NRI Life Insurance & ULIP Taxation Rules

Life insurance and ULIPs remain popular with NRIs both as a protection product and, historically, as a tax-efficient savings vehicle. Two rounds of tightening; the ULIP premium cap introduced from February 2021 and the broader life insurance premium cap from April 2023; have narrowed how much of that maturity value actually comes out tax-free, and the rules apply slightly differently once an NRI's TDS treatment is layered on top. This guide walks through purchase eligibility, premium payment channels, when Section 10(10D) exemption actually applies, and TDS on payouts.

Can NRIs Buy Life Insurance and ULIPs in India?

Yes, most major Indian insurers issue life insurance and ULIP policies to NRIs, though the underwriting and documentation process is somewhat heavier than for a resident applicant. Expect to provide passport copies, visa or OCI/PIO status, overseas address proof, and sometimes additional medical or financial documentation depending on the sum assured. Two practical points worth checking before applying: not every plan is available in every country (insurers restrict certain products by country of residence due to local regulatory considerations), and some insurers apply different premium rates or exclusions for NRI policyholders based on occupation or destination country risk factors.

Which Account Should Fund the Premiums?

Premiums can be paid from an NRE account, an NRO account, an FCNR(B) account, or by direct inward remittance. The choice has downstream consequences at maturity:

• NRE-funded premiums generally keep the eventual maturity proceeds more straightforwardly repatriable abroad, since the source of funds is already established as foreign-origin.
• NRO-funded premiums can still be used, but repatriation of the maturity proceeds later may need more documentation to establish the tax position, similar to any other NRO-sourced repatriation.

For a fuller comparison of how these two accounts work and their respective repatriation limits, see our NRE vs NRO guide.

Section 10(10D): When Maturity Proceeds Are Actually Exempt

Section 10(10D) is the exemption provision for life insurance and ULIP maturity or surrender proceeds. It has always carried a broad condition tying exemption to the premium not exceeding a stated percentage of the sum assured, but two more recent, product-specific premium caps now sit alongside that general rule and are the ones most policyholders actually run into:

Two points apply across both thresholds. First, the aggregation is across all policies of that type held by the individual, not per policy; someone holding three ULIPs with combined annual premiums of Rs 3 lakh loses the exemption on all three, not just the excess. Second, the death benefit paid to nominees on the death of the life assured remains fully exempt under Section 10(10D) in every case, irrespective of how much premium was paid; these premium caps only affect maturity and surrender proceeds paid to a living policyholder.

For an NRI evaluating a large-ticket ULIP or endowment plan as a savings vehicle rather than pure protection, checking the premium against these thresholds before committing to the premium amount matters more than it did a few years ago, since the tax-free positioning that made these products attractive is conditional now, not automatic.

TDS on Maturity Payouts: Different Rules for NRIs

Where the maturity or surrender proceeds are not exempt under Section 10(10D), tax must be withheld at the time of payout. For resident policyholders, this happens under Section 194DA, deducted on the income component (payout minus premiums paid), not the full payout. For NRI policyholders, the withholding instead falls under Section 195, the general TDS provision for payments to non-residents, rather than Section 194DA.

This distinction matters in practice: Section 195 withholding tends to be applied at a materially higher effective rate than the resident-focused Section 194DA rate, and insurers typically deduct conservatively at source given the compliance risk of under-withholding on a non-resident payment. An NRI expecting a specific net payout should account for this before relying on the insurer's illustration, which is often built around resident tax treatment by default.

NRIs can seek to reduce this withholding through Double Taxation Avoidance Agreement relief, by furnishing a Tax Residency Certificate and Form 10F, though the practical process usually requires either the insurer being willing to apply a treaty rate directly (uncommon without a lower-deduction certificate) or the policyholder claiming a refund of excess TDS when filing the Indian tax return for that year. Either way, the excess withholding is recoverable, not lost, but it does mean cash flow planning should assume the higher upfront deduction rather than the treaty-adjusted figure.

Practical Takeaways

• Confirm plan availability and any country-specific restrictions with the insurer before applying.
• Fund premiums from NRE where repatriability of the eventual maturity proceeds is a priority.
• Check aggregate annual premium across all ULIPs (Rs 2.5 lakh) or all other life policies (Rs 5 lakh) issued after the respective cutoff dates before assuming maturity proceeds will be tax-free.
• Budget for Section 195 withholding on any non-exempt payout, and plan to recover excess TDS through DTAA relief or the annual tax return rather than expecting a reduced rate at source by default.