What are the tax benefits on ULIP pension plans for NRIs?
NRIs have to follow a different policy of taxation when it comes to banking and transactions of various natures. The exact policy for them is extensive but to sum it all up, NRIs have to pay higher taxes than regular Indian citizens do.
Some NRIs may have retirement plans that include moving back to India. These plans involve buying new property, saving high amounts of money, making investments in the stock market, along with many other things. When you think about it, all of this seems like the best idea to have. However, it is not that simple to achieve. The country that they live in might have a stronger and highly valued foreign currency. Having lived for that long in a foreign country means that they have a large amount of money saved up. This is the money that they plan to use for building a great life here. However, complications arise when they have to get that money to India. More precisely, they will have to go through many formalities.
Transacting for NRIs
Usually, anyone who wants to transact money in India just needs a savings account. However, NRIs need NRE or NRO savings or current accounts to perform banking transactions. Moreover, there is strict procedure that has to be followed when opening and using these accounts. Through these accounts you can exchange your foreign currency to get valid currency for use in India. Just like banking, there are formalities that NRIs need to fulfill formalities for investments as well. Many NRI investors that try to invest money into the Indian stock market have a hard time from the day they start. This leads to them losing their hard-earned and saved money. To avoid such a situation, they need to look for low risk options to invest in. One such option is Unit linked Insurance plans (ULIPs).
ULIPs for NRIs
ULIPs are a hybrid financial tool that provide you with the double benefit of life insurance coverage and investment returns for wealth generation. Just like every other type of insurance, ULIPs require a premium payment. To know the premium to be paid for the ULIP plan, you can use a ULIP calculator available online. But here they are allocated into different parts of the policy. A part of the premium paid is allocated towards investment avenues like equity or debt funds. The rest of the premium is used to buy life insurance. Some insurance providers tend to have a preference towards putting more of the premium in funds or in insurance. Ultimately, the decision is the investor’s to make. Moreover, for ULIP plans, there is a long list of tax benefits.
Tax benefits of ULIPs
- Section 80D
The Indian Government offers tax benefits to people that buy insurance. These benefits come from Section 80D of the Indian Income Tax Act. According to this section, any payment that you make towards medical or life coverage qualifies you for a tax deduction. NRIs can also enjoy this benefit. As ULIP tax benefits, you can claim a tax deduction of up to ₹ 1,50,000 in a financial year.
- TDS (Tax Deductible at Source)
The returns from a ULIP plan are received at a fixed frequency. This could be annually, half-yearly, or monthly. This frequency can be decided by the policyholder. Sometimes, these payouts can be extremely high. If the funds perform well, you could receive returns above ₹ 10,000. ₹ 10,000 is the limit on these payouts, beyond which the policyholder could be eligible for TDS returns. These returns can be claimed later when you file income tax.
NRIs being citizens of two countries can end up paying taxes in both countries. Moreover, an NRI would have to pay a higher amount of money as tax in India than a permanent citizen. This means that they lose more money that they would be comfortable with. In such a situation, an NRI can apply for a Double Taxation Avoidance Agreement. More than 80 countries have a DTAA agreement with India. Hence, if the resident country of the NRI is one of them, they should definitely go for a DTAA when investing in ULIPs.