Foreign-Currency Life and General Insurance for NRIs: How Premiums, Claims and Repatriation Work Under FEMA

Non-resident Indians increasingly hold foreign-currency life and general insurance policies - some bought from Indian insurers with a foreign-currency option, others bought abroad while the policyholder also keeps Indian assets. The rules that govern the premium, the claim and the repatriation of proceeds sit in the Foreign Exchange Management Act, 1999 (FEMA) and the Reserve Bank of India's FED Master Direction No. 9/2015-16 (Insurance), issued under FEMA Sections 47(2), 10(4) and 11(1). This guide sets out what the statute permits, how India taxes the money, how a resident country such as the United States or the United Arab Emirates treats it, and the exact mechanics of getting the proceeds out.

FEMA / DTAA Position

The authority for the whole framework is FEMA 1999. Section 47(2) empowers the RBI to make regulations on current and capital account transactions, Section 10(4) governs authorised dealers, and Section 11(1) lets the RBI issue directions to those dealers - the three enabling provisions under which the FEMA insurance rules were notified. The operative text is the RBI's FED Master Direction No. 9/2015-16 (Insurance), the consolidated instruction an authorised-dealer bank follows when an NRI remits a premium or receives a payout.

Under that Master Direction, an NRI may hold a foreign-currency life insurance policy. The premium may be paid out of a foreign-currency source abroad or debited to the policyholder's NRE account or FCNR deposit in India. The defining rule is one of proportion: a foreign-currency claim or maturity payout is permitted only in proportion to the premia that were paid in foreign currency. If half the premiums over the life of the policy were paid in foreign currency, only that half of the payout may be taken in foreign currency; the balance follows the rupee rules.

A tax treaty does not override FEMA - the two operate on different questions. FEMA decides whether the money may cross the border and in which currency; the Double Taxation Avoidance Agreement (DTAA) decides which country may tax it and at what ceiling. The distinction matters most for unit-linked insurance plans (ULIPs), whose investment gains can be taxed as capital gains rather than as exempt insurance proceeds. India retains the right to tax capital gains on Indian securities: the India-US treaty (in force from 12 September 1991) and the India-UAE treaty (in force from 22 September 1993) both leave long-term capital gains taxable in India at 12.5%. Capital gains are never "exempt" under either treaty, a point UAE-resident NRIs in particular should note because the UAE levies no personal income tax of its own.

Tax Treatment in India

Indian taxation of insurance proceeds turns on Section 10(10D) of the Income-tax Act, 1961. The section exempts sums received under a life insurance policy, but only where the policy satisfies the statutory premium-to-sum-assured condition; policies that breach it, and high-value ULIPs, fall outside the exemption. Where the exemption is lost, the taxable portion is brought to charge, and for a non-resident the deduction of tax at source is governed by Section 195 rather than the resident provision in Section 194DA.

For ULIP proceeds that are taxed as capital gains, the figure to apply is the equity long-term capital gains rate: 12.5% on gains above the annual exemption of Rs 1.25 lakh, as set by Budget 2024 and effective from 23 July 2024. The same 12.5% rate is the treaty ceiling under both the US and UAE DTAAs, so a resident of either country does not face a higher Indian rate by virtue of being non-resident. You can model the Indian liability on a mixed income profile with the NRI income-tax calculator.

Two surcharge points are worth stating precisely, because they are frequently misquoted. The surcharge on income above Rs 5 crore is capped at 25% in the new tax regime; the 37% rate survives only in the old regime. A health and education cess of 4% applies on tax plus surcharge in both regimes. Separately, the Section 87A rebate in the new regime for FY 2025-26 is Rs 60,000 where total income stays within the Rs 12 lakh threshold raised by Finance Act 2025 - relevant to a returning NRI whose total Indian income is modest in the year of maturity.

Every taxable payout to a non-resident is a remittance event, so the payer typically requires the Section 195 withholding paperwork before releasing funds. We covered that chain in Form 15CA and 15CB: the TDS paperwork before any remittance leaves India, and the same TDS certification applies when an insurer pays a taxable claim abroad.

Tax Treatment Abroad

The resident country taxes the policyholder on the basis of its own residence rules, and the DTAA then relieves double taxation - usually by a foreign tax credit rather than by exemption. The India-US treaty provides for the credit method in Article 24: an NRI resident in the United States who has suffered Indian tax on a taxable insurance gain claims that Indian tax as a credit against US tax on the same income. The US itself taxes its residents on worldwide income and has its own rules on the inside build-up of life insurance, so the credit prevents the Indian 12.5% from stacking on top of the US charge rather than cancelling it.

The United Arab Emirates sits at the other end. The UAE levies no personal income tax, so there is usually no foreign tax for a credit to offset; the value of the treaty there is the ceiling it places on Indian withholding. To claim a treaty rate an NRI must hold a Tax Residency Certificate, and the India-UAE treaty requires proof of a UAE establishment behind that certificate. The treaty rates below are the ceilings India may apply to the respective income heads; the insurance relevance is chiefly for the investment component inside ULIPs and for interest or dividends on any linked portfolio.

Two caveats apply to the US column. Under Article 10, the 15% dividend rate is available only where the recipient holds at least 10% of the voting stock in a parent-subsidiary relationship; ordinary portfolio holdings are charged at 25%. And Article 12 applies a "make available" test to fees for technical services, which is unlikely to touch a pure insurance payout but can matter for advisory fees around a policy. Residence rules for returning NRIs - and the RNOR window - interact with all of this; the broader residence framework also shapes OCI cardholders' rights under the March 2021 MHA notification.

Repatriation Mechanics

Repatriation is where FEMA's proportionality rule becomes concrete. A foreign-currency life policy whose premia were paid in foreign currency pays out in foreign currency, and that payout may be credited to an NRE account or FCNR deposit - both fully repatriable - in proportion to the foreign-currency premia. The portion attributable to rupee premiums does not get the same free exit; it follows the rupee route and the ordinary NRO repatriation ceiling.

General insurance is treated differently and more strictly. Where the premium on a general insurance policy was remitted from India, the Master Direction requires the policyholder to repatriate the maturity or claim proceeds through banking channels within seven days of receipt. This is a hard timing rule, not a guideline: the seven-day clock runs from receipt of the proceeds, and routing them through the banking channel is the compliance act. A maturity benefit or a settled claim both count as proceeds for this purpose.

For a policy surrendered before maturity, the surrender value is treated on the same proportionality logic as a maturity payout: the foreign-currency share of premia determines the foreign-currency share of the surrender proceeds, and the balance moves as rupees. Where proceeds sit in an NRO account first, the usual NRO repatriation framework and the Section 195 withholding paperwork apply before the money leaves India. Model the mechanics with the NRI repatriation calculator, and if the same policyholder also earns Indian rent, the rental income-tax calculator completes the picture.

The three documents that recur in practice are the Tax Residency Certificate for the treaty rate, Form 10F and the Section 195 certification for the remittance, and the insurer's own currency-split statement that evidences how much of the premium history was in foreign currency. Keeping the currency-split statement is the single most useful habit, because it is the evidence the authorised-dealer bank uses to decide how much of the payout it may release in foreign currency under the FEMA 1999 framework.

FAQ

Can an NRI pay the premium on a foreign-currency Indian life policy from an NRE account?

Yes. Under RBI FED Master Direction No. 9/2015-16, premia on a foreign-currency life policy may be paid from a foreign-currency source abroad or debited to an NRE account or FCNR deposit. The crediting of any foreign-currency payout back to NRE or FCNR is then permitted in proportion to the premia actually paid in foreign currency.

Is a life insurance maturity payout always tax-free for an NRI?

No. Section 10(10D) of the Income-tax Act, 1961 exempts life policy proceeds only where the statutory premium-to-sum-assured condition is met. High-premium ULIPs and policies that breach the condition lose the exemption, and the taxable gain on an equity-oriented ULIP is charged as long-term capital gains at 12.5% above the Rs 1.25 lakh annual exemption introduced by Budget 2024.

How quickly must general insurance proceeds be repatriated?

Within seven days of receipt, where the premium was remitted from India. The Master Direction requires the policyholder to route the maturity or claim proceeds through banking channels within that seven-day window; it is a timing obligation, not a recommendation.

Does the DTAA make insurance capital gains exempt in India?

No. Both the India-US treaty (in force since 12 September 1991) and the India-UAE treaty (in force since 22 September 1993) leave long-term capital gains taxable in India at 12.5%. The treaties relieve double taxation through a foreign tax credit in the country of residence, not by exempting the gain in India.

What surcharge applies to a large taxable payout?

For income above Rs 5 crore the surcharge is capped at 25% in the new tax regime; the 37% rate applies only under the old regime. A 4% health and education cess is then charged on tax plus surcharge. Most insurance payouts fall well below the Rs 5 crore threshold, but the cap matters for very large settlements.

What paperwork does the insurer need before paying an NRI abroad?

For a taxable payout, the payer deducts tax under Section 195 and will usually require Form 15CA and 15CB, a Tax Residency Certificate and Form 10F to apply any treaty rate. For a foreign-currency payout, the authorised-dealer bank also relies on the insurer's currency-split statement to confirm the repatriable proportion.

Can a returning NRI still claim the Section 87A rebate in the year of maturity?

Possibly. For FY 2025-26 the Section 87A rebate in the new regime is Rs 60,000 where total income stays within the prescribed threshold. A returning NRI with modest Indian income in the maturity year may fall within it, but a large taxable ULIP gain can push total income past the limit, so the position must be computed case by case.