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Benefits of ULIP Taxation for NRIs

ULIPs are multidimensional financial instruments with tax advantages. They provide NRIs with insurance coverage and investment opportunities for fund accumulation and security.

  • 7,372 Views | Updated on: Jul 03, 2024

Unit-Linked Insurance Plans (ULIPs) are dual-purpose plans that are advantageous for Non-Resident Indians (NRIs) as they provide insurance coverage along with some investment options. By understanding the ULIP taxation for NRIs, NRIs aim to give more opportunities for long-term financial planning and secure their potential future.

Key Takeaways

  • ULIP plans offer NRIs the dual benefit of insurance coverage and investment opportunities.
  • As per Indian tax laws, NRIs are entitled to a tax benefit on ULIP premiums and returns.
  • The ULIP’s maturity and death benefits being tax-free increase its attractiveness as an investment option.
  • NRIs can easily purchase ULIPs in India and pay premiums through various channels, including online payment and ECS.
  • ULIPs are effective tools for retirement planning, estate planning, and currency diversification for NRIs.

This guide explores how ULIPs offer tax advantages for NRIs, aiding them in understanding tax complexities and making wise investment choices to meet their financial objectives. These plans provide potential for wealth growth and significant tax advantages under Indian tax laws.

What is ULIP?

A ULIP, or Unit Linked Insurance Plan, is a type of insurance product that combines insurance coverage with investment opportunities. Your premium is split: part of it goes towards insurance, while the rest is invested in funds like stocks or bonds tailored to your risk preference and financial objectives. The performance of the investments directly impacts the returns you receive on your policy. ULIPs offer flexibility regarding investment choices and the ability to switch between funds, but they also come with charges and fees that may affect your overall returns.

ULIP Tax Benefits For NRIs

There are two types of ULIP taxation for NRI. They are:

  • Tax benefits on the premiums paid
  • Tax benefits on the maturity and claims post-demise of the policyholder

Here are the details of the benefits that fall into these two categories:

Tax Exemption under Section 10(10D)

One of the primary tax benefits of ULIP for NRIs is the tax exemption on the maturity amount. According to Section 10(10D) of the Income Tax Act, any sum received by the policyholder upon maturity of the ULIP is entirely tax-free. This means that NRIs can enjoy the entire maturity amount without tax deductions, making ULIPs an attractive long-term investment option.

Tax Deduction under Section 80C

NRIs can also benefit from tax deductions on their taxable income by investing in ULIPs under Section 80C of the Income Tax Act. Currently, NRIs can claim a deduction of up to ₹1.5 lakhs on the premium paid for ULIPs in a financial year. This deduction applies to the total premium paid for all life insurance policies, including ULIPs, provided it does not exceed the prescribed limit.

Partial Withdrawal Tax Benefits

ULIPs offer the flexibility of partial withdrawal after the lock-in period, which is usually five years. The amount withdrawn is tax-free, making it a useful feature for NRIs who may require funds for emergencies or other financial needs. This tax benefit can help NRIs effectively manage their finances and fulfill unexpected expenses without tax implications.

Fund Switching Without Tax Liability

ULIPs allow investors to switch between different investment funds based on their risk appetite and market conditions. NRIs can avail of this feature without tax liability on the gains made during the switching process. This tax-free fund switching allows NRIs to maximize their returns and optimize their investment portfolio.

Tax Benefits on Demise of the Policyholder

The nominee receives the death benefit in the unfortunate event of the policyholder’s demise during the policy term. The death benefit received by the nominee is exempt from income tax under Section 10(10D). This ensures that the sum assured, along with any bonuses or investment gains, is entirely tax-free for the nominee, providing financial security to the family of the deceased NRI policyholder.

Tax Benefit on the Premiums Paid

NRIs investing in ULIPs can claim tax benefits under Section 80C of the Income Tax Act, 1961. They can deduct up to ₹1.5 lakh annually for premiums paid towards ULIPs. However, for policies issued after February 1, 2021, if the aggregate premium exceeds ₹2.5 lakhs, maturity proceeds may be taxed as capital gains, while exemptions under Section 10(10D) continue for policies with annual premiums below ₹2.5 lakhs.

Tax Benefit on Maturity/Death Benefits

Maturity and death benefits received from ULIPs are subject to tax regulations in India. As of the current guidelines:

  • Death benefits nominees receive are generally tax-exempt under Section 10(10D) of the Income Tax Act, 1961.
  • Maturity benefits obtained by the policyholder may also be tax-free, provided specific conditions are met.

Note: Tax exemptions are subject to the provisions of the Income Tax Act and may vary based on individual circumstances.

Taxation on Capital Gains

Like resident policyholders, NRIs can enjoy an exemption from Long-Term Capital Gains (LTCG) tax on gains from ULIPs, provided the annual premium remains below ₹2.5 lakh.

ULIP: A Reliable Investment Option

As a ULIP policyholder, an NRI can avail of tax exemption on their plan under the guidelines of the Income Tax Act 1961. This allows them to save more money because investing in ULIPs gives them the option to save more tax.

So, an NRI can opt for different financial avenues in India to build more on their savings. This allows them to be assured of their financial growth and stability and build up a decent corpus back at their home while saving income tax.

Why are Unit-Linked Insurance Plans Crucial for NRIs?

Unit-Linked Insurance Plans (ULIPs) hold significant importance for NRIs due to their multifaceted benefits:

Financial Security

ULIPs offer life insurance coverage and investment opportunities, providing NRIs with financial security for themselves and their families.

Retirement Planning

NRIs can use ULIPs as a tool for retirement planning. They can build a corpus over time through systematic investments while ensuring life cover.

Tax Benefits

ULIPs offer tax benefits under Section 80C for premium payments and tax-free returns on maturity and death benefits under Section 10(10D), helping NRIs optimize their tax liabilities.

Estate Planning

ULIPs facilitate estate planning for NRIs by providing a structured way to pass on wealth to their beneficiaries, ensuring a smooth transfer of assets in the event of their demise.

Currency Diversification

For NRIs with investments spread across multiple currencies, ULIPs denominated in Indian rupees offer a way to diversify currency exposure and potentially mitigate currency risk.

How can NRIs buy ULIPs in India to Avail of ULIP Taxation for NRI?

NRIs interested in purchasing ULIPs in India can do so by following a straightforward procedure:

Documentation Submission

Submit the required documents along with the application form to the insurer. This typically includes a scanned copy of the passport, proof of residence in India and overseas, proof of income, OCI/PIO card (if applicable), PAN card, and other documents for KYC compliance.

Application Evaluation

The insurer evaluates the application and issues the policy upon approval.

Premium Payment

NRIs can pay premiums through Indian bank accounts or other approved channels. Payment options include domestic/international credit cards, internet banking, debit cards, online wallets, CCSI, NACH, etc.

What Modes Can NRIs Use to Pay Their ULIP Premiums?

NRIs interested in securing their financial future through ULIPs can conveniently pay their premiums using multiple modes that cater to their specific needs and locations. We will now explore the various modes through which NRIs can pay their ULIP premiums.

Online Payment

In the digital age, online payment has become the most accessible and widely used mode of paying ULIP premiums for NRIs. They can easily access their insurance provider’s website or mobile app and make premium payments using their international debit or credit cards. Additionally, they may be able to transfer funds from their NRE (Non-Resident External) or NRO (Non-Resident Ordinary) bank accounts directly to the insurer’s account.

ECS (Electronic Clearing Service)

For NRIs who prefer a hassle-free payment process, the Electronic Clearing Service (ECS) is a convenient option. Linking their NRE/NRO bank account to the ULIP policy will automatically deduct the premium amount from their account on the due date. This ensures timely payments without the need for manual intervention.

SWIFT Transfer

For NRIs who prefer to make bulk payments or have significant funds in their foreign accounts, SWIFT (Society for Worldwide Interbank Financial Telecommunication) transfer is a viable option. Through this mode, they can transfer funds directly from their foreign bank account to the insurance company’s account. Providing the correct policy details and SWIFT code is essential to ensure smooth and accurate transactions.

NRI Service Centers

Many insurance providers have dedicated NRI service centers to cater specifically to the needs of non-resident customers. NRIs can visit these centers or contact them via phone or email to get assistance with their premium payments. These service centers can guide NRIs through payment, address their queries, and offer personalized solutions.

Authorized Agents

In certain cases, NRIs might prefer to seek assistance from authorized agents or insurance company representatives. These agents can help NRIs understand the payment options, complete the necessary paperwork, and ensure their premium payments are processed smoothly.

How do NRIs benefit from investing in ULIP Taxation for NRI in India?

NRIs benefit from investing in ULIPs in India through favorable ULIP taxation for NRI policies:

Tax Deductions

NRIs can claim deductions of up to ₹1.5 lakh annually under Section 80C of the Income Tax Act for ULIP premiums paid, reducing their taxable income.

Tax-Free Proceeds

Maturity benefits and death benefits received from ULIPs are typically tax-free under Section 10(10D) of the Income Tax Act, providing tax-free returns on investment.

Exemption from LTCG Tax

NRIs enjoy exemption from Long Term Capital Gains (LTCG) tax on ULIP gains, provided certain conditions are met, offering additional tax advantages.

Conclusion

Overall, ULIP taxation for NRI is a great way to save taxes in India. Also, along with market-linked investment options, NRIs get the added benefit of life insurance with ULIP. This makes ULIP an excellent choice for investment in India while allowing tax benefits on your hard-earned money.

FAQs on Benefits of ULIP Taxation For NRI

1

Can NRI have a ULIP policy?

NRIs can purchase ULIP policies in India and avail of the associated benefits.

2

What is the TDS rate for ULIP?

The TDS rate for ULIP proceeds for NRIs is typically set under Section 195 of the Income Tax Act. A lower rate may apply if a Double Taxation Avoidance Agreement (DTAA) is in place.

3

What are the ULIP taxation for NRI?

NRIs can claim tax deductions on premiums under Section 80C. Maturity proceeds and death benefits are tax-free under Section 10(10D), subject to certain conditions. Long-term capital gains on ULIPs are exempt if annual premiums are within specified limits.

4

Is Basic Exemption Available to NRI?

NRIs are eligible for the basic exemption limit on their income, similar to resident Indians. When it comes to NRI ULIP taxation, it is essential for NRIs to understand the implications and regulations surrounding their investments.

5

What Is Tax Residency Certificate (TRC)?

A Tax Residency Certificate (TRC) certifies the taxpayer’s country of residence and is required to avail benefits under DTAA.

6

Is NRI taxable on investment?

Yes, NRIs are taxable on income earned from investments in India but can avail benefits and exemptions under various sections of the Income Tax Act and DTAA provisions.

7

What is the taxable limit for NRI?

NRIs are subject to the same tax rates and slabs as resident Indians.

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Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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