Settlement money on Insurance policies – FEMA and Income tax in India

Many NRIs prefer having insurance policies in India with a planning that they may eventually settle down in India. Also, many would have already taken insurance cover before moving abroad.

This write-up covers the broad provisions of Foreign Exchange Management Act (‘FEMA’) and Income tax Act, 1961 pertaining to settlement money received:

Part A – FEMA:

General/Health Insurance policies by Residents outside India.

Resident outside India may take general/health insurance policy as permitted by IRDAI from Indian Insurers. Claims arising under the policies are to be settled in INR if payment of premium is in INR  and in any currency if payment of premium is in foreign currency.

Claims can be settled under foreign currency for IRDAI permitted general/ health insurance policies issued by Indian insurers where settlement of claims is assured in foreign currency subject to certain conditions. One of the key conditions is that the beneficiary should be a resident outside India. In case of person resident in India, the claims may be settled in INR equivalent of foreign currency due. Under no circumstances payment in foreign currency be made to a resident beneficiary.

Life Insurance from insurers in India

  • Insurer in India may issue policies denominated in foreign currency through their offices in India or abroad to residents outside India provided the premium are collected in foreign currency from abroad or out of NRE/FCNR accounts of the insured or his family members held in India.
  • For policies denominated in rupees issued to residents outside India, funds held in NRO accounts can be accepted towards payment of premium.

Settlement of claims:

Claimants resident outside India:

  • The basic rule for settlement of claims on rupee life insurance policies in favour of claimants resident outside India is that payments in foreign currency will be permitted only in proportion in which the amount of premium has been paid in foreign currency in relation to the total premium payable.
  • Residents outside India who are beneficiaries of insurance claims/maturity/surrender value settled in foreign currency may be permitted to credit the same to NRE/FCNR account, if they so desire.

Beneficiaries resident in India:

  • Resident beneficiaries of the insurance claims/ maturity/ surrender value settled in foreign currency can open and credit the proceeds thereof to their RFC (Domestic) Account.
  • Claims/maturity proceeds/ surrender value in respect of rupee life insurance policies issued to Indians resident outside India for which premium have been collected in non-repatriable rupees may be paid only in rupees by credit to NRO account of the beneficiary. This would also apply in cases of death claims being settled in favour of resident outside India assignees/ nominees.

Part B- Indian Income tax provisions:

Under section 10(10D) of the Income tax Act, 1961, any sum received on life insurance policy (including bonus) on death of a person, is exempt from tax.

Apart from above, Section 10(10D) exempts sum received under a life insurance policy including bonus under following circumstances:

  • Where policy is issued after 01.04.2012 and the premium payable does not exceed 10% of the sum assured
  • Where policy is issued before the above date – 20% of sum assured

Where premium amount exceeds the above percentage, maturity proceeds will be taxable.

Also, where the claimant is a non-resident, one also needs to see the provisions of relevant Double Taxation Avoidance Agreement between India and the country where the claimant resides.

Leave a Comment

Scroll to Top