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Life insurance tax benefits for NRIs

Life insurance tax benefits for NRIs

Find out how life insurance policies offer tax advantages to non-resident Indians (NRIs) in India.

Life insurance tax benefits for NRIs

Home / Life Insurance / Life insurance for NRIs / Life insurance tax benefits for NRIs

Life Insurance (LI) is crucial to ensure the financial security of your loved ones. This is applicable to Non-resident Indians as well, especially those who have dependent family members back home in India. Along with ensuring financial stability in your absence, a LI policy can also offer certain tax benefits. Read ahead to learn about life insurance tax benefits for NRIs.

Overview of life insurance tax benefits for NRIs
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The Indian financial ecosystem offers an array of tax benefits to attract NRIs to invest in life insurance policies in India. These benefits were introduced under the Income Tax Act of 1961. Here are a few tax benefits NRIs could capitalise on.

Section 80C: Deduction of life insurance premiums

Under Section 80C of the Income Tax Act, NRIs can claim a tax deduction on insurance premiums. The cap on deduction claims is one and a half lakh rupees. 

Section 10(10D): Tax exemption on policy maturity or death benefits

Any sum received as a policy maturity or death benefit is tax-free under Section 10(10D) of the Income Tax Act as per applicable terms and conditions. Note that tax benefits are subject to amendments made by the government from time to time. Hence, to get a clear picture, please consult a tax advisor before buying any policies. 

Double Taxation Avoidance Agreement (DTAA)

India has signed DTAA, or Double Taxation Avoidance Agreements, with several countries. Under the DTAA, NRIs can claim tax relief from their country of residence for the taxes they've paid in India. The agreement ensures that NRIs are not taxed twice on the same income and can benefit from lower withholding tax rates.

Why is a life insurance plan crucial for NRIs?
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Life insurance is considered one of the most crucial aspects of financial planning. If an NRI invests in a LI plan, they can expect the following advantages.

Financial security
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Through the compensation received from the policy, the family members can pay off debts, cover day-to-day expenses and cope with the policyholder’s loss.

Retirement planning
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Some policies offer retirement planning, like Endowment Policy and Whole Life Insurance. Such policies offer profitable returns through regular bonuses and investments. They contribute towards providing a stable recurring income post-retirement.

Tax benefits
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The Income Tax Act of 1961 introduced multiple benefits, such as premium deductions and tax exemptions on policy maturity or death benefit. Moreover, the Double Taxation Avoidance Agreement (DTAA) can help NRIs avoid paying taxes on the same income in India and their country of residence.

Estate planning
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Passing on a fortune from generation to generation could often be challenging. Life Insurance policies could be practical estate planning tools for NRIs.

Also Read: Life insurance Estate planning

Currency diversification
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By investing in LI policies in India, NRIs can diversify their financial portfolios by holding assets in Indian Rupees (INR). It mitigates the risks associated with currency rate fluctuation. Moreover, financial investment diversification is always advisable. 

Eligibility criteria for NRIs to purchase life insurance in India
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To buy life insurance policies in India, NRIs must satisfy certain eligibility criteria. Here are the details. 

Age requirement

The age limit for buying a LI policy in India depends on the type of policy and the insurance company. Generally, the minimum age requirement is 18 and the maximum limit ranges between 60 and 75 years. 

Documentation

Insurance companies generally have a stringent document verification process. The documents demanded may include the following.

  1. Passport: A copy of the NRI applicant's passport is mandatory. The passport consists of essential details such as a permanent address, personal information, and visa.

  2. Address proof: An address proof must provide proof of residence in the residing country. A rental agreement or a utility bill could serve as proof of address. 

  3. Proof of income: An income proof document is mandatory for NRI applicants. Valid income proofs include salary slips, income tax returns, or bank statements. The evidence of income is used to determine whether the applicant is financially capable of paying the premium. 

  4. PAN Card: Every applicant must submit a copy of the PAN Card issued by the Indian government. 

  5. Photographs: Recent passport-size photographs are necessary.

  6. Proposal form: Every applicant must submit a signed proposal form that provides personal information, health, family history, and other relevant information.

Premium payment options for NRIs
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Making international payments could often be a hassle. However, NRIs planning to buy Indian LI need not worry. There are ample payment options they can use to pay the premium. Here are the most common methods.

Non-Resident External (NRE) or Non-Resident Ordinary (NRO) Bank Account
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NREs and NROs are explicitly designed for NRIs to manage their finances. Through these bank accounts, NRIs can easily make transactions to Indian Bank accounts in INR.

Foreign Currency Non-Resident (FCNR) Account
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An FCNR account is a foreign bank account owned by an NRI. NRIs can pay their premium in foreign currency through these accounts.

Remittance from Overseas
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NRIs can also pay their premiums through bank transfers directly to the insurance company. These transactions must, however, comply with regulatory guidelines and foreign exchange regulations.

Choosing the perfect life insurance coverage for NRIs
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This section highlights the different types of life insurance policies available for NRIs.

Term Insurance
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Term insurance is a pure risk cover policy that offers financial protection to the policyholder's family in the event of their unexpected death during the policy term. These policies provide high coverage at relatively low premium rates. Term insurance suits NRIs that are seeking affordable, straightforward life coverage without any investment component.

Whole Life Insurance
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Whole Life Insurance policies cover the policyholder's lifetime, typically up to 100 years. Apart from offering death benefits, these policies also have a savings component that accumulates cash value over time. Whole Life Insurance is ideal for NRIs seeking long-term financial protection and wealth accumulation.

Endowment Policies
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Here, a portion of the premium is allocated towards life coverage, while the remaining is invested in financial instruments, allowing policyholders to build a corpus over time. Endowment policies are suitable for NRIs seeking a combination of risk cover and savings for specific financial goals, such as retirement planning or children's education.

Unit Linked Insurance Plans (ULIPs)
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ULIPs offer a mix of LI coverage and investment in market-linked instruments, such as equity and debt funds. Policyholders can choose their preferred investment options based on risk appetite and financial objectives. ULIPs provide the flexibility to switch between funds and offer the potential for higher returns. They are an appropriate choice for NRIs with a long-term investment horizon and a higher risk tolerance.

Frequently Asked Questions (FAQs)
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Here’s a list of questions and answers related to life insurance tax benefits for NRIs.

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Can NRIs who are foreign nationals purchase an Indian life insurance policy?

Yes, NRIs who hold a foreign nationality can purchase Indian life insurance provided they meet the eligibility criteria. 

What happens to an NRI's life insurance policy if they return to India permanently?

If an NRI returns to India permanently, their LI policy will remain valid, and they can enjoy the benefits and coverage offered.

Are there any restrictions on the sum assured for NRIs purchasing life insurance policies in India?

There are no specific restrictions on the sum assured for NRIs purchasing life insurance policies in India.

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes.