits, maturity proceeds, and cash value withdrawals are taxable for non-resident individuals (NRIs).

When filing tax returns, adhere to the reporting requirements for life insurance plans held in India.

Consult financial planners or tax experts specialising in cross-border taxation for assistance on the best tax planning techniques.

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). It mitigates the risks associated with currency rate fluctuation. Moreover, 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.

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 who are foreign nationals purchase an Indian life insurance policy?

Yes, NRIs who hold a foreign nationality can purchase Indian life insurance provided they meet the eligibility criteria.

What happens to an NRI's life insurance policy if they return to India permanently?

If an NRI returns to India permanently, their LI policy will remain valid, and they can enjoy the benefits and coverage offered.

Are there any restrictions on the sum assured for NRIs purchasing life insurance policies in India?

There are no specific restrictions on the sum assured for NRIs purchasing life insurance policies in India.

Which life insurance is ideal for being exempt from taxes?

Section 80C of the Income Tax Act of 1961 allows for a tax exemption on all life insurance policies.

Are beneficiaries of NRIs subject to taxes in India on the death benefits they receive?

Under Section 10(10D) of the Income Tax Act, death benefits obtained by beneficiaries of non-resident individuals are generally tax-free in India as long as the premiums paid do not surpass a specific proportion of the amount guaranteed.

Which kinds of life insurance policies provide NRIs with tax advantages?

Depending on their unique features and conditions, various life insurance policy types, such as whole life insurance, unit-linked insurance plans (ULIPs), and term insurance, provide tax benefits for non-resident individuals.

What’s the maximum coverage I can get for an Accidental Death Benefit rider?

As per the IRDAI, you can purchase an Accidental Death Benefit Rider with coverage up to three times (3x) the base sum assured of your life insurance policy.

Can Non-Resident Indians Obtain Life Insurance in India? Described

The life insurance policy issued by Indian insurance companies to non-resident Indians (NRIs) covers them anywhere in the world in the event of their death.

What new options do I have for adjusting my premium?

As per the IRDAI, you have the option to decrease the premium amount or sum assured of your life plan after 3 years instead of the previous restriction of 5 years.

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.