Unit Linked Insurance Plans can be a great investment option for Non-Resident Indians (NRIs) due to the tax benefits they offer. As a ULIP policyholder, an NRI may profit from the tax deductions or exemptions granted in the Income Tax Act of 1961. In addition to ensuring their financial stability and growth, this also enables them to accumulate a considerable corpus for their life goals. Still, NRIs need to understand the terms and conditions associated with the tax benefits of ULIPs to make their investment worthwhile. Here’s looking at the ULIP tax benefits applicable in this regard.
ULIP tax benefits for NRIs
One of the leading tax benefits of a ULIP investment plan for NRIs is the capability to claim deductions under the rules of Section 80C of the Income Tax Act. This section allows NRIs to claim deductions of Rs 1.5 lakh per year on their ULIP premiums. This can help NRIs reduce their taxable income and maximize their savings. Yet, NRIs should note that this deduction is only possible if the premiums for the ULIP are equal to or less than 10% of the sum assured amount. This is for ULIP policies that have been issued prior to April 2012. For those policies issued after April 2012, the premiums should be equal to or less than 20% of the sum assured amount.
There are tax benefits on the death benefits and maturity proceeds of ULIPs under Section 10 (10D) of the Income Tax Act. The exemption is provided on the death benefit paid out to the nominee in case of the policyholder’s demise within the policy tenure. For ULIPs purchased on or after February 2021, the maturity benefit is non-taxable if the annual premium for the plan is equal to or lower than Rs. 2.5 lakh. For ULIPs bought prior to February 2021, exemptions are given for the maturity proceeds, where the premium is equal to or lower than 20% of the sum assured amount.
This benefit is available for all NRIs investing in ULIPs in India. Yet, if the annual premium surpasses Rs. 2.5 lakh, there will be capital gains taxes imposed on returns from ULIPs. The rule applies for ULIPs bought on or after the 1st of February, 2021.
Suppose the NRI surrenders the plan before the minimum five-year lock-in period. In that case, the surrender value will be added to the individual’s annual taxable income, and this will be taxed as per the applicable slab rate. However, if the ULIP surrender happens after the conclusion of this lock-in period, then surrender charges will not be there, and tax exemptions will also be provided on the surrender value.
NRIs are sometimes subject to double taxation, which may dent their total income considerably. Income taxes are also comparatively higher for NRIs in many cases. They should thus examine the DTAA or Double Taxation Avoidance Agreement since India already has this in place with many global nations. Rates are fixed likewise between these countries. But how can NRIs make investments in ULIPs in the first place? Read on for more information in this regard.
NRI investments in ULIPs- Modus Operandi
NRIs may invest in the country per FEMA (Foreign Exchange and Management Act) regulations, including in ULIPs. NRIs should finalize their policy and fill out the application form before providing all necessary documentation. Some of the documents required include the following:
- Scanned passport copy
- Proof of foreign residence
- Proof of Indian residence
- Passport-size photograph
- Income proof
- OCI (Overseas Citizenship of India) Card or the PIO (Persons of Indian Origin) Card
- Foreign Residency Supplementary Questionnaire
- PAN Card or Form 60 for NRIs who have income in India
- Medical examination or records if the insurance company asks for the same
Once the formalities are completed and necessary payments made, the ULIP will come into effect accordingly. NRIs can also take their pick from several payment methods for their ULIP premiums. Here’s looking at the same.
How can NRIs pay premiums for their ULIPs?
NRIs can pay through several payment modes. To make your search simpler, here’s a list of them.
- Domestic or international credit or debit card
- Internet banking
- E-wallets available in India
- National Automated Clearing House (NACH)
- Credit Card Standing Instructions (CCSI)
It is important to note that NRIs cannot pay from a foreign bank account. Payments are possible only from NRE or NRO accounts of an Indian bank.
Overall, investing in tax-saving ULIPs can be a good alternative for NRIs who want to save money on taxes while building a healthy financial portfolio. However, before selecting a ULIP, NRIs should carefully examine their unique needs and circumstances and review the policy’s terms and conditions.