ULIP Tax Benefits for NRIs
The Government of India provides tax benefits to NRIs investing in ULIP plans. The ULIP tax benefits for NRIs are given in different categories:
ULIP Maturity Taxation for NRI
Under Section 10(10D) of the Income Tax Act, maturity proceeds from a ULIP are tax-free for NRIs.
- However, the maturity tax exemption comes with a caveat that the annual premium shouldn’t exceed ₹2.5 lakh.
- This restriction applies to ULIPs purchased on or after February 1, 2021. Policies bought before the cutoff date enjoy tax-free maturity with fewer restrictions.
- If your annual premium crosses the ₹2.5 lakh in a year, your ULIP proceeds are taxed as capital gains.
- The applicable capital gains are long-term and short-term, depending on your holding period.
- If the policyholder dies while the ULIP is active, the nominee receives tax-free death benefits from the insurer.
ULIP Tax Benefits on Premium for NRIs
NRIs can claim tax benefits of up to ₹1.5 lakh in a year for premiums paid towards a ULIP under Section 80C of the Income Tax Act, provided they have chosen the Old Tax Regime.
- This benefit applies with the condition that your premiums must not exceed 10% of the actual capital sum assured in a financial year.
- Crossing the annual premium mark will attract similar capital gains as mentioned in the above section.
Country Specific ULIP Taxation for NRIs
It’s important to understand the tax treatment an NRI investment plan, such as a ULIP, receives in your country of residence. Taxation on ULIPs varies from country to country.
ULIP PFIC US Taxation
An NRI investing in a ULIP in India may attract stringent tax treatment in the USA, as most ULIPs are classified as a Passive Foreign Investment Company by the US government. This implies that:
- NRIs living in the US may face higher tax liability and increased reporting obligations compared to their Indian tax treatment.
- They must fill out Form 8621 annually to report their ULIP income.
- Additionally, certain foreign insurance policies may be subject to a 1% federal excise tax, depending on their structure.
NRIs in UAE and Other Gulf Countries
Gulf countries such as Saudi Arabia or UAE do not levy any personal income tax on individuals. As a result, NRIs living in these countries may need to consider only their Indian tax implications for ULIPs.
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