Life Insurance Tax Rules for NRI

Therefore, it is suggested that you refer to your financial advisor to get a clear view of the NRI tax benefits on life insurance plans purchased in India. 

What are the Life Insurance Tax Benefits for NRIs?

1. Section 80C: Premium Deduction

   NRIs can claim tax deductions up to ₹1.5 lakh under Section 80C on life insurance premiums for policies that cover themselves, their spouse, or children. This deduction applies to investments in various financial instruments, including life insurance policies, Unit Linked Insurance Plans (ULIPs), and other qualifying instruments. However, it is better to check with your financial advisor about the applicability of these sections to your premiums.

2. Section 10(10D): Maturity and Death Benefit Exemption

   Proceeds from life insurance policies are generally tax-exempt under Section 10(10D) of the Income Tax Act. However, starting from the 2023-24 financial year, policies with an aggregate annual premium exceeding ₹5 lakh (excluding ULIPs) have become taxable if purchased after April 1, 2023. Importantly, death benefits under these policies remain fully tax-exempt, regardless of the premium paid.

3. Specific Taxation on ULIPs

   As per the 2021 update, gains from ULIPs with an annual premium above ₹2.5 lakh are subject to capital gains tax. Lower-premium ULIPs, however, maintain their tax-exempt status, similar to traditional life insurance policies.

What are the Additional Life Insurance Tax Rules For NRIs?

1. Tax Deducted at Source (TDS) on Life Insurance for NRIs

   (a) Taxability of Payouts

   • Exempt Payouts: Payouts under Section 10(10D) of the Income Tax Act are exempt from tax. No TDS is deducted in such cases.

   • Taxable Payouts: If the payout is not exempt under Section 10(10D), TDS is applicable under Section 195.

   (b) TDS on Interest Income

   • Interest earned on life insurance policies is taxable, even if the maturity amount qualifies under Section 10(10D).

   (c)TDS Rates for NRIs

   For ULIPs (From April 1, 2025):

   Taxable Income	PAN Linked	PAN Not Linked / Invalid
   Up to ₹50L	13%	20%
   ₹50L - 1Cr	14.30%
   Above ₹1Cr	14.95%

   For Other Policies (Term, Endowment, Annuity):

   Taxable Income	TDS Rate
   Up to ₹50L	31.20%
   ₹50L - ₹1Cr	34.32%
   ₹1Cr - ₹2Cr	35.88%
   ₹2Cr - ₹5Cr	39.00%
   Above ₹5Cr	42.75%

   (d)TDS Certificate Timelines

   Quarter	Certificate Available By
   Q1 (Apr-Jun)	15th August
   Q2 (Jul-Sep)	15th November
   Q3 (Oct-Dec)	15th February
   Q4 (Jan-Mar)	15th June

2. Double Taxation Avoidance Agreement (DTAA)

   NRIs can reduce or eliminate TDS on payouts using DTAA benefits. To claim this:

   • Submit E-filed Form 10F via the Income Tax Portal.

   • Provide a valid Tax Residency Certificate (TRC) issued by your country of residence.

   These documents should be submitted before the payout is processed and must be valid for the period during which the income is received.

3. PAN and Tax Credit

   • PAN is mandatory for claiming TDS credit and receiving the TDS certificate.

   • If PAN is not available, Form 60 may be submitted, but DTAA and tax credit benefits cannot be claimed.

4. Tax on Annuities and Surrenders

   • Annuity payouts to NRIs are taxable at source as per Section 195.

   • In case of surrender of policies, TDS is applied on the net income: (Total payout - Total premium paid).

5. Single Premium Policies (Post-April 2023)

   • If the annual premium exceeds ₹5 lakh, the payout is not exempt under Section 10(10D) and is taxed as "Income from Other Sources."

6. ULIPs and Capital Gains Tax

   • If ULIPs (issued on or after Feb 1, 2021) have annual premiums exceeding ₹2.5 lakh, the proceeds are taxed under Capital Gains.

   • TDS for long-term capital gains is 12.5% + surcharge & cess (no indexation or threshold benefits).

7. FATCA and CRS Compliance

   NRIs must comply with FATCA/CRS if they:

   • Are tax residents or citizens outside India

   • Have foreign mailing address, phone number, or POA holder abroad

   Documents required:

   • TIN (Taxpayer Identification Number)

   • Country of Residence

   • Valid address proof outside India

   Non-compliance may result in penalties under Section 271FAA.

What are the NRI Term Plan Tax Benefits?

Buying a term insurance plan from India not only secures your family's future but also offers attractive tax benefits for NRIs. Here's how you can save on taxes while ensuring financial protection:

1. Tax Deduction Under Section 80C

   Premiums paid towards a term insurance policy are eligible for tax deduction up to ₹1.5 lakh per year under Section 80C of the Income Tax Act, 1961. This benefit is available to NRIs on income taxable in India.

2. Tax-Free Death Benefit

   The death benefit received by nominees is fully tax-exempt under Section 10(10D), regardless of the sum assured, making term insurance an efficient estate planning tool for NRIs.

3. No TDS on NRE Account Premium Payments

   If you pay term insurance premiums from your NRE account, you typically avoid tax deduction at source (TDS), provided the premium is not claimed as a deduction from Indian income.

4. Avoiding Tax on Maturity Payouts

   For policies with return of premium (TROP) features, the maturity benefit remains tax-free if the annual premium does not exceed ₹5 lakh, in accordance with the updated Section 10(10D) rules.

5. DTAA Advantage

   Many NRIs living in countries like the UAE benefit from the Double Taxation Avoidance Agreement (DTAA), which ensures they are not taxed twice, once in India and again in their country of residence.

   However, it is suggested that you always consult a tax advisor to understand how these benefits apply to your specific income sources and residential status.

Eligibility and Residency Criteria to Buy NRI Term Insurance

For an NRI to be eligible for life insurance in India, they must meet certain residency requirements, as defined under the Foreign Exchange Management Act (FEMA). Broadly, NRIs are individuals who reside outside India but retain Indian citizenship, or people of Indian origin who satisfy specific conditions. NRIs must also provide residency documentation (such as passport and address proof) and may face additional requirements if residing in certain high-risk countries.

What are the Types of Life Insurance for NRIs Available in India?

NRIs around the world have access to various types of life insurance policies in India, including:

• Term Insurance: Provides financial protection for a specified term, with payouts only upon death, making it ideal for temporary coverage.

• Whole Life Insurance: Offers lifelong coverage and savings, allowing cash value accumulation.

• Endowment Plans: A blend of insurance and investment, paying a lump sum upon maturity or death, which can serve as a retirement corpus.

What is the NRI GST Waiver on Premiums?

The NRIs can get an 18% GST waiver on the premiums paid via NRE (Non-residential External) accounts that support freely convertible currency. This allows NRI customers to further save on their premiums and buy affordable term life insurance plans.

Are There Any Premium Limits for Tax-Free Maturity Benefits?

NRIs should be aware of the ₹5 lakh annual premium limit for tax-free maturity benefits. If the aggregate premium on multiple policies surpasses this threshold, only the policies below it will retain tax-exempt maturity benefits. Monitoring premium contributions helps NRIs avoid tax liabilities on maturity proceeds and ensure continued tax savings.

Do NRIs Have to Pay Taxes in India for Income Earned Abroad?

Yes, NRIs are liable to pay taxes in India only on income that is earned or deemed to accrue or arise in India. Income earned abroad is not taxable in India for NRIs. Tax liability depends on the residential status of the individual in a financial year. Here’s a breakdown:

• For Resident Indians: Global income is taxable, whether earned in India or outside.

• For Non-Resident Indians (NRIs): Only income earned or accrued in India is taxable. Income earned outside India is not subject to Indian income tax.

So, if you're an NRI and you earn income solely from foreign sources (like a job abroad), you do not have to pay tax on that income in India. However, you may still be taxed in India on income sources like Indian rental properties, Indian capital gains, or bank interest (except for NRE/FCNR accounts).

What is Income Earned or Accrued in India?

As per the Income Tax Act, 1961, any income that is earned or accrued through a source located in India is considered taxable in India. This follows the source-based rule of taxation, which means if the income originates from an Indian source, either directly or indirectly, it becomes taxable, regardless of the residential status of the individual.

To determine tax liability, identifying the source of income is the first step. If the source is based in India, the income is taxable under Indian law. Below are some common examples of such income:

This rule applies to both resident and non-resident individuals. However, NRIs are only taxed on income earned or accrued in India, not on global income.

What are the Important Considerations for NRIs?

• Check Policy Tenure and Premium Limits: It is advisable for NRIs to choose policies with premiums within the tax-exempt limits to avoid maturity tax liabilities.

• Consult Tax Advisors: Changes in tax rules frequently affect NRIs. Consulting with tax professionals ensures compliance with current regulations and optimizes tax savings under Indian and international tax laws.

• Choose Policies Aligned with Financial Goals: With options like term, whole life, and endowment policies, NRIs should select plans that align with their long-term goals, considering factors like premium payment flexibility, policy duration, and cash value growth for ULIPs or endowment policies.

Wrapping it Up!

Life insurance offers NRIs a solid way to save on taxes while securing their family’s future, but understanding the latest rules is essential. By staying within premium limits, exploring tax-saving sections like 80C, and keeping updated with the latest tax laws, NRIs can maximize both savings and benefits. Staying informed and seeking professional advice can make the process easier, allowing you to confidently use life insurance to meet your financial and family goals, no matter where you live.

Note: You should also check the term insurance benefits if you are planning to purchase the term insurance plan.

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