NRIs or Non-Resident Indians often make investments in India even when they are living abroad. The main aim of these investors is to keep the money in the market for the long term and enjoy the returns during their later years, or retirement. Many even have plans to shift back to India during this period to make the most of these returns. However, if you are an NRI investor in India, you must go through several formalities before you get to benefit from your investment gains. Firstly, you need to open an NRE or an NRO account. These accounts are required to help you exchange your foreign currency in a more effective manner. Another important aspect is to look at the taxation on your investment returns. NRIs have different taxation norms as compared to resident Indians.
One way to beat over-taxation is to look for tax-efficient investment plans. One such plan is the ULIP or the Unit-Linked Insurance Plan. Let’s look at the taxation benefits on ULIP pension plans for NRIs.
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How do ULIPs work?
Understanding how ULIPs work is elemental to saving taxes on ULIP plans. When you pay the premiums for a ULIP plan, the insurer distributes that premium into two uses – the insurance cover and the investment portion. The insurance cover is helpful for the loved ones in the event of the policyholder passing away. The investment portion is used to invest in the financial instruments of your choice. You can invest in debt funds or equity funds as per your risk appetite. You can also opt for hybrid funds to have a balanced portfolio. A ULIP calculator can be used to get an estimate of the returns from each kind of fund under the same premium amount.
ULIP tax benefits for NRIs
Tax-saving via Section 80C
Section 80C of the Income Tax Act, 1961, offers a slew of tax-saving benefits to the tax-savvy investor. The NRI ULIP investor can claim a tax deduction of up to Rs 1.5 lakhs against the premium they pay for their ULIP policies. For this benefit to be valid, the policy must be held in the name of the NRI, their spouse, or their children. Another major condition is that the annual premium should not be more than 10% of the sum assured of the ULIP plan.
Tax-saving via Section 80D
Section 80D deals with tax benefits on health insurance-related policies. As a ULIP policyholder, you can claim deductions under Section 80D by opting for the critical illness insurance rider. The maximum deduction an under-60-year-old individual can claim is Rs 25,000. If you are over 60, the maximum deduction can increase to Rs 50,000. Do check the estimated cost of this add-on before you buy it with the help of the ULIP calculator.
Tax refunds via TDS
Tax Deducted at Source or TDS is a form of taxation that is applicable on ULIP pay-outs. One can withdraw from ULIPs on a monthly, half-yearly, or annual basis. If the TDS collected during these withdrawals is not in tandem with the yearly tax exemption limit, then you must make sure to file for a TDS refund.
Tax-saving via DTAA
Since NRIs reside in dual countries, they may end up paying taxes for both countries. This can have a considerably negative impact on your income. This is exacerbated by the fact that, as an NRI, you may have to pay higher taxes than a normal citizen. To ensure that such an occurrence does not happen, you should apply for the DTAA or the Double Taxation Avoidance Agreement. As an NRI, you can apply for the DTAA in over 80 countries. If your resident country is on that list, do apply for the same to save on taxes.
Are ULIPs a good retirement investment option for NRIs?
If you look at the performance of the major ULIPs by major insurers, the answer is a resounding ‘yes’. Considering the fact that they offer life insurance and investment under one product, ULIPs are an immensely beneficial buy. Before you go ahead with a ULIP plan though, ensure to check the various ULIP charges that the insurer levies. Also, check whether NRI investors have any specific ULIP charges.
It is best to consult a tax expert. They will be able to provide you with pieces of advice particular to your situation after taking into consideration several subjective aspects. Before you sign the ULIP proposal, ensure to read the terms and conditions, know the ULIP charges, and review the risk factor, amongst other things.