Part 1- General Insurance

Cross border insurance products, premium payments and claim settlements have certain FEMA and corresponding tax issues both for Resident and Non-residents. We have tried to touch upon some of interesting issues with respect to cross border insurances, both for Resident and non-resident.

Part 1 of this insurance series we are examining FEMA and tax issues around general insurance covering health insurance and insurances for various assets. Next part will cover FEMA and tax issues with respect to cross border Insurance.  

Meaning of General Insurance Policy

General Insurance refers to all types of insurance that are not related to life insurance. In simple terms, it provides financial protection for assets like your health, car, home, business, or travel. These policies cover you against losses or damages caused by accidents, natural disasters, theft, fire, illnesses, and more.

Permission for Resident Indians to Hold Overseas General/Health Insurance Policies

• A person living in India can take or continue a health insurance policy from a foreign insurer, as long as the total money sent abroad, including premium, is within the limit allowed under the Liberalised Remittance Scheme (LRS).
• No one is allowed to buy or renew insurance for any property in India or for ships or aircraft registered in India with a foreign insurer, unless they get permission from the Insurance Regulatory and Development Authority of India (IRDAI).
• Other types of general insurance policies from foreign insurers can be held only if the person has specific or general permission from the Central Government.
• Policies taken while the person was living outside India can be continued after becoming a resident in India.

Repatriation of Claim Amount by Resident Indian: If premium is paid from India, then any maturity amount or claim must be brought back to India within 7 days through normal banking channels.

Eligibility for NRIs to purchase General/health insurance in India:

NRIs are allowed to purchase new general or health insurance policies in India, as permitted by IRDAI, and can also continue with their existing general or health insurance plans.

Repatriation of Claim Amount by NRIs: For NRIs, if the premium for a general or health insurance policy was paid in Indian Rupees, the claim amount will also be paid in Indian Rupees. However, if the policy includes global coverage and the claim is made outside India, the settlement can be done in foreign currency—but only if the premium was also paid in foreign currency.

Transaction in Nepal and Bhutan:

Indians, Nepalese, and Bhutanese living in Nepal or Bhutan, are considered residents of India when it comes to transactions in Indian Rupees (INR). Therefore, claim payments under general or health insurance policies to such individuals can be freely made in INR. However, if the claim is to be paid in foreign currency, prior approval from the Reserve Bank of India is required—unless the insurance premium was also originally collected in foreign currency.

Taxability on proceeds from Insurance company

• For Health Insurance: Medical insurance reimbursements received by the policyholder are excused from tax under Section 10(10D) of the Income Tax Act, 1961

• For other General Insurance:

Compensation received from an insurer for destruction of assets due to natural disasters, riots, fire, accidents, or enemy action is covered under Section 45(1A) of the Income Tax Act, 1961.

Such receipts are taxable as capital gains in the year they are received.

• Consideration: Value of money or Fair value of assets received.
• Deduction: Cost of acquisition and Cost of Improvement of the original asset is deductible.
• Holding Period:
  • > 24 months: Taxed as Long-Term Capital Gains (LTCG) @ 12.5%
  • ≤ 24 months: Taxed as Short-Term Capital Gains (STCG) @ applicable slab rate (plus surcharge and cess)