No matter where you may be in your financial planning journey, there are two key financial goals that you will no doubt want to fulfill. These are insurance and investment. Fortunately, there is one financial product that can help you meet both these goals under one roof - the ULIP investment plan. ULIPs or Unit Linked Insurance Plans offer many advantages to the investor, right from market-linked returns to ULIP tax benefits.
To understand more about this plan and to see how it can benefit NRIs, let us begin at the fundamentals and answer the basic question -
What is a ULIP plan?
A Unit Linked Insurance Plan is an option where policyholders get to enjoy the advantage of investments coupled with an insurance cover. When you purchase a ULIP investment plan, you can choose to invest in equity funds, debt funds, or a combination of both. Therefore, you can choose the funds according to your investment goals and your risk appetite.
In addition to this, the life cover offered by a ULIP investment plan secures the financial future of your family. In case of your unfortunate demise during the tenure of the ULIP, the insurer pays out the death benefits to your nominee. ULIPs come with a lock-in period of five years, so you will find that they are one of the preferred investment options if you want to save up for long-term life goals.
ULIP taxation for NRIs
Unit Linked Insurance Plans offer threefold tax benefits under the Income Tax Act, 1938 ("the Act"). Here is a closer look at the ULIP tax benefits available to NRI policyholders as well –
• Tax benefit on the premiums paid
As per section 80C of the Income Tax Act, 1961, taxpayers can claim a deduction of up to Rs. 1.5 lakh during a financial year for certain specified investments, subject to the provisions stated therein. The premiums paid for ULIPs also qualify for this deduction.
For policies issued after 1 February 2021, in case the aggregate premium in a financial year exceeds Rs.2.5 lakhs, the maturity proceeds from such policy would be taxed as capital gain basis the recent Finance Bill. However, the tax exemption under Section 10(10D) of the Act would continue for policies with annual premium less than Rs.2.5 lakhs in aggregate subject to provisions stated therein.
The same provisions would be applicable for NRI customers who have purchased a ULIP investment plan. TDS would be applicable under Section 195 as per applicable rates. Income from such policy will be taxed as a capital gain. The policyholder subject to the necessary documentation can obtain double Tax Avoidance Agreement (DTAA) benefit if available.
• Tax benefit on maturity/death benefits
In case of the policyholder’s death during the tenure of the plan, the nominees receive the death benefits from the insurer. These benefits are exempt from tax in the hands of the nominees, as per section 10(10D) of the Income Tax Act, 1961. Conversely, the maturity benefits received by the policyholder are also tax-free as per the provisions of the same section.
Like the deduction u/s 80C, these ULIP tax benefits are also subject to the following conditions –
• For ULIP policies purchased on or after April 1 2012, this benefit is available on the condition that the amount of premium is less than or equal to 10% of capital sum assured.
• For ULIPs purchased before April 1 2012, the benefit u/s 10(10D) can be availed when the premium is less than or equal to 20% of capital sum assured.
Note that Death benefit under Keyman policy is taxable subject to the provisions stated therein. In addition to the above conditions, Budget 2021 announced that the proceeds would be tax-free only if the annual premium paid by the policyholder does not exceed Rs. 2.5 lakh. If you invest more than Rs. 2.5 lakh in ULIPs, the income or the returns on maturity will be subject to tax. This is applicable only for policies taken on or after February 1, 2021.
Taxation on capital gains
Gains on ULIPs are exempt from Long Term Capital Gains (LTCG) tax, provided the annual premium paid does not exceed Rs. 2.5 lakh. Just like resident policyholders, NRIs can also benefit from this provision.
How can NRIs buy ULIPs in India?
Given these ULIP tax benefits, many NRIs may want to buy ULIPs in India. The procedure for this is simple. Here is a closer look.
1. NRIs who wish to buy ULIPs in India need to submit the relevant documents to the insurer, along with the application form.
2. This generally includes the following –
a. A scanned copy of the passport that acts as proof of age and identity
b. A recent passport-sized photograph
c. Proof of residence in India
d. Proof of residence overseas
e. Proof of income
f. Overseas Citizenship of India (OCI) or Persons of Indian Origin (PIO) Card for permanent overseas citizens
g. Copy of PAN card or Form 60, in case the NRI has income that is earned in India
h. A Foreign Residency Supplementary Questionnaire for NRIs or PIOs
i. Medical examination report as may be applicable
j. Any other document as may be required to ensure compliance with applicable Anti-money laundering and Know Your Customer (KYC) norms
3. Once this is done, the insurer will evaluate the application and issue the policy.
4. NRIs can generally pay premiums through Indian bank account or through an NRE account or an NRO account maintained with an Indian bank.
5. The following modes of premium payment are available for NRIs –
a. Domestic or international credit cards
b. Internet banking
c. Debit cards
d. Online wallets like PayTM and Google Pay
e. Credit Card Standing Instructions (CCSI)
f. National Automated Clearing House (NACH)
g. Online ECS mandates
NRIs enjoy many ULIP tax benefits along with the dual advantage of insurance coupled with investments. Therefore, for any non-resident Indian looking for an investment avenue that brings in the benefit of market-linked returns along with tax benefits, ULIPs check all the boxes.