Part 2 – Life Insurance
In Part 2, we are covering FEMA and tax issues with respect to Life Insurance. Issues related to cross-border insurance products, premium payments, and claim settlements involve certain FEMA and corresponding tax implications for both Residents and Non-Residents. We have touched upon some interesting aspects of cross-border insurances for both categories.
Meaning of Life Insurance Policy
A life insurance policy is a contract between an individual and an insurance company that provides financial protection. In return for regular payments (called premiums), the insurance company promises to pay a lump sum of money in either of the following situations:
- If the insured person passes away, the amount is paid to their loved ones (beneficiaries).
- If the insured person survives till the policy’s maturity date, the amount is paid directly to them.
Life Insurance Policy from Insurer Outside India by Residents
i. A person resident in India may take or continue to hold a life insurance policy issued by a foreign insurer, provided they have general or specific permission from the Reserve Bank of India (RBI).
ii. A resident may also continue to hold a life insurance policy taken while they were a non-resident.
Repatriation of Claim Amount by Resident Indian: If any premium is paid through remittance from India, the maturity proceeds or claim amount must be repatriated to India via normal banking channels within seven days of receipt.
Insurance Policy by NRI from Indian Insurer
i. Foreign Currency Policies for Returning Indians: Policies can be issued in foreign currency to Indian nationals or Persons of Indian Origin (PIOs) who return to India, provided premiums are paid from foreign currency held abroad or from their Resident Foreign Currency (RFC) account in India.
ii. Foreign Currency or Rupee Policies for Foreign Nationals: Policies can be issued in foreign currency or INR to foreign nationals not permanently residing in India, as long as premiums are paid from foreign currency funds or income earned in India.
iii. Conversion of Rupee Policies: Rupee-denominated policies of Indian residents cannot be converted to foreign currency or transferred outside India without prior RBI approval.
iv. Foreign Currency Policies for NRIs: Indian insurers can issue foreign currency policies to NRIs, provided premiums are collected in foreign currency from abroad or from NRE/FCNR accounts in India.
v. Rupee Policies for NRIs: Premiums for rupee-denominated policies issued to NRIs can be paid from NRO accounts.
vi. Transfer of Policies on Return to India: Policies issued to Indian nationals or PIOs living abroad can be transferred to the Indian register upon their return. Foreign currency policies will be converted to rupee policies unless:
- The policy has been in force for at least 3 years, and
- The policyholder opts to retain it in foreign currency.
Premiums may continue in foreign currency if the policyholder agrees to repatriate maturity proceeds/claims to India within seven days.
Settlement of Claims
- Claims in Foreign Currency: For rupee life insurance policies, claims paid in foreign currency are allowed only in proportion to the premiums paid in foreign currency relative to total premiums.
- Credit to NRE/FCNR Accounts: NRIs receiving insurance claims, maturity, or surrender value in foreign currency can have the amount credited to their NRE/FCNR accounts.
- Credit to RFC Accounts:
- Resident beneficiaries of insurance claims paid in foreign currency can credit proceeds to their RFC (Domestic) account.
- Indian residents who were previously NRIs may credit such foreign currency claims to their RFC account after becoming residents.
- Payment in Rupees for Non-Repatriable Policies: Claims or maturity proceeds for rupee life insurance policies (where premiums were paid in non-repatriable rupees) can only be paid in rupees and credited to the NRO account. This includes death claims for NRIs.
- Claims for Foreign Nationals: For rupee policies issued to foreign nationals not residing in India, claims can be paid in rupees or remitted abroad, based on the claimant’s preference.
Taxability on Proceeds from Insurance Company
As per Section 10(10D) of the Income Tax Act, any sum received under a life insurance policy, including bonuses, is exempt from tax except in the following cases:
i. Any amount received under a Keyman insurance policy.
ii. Life policies issued between 1st April 2003 and 31st March 2012, if annual premiums exceed 20% of the sum assured.
iii. Life policies issued on or after 1st April 2012, if annual premiums exceed 10% of the sum assured.
iv. Life policies (excluding ULIPs) issued on or after 1st April 2023, if the premium exceeds ₹5,00,000 per year.
v. ULIPs issued on or after 1st February 2021, if annual premiums exceed ₹2,50,000 in any year.
Note: In the event of death, any amount received by the nominee is fully exempt from tax, regardless of premium amount or policy issue date.
Taxability on Various Life Insurance Policies
| Particulars | Term Insurance (Death Benefit Only) | Endowment Policy | ULIPs |
|---|---|---|---|
| Relevant Head of Income | Not Taxable | Income from Other Sources | Capital Gains |
| Applicable Tax Rates | NA | As per individual’s slab rate | – Equity-oriented: 20% (STCG under Sec. 111A), 12.5% (LTCG under Sec. 112A) – Others: Slab (STCG), 12.5% (LTCG without indexation) |
| Exemption under Section 10(10D) | Fully Exempt | Exempt if annual premium ≤ 10% of sum assured and ≤ ₹5,00,000 | Exempt if annual premium ≤ 10% of sum assured and ≤ ₹2,50,000 |
Example: Taxability
| Particulars | Raman | Sachin |
|---|---|---|
| Type of Policy | Endowment Policy | ULIP |
| Date of Policy Issuance | After 1st April 2012 | After 1st February 2021 |
| Policy Term | 3 Years | 3 Years |
| Annual Premium Paid | ₹5,50,000 | ₹3,50,000 |
| Total Premium Paid | ₹16,50,000 (₹5.5L × 3 years) | ₹10,50,000 (₹3.5L × 3 years) |
| Threshold for Exemption | ₹5,00,000 | ₹2,50,000 |
| Exceeds Threshold? | Yes | Yes |
| Maturity Amount Received | ₹20,00,000 | ₹14,00,000 |
| Exempt under Sec. 10(10D)? | No | No |
| Taxable Amount | ₹3,50,000 (₹20L – ₹16.5L) | ₹3,50,000 (₹14L – ₹10.5L) |
| Tax Head Applicable | Income from Other Sources | Capital Gains |