Tax Benefits on ULIP Plan for NRIs

NRIs or Non-Resident Indians, are Indian citizens who temporarily reside outside of India. NRIs hold a passport issued by the Indian government and are eligible for the same benefits as other Indian citizens. NRIs also have the right to invest in India and avail of the different tax benefits. Over the years, ULIPs (United Linked Insurance Plans) have become a popular investment choice amongst NRIs. As per the Income Tax Act 1961, NRIs can also avail of ULIP tax exemptions. By investing in tax-saving ULIPs, NRIs can save more on their income tax liability.

Here are the different ULIP tax benefits available for NRIs:

• Tax benefit on ULIP premiums: As per Section 80C of the Income Tax Act, all Indian citizens and NRIs can get ULIP tax treatment on the premiums paid for the ULIP policy. This Section allows a deduction of up to ₹1.5 lakhs on premiums. However, this ULIP tax treatment is only given if the ULIP policy premiums are less than or equal to 10% of the sum assured (for ULIP plans issued before April 2012) and 20% of the sum assured for ULIP plans issued after April 2012.
• Tax benefit on ULIP maturity and death benefits: As per Section 10(10D) of the Income Tax Act, ULIP tax exemption is given on the death benefit received by the nominee in case of the demise of the policyholder during the ULIP policy.
  
  Moreover, under this Section, the ULIP tax benefits also extend to the maturity benefits received by the policyholder, subject to the following provisions:
  • For ULIP plans purchased on or after February 2021, the maturity ULIP tax benefit is available only when the total annual ULIP plan premium is less than or equal to ₹2.5 lakhs.
  • For ULIP plans purchased before February 2021, ULIP tax exemption is given for maturity amount where the premium is less than or equal to 20% of the sum assured.
    These ULIP income tax benefit is also available for NRIs investing in ULIP plans in India
    However, if the annual premium is above ₹2.5 lakhs, there will be a capital gains tax on ULIP returns. The rule is applicable for tax-saving ULIPs purchased on or after February 1, 2021. That said, if an NRI or any other person surrenders the ULIP policy before the minimum lock-in period of five years, the surrender value of the ULIP will be added to the annual taxable income of the person and taxed as per the applicable slab rate. However, if the ULIP plan is surrendered after the expiry of the five-year lock-in, there will be no surrender charge, and the surrender value will also get the ULIP tax exemption.
    Further, NRIs might end up paying double taxes, which can significantly reduce their overall income. Moreover, income tax for NRIs is much higher as compared to the permanent citizens of India. Hence, to avoid paying double taxes, NRIs should check the Double Taxation Avoidance Agreement (DTAA). India has DTAA with several foreign countries, which means that between both nations, the applicable income tax rates have been fixed.

How can NRIs invest in ULIP plans in India?

As per the Foreign Exchange Management Act (FEMA), NRIs can invest in India, including ULIP plans. NRIs can compare different ULIP plans in India and choose one that best meets their requirements. Once the plan is shortlisted, a person only needs to fill a basic application form and submit the below documents:

• Scanned copy of the passport
• Recent passport-size photograph
• Proof of Indian residence
• Proof of residence overseas
• Proof of income
• Overseas Citizenship of India (OCI) card or Persons of Indian Origin (PIO) card
• A copy of the PAN card or Form 60 for those earning income in India
• A Foreign Residency Supplementary Questionnaire
• Medical examination, if needed by the insurance company

What modes can NRIs use to pay their ULIP premiums?

NRIs can use these accounts to pay premiums for their tax-saving ULIPs:

• An Indian bank account
• An NRE or NRO account with a recognised Indian bank

The medium of premium payments for a ULIP policy can be:

• Domestic or international credit or debit card
• Internet banking
• E-wallets such as Google Pay and Paytm
• National Automated Clearing House (NACH)
• Credit Card Standing Instructions (CCSI)

How do NRIs benefit from investing in tax-saving ULIPs in India?

NRIs, or non-resident Indians, can benefit from investing in ULIPs, or Unit Linked Insurance Plans, in a number of ways. ULIPs are insurance policies that offer a combination of insurance coverage and investment options. By investing in a tax-saving ULIP, NRIs can potentially save on taxes while also building a financial cushion for themselves and their families.

• Flexibility of Investment: One of the key benefits of ULIPs is that they offer flexibility in terms of the investment options they provide. NRIs can choose from a range of investment options, such as equity, debt, and balanced funds, based on their risk appetite and financial goals. This allows NRIs to tailor their investment strategy to suit their individual needs and circumstances.
• Tax Deductions under Section 80C: Another advantage of ULIPs is that the premiums paid on these policies are eligible for tax deductions under Section 80C of the Income Tax Act. This means that NRIs can claim a tax deduction on the premiums they pay for their ULIPs, up to a maximum of Rs. 1.5 lakhs per financial year. This can help NRIs save on their tax liabilities and potentially increase their overall returns on investment.
• Efficiently Manage Financial Goals:  ULIPs also offer a range of additional features and benefits, such as the option to switch between investment funds, partial withdrawal facilities, and top-up premiums. These features can provide NRIs with greater control over their investments and help them manage their financial goals more effectively.

Overall, investing in tax-saving ULIPs can be a beneficial option for NRIs looking to save on taxes and build a strong financial portfolio. It is important for NRIs to carefully consider their individual needs and circumstances before choosing a ULIP and to carefully review the terms and conditions of the policy.

Sound tax-saving investment options like ULIPs can help NRIs get guaranteed benefits and secure their financial future, especially in their retirement years. However, it is important to be careful when investing in a ULIP policy in India. With so many options available, you should be cautious when selecting the best ULIP policy with guaranteed returns and comprehensive insurance. Make a wise decision for a better tomorrow! 

Swati Tumar - Travel & Finance Writer

Swati is a Writer in the day and an illustrator at night. Among her interests, she is quite fond of art and all things creative. She often indulges herself in creating doodles, illustrations, and other forms of content. She identifies herself as an avid traveler and shameless foodie.