Budget 2025 | GIFT City insurance and endowment plans are now tax-free for NRIs

The Union Budget for 2025-26 has proposed a major tax arbitrage for unit-linked insurance policies and endowment plans sold via Gift City. If approved, the maturity proceeds in such dollar-denominated insurance plans will be tax-free if the premium amount is under 10% of the sum assured.

Currently, maturity proceeds in Gift City-linked ULIPs and endowment plans are taxable if the annual premium is above ₹2.5 lakh and ₹5 lakh, respectively. That will change once the Budget proposal is cleared in Parliament.

Gift City is a foreign jurisdiction for tax purposes and is regulated by the International Financial Services Centres Authority (IFSCA).

“In order to provide parity to non-residents availing life insurance from insurance office in IFSC vis a vis other foreign jurisdiction, it is proposed to amend the clause (10D) of section 10 so as to provide that proceeds received on life insurance policy issued by IFSC insurance intermediary office shall be exempted without the condition related to the maximum premium payable on such policy,” reads the memorandum explaining Budget 2025’s provisions.

This is expected to encourage wealthy non-resident Indians (NRIs) to invest in dollar-denominated insurance-cum-investment products for tax-efficiency, according to industry experts and executives.

The government does not want to tax NRIs for investments in Gift City, which otherwise could have been made in tax havens, said chartered accountant Gautam Nayak.

Also read |Decoding dual taxation: What NRIs need to know for better tax efficiency

A budget boost

As many as six life insurance companies have a presence at Gift City, the IFSCA website shows, but not all of them have launched products yet.

IndiaFirst Life Insurance, which commenced operations in Gift City in August last year, has a ULIP product called IndiaFirst Life Wealth Wise plan.

“The Budget 2025 amendment will boost investment in the foreign currency denominated products,” said Rushabh Gandhi, managing director and chief executive, IndiaFirst Life Insurance, adding that the company needed to “amend this product to follow the 10% of SA (sum assured) requirement”.

HDFC Life International and Reinsurance also launched a ULIP product in Gift City in August last year, called the US Dollar Global Education Plan.

HDFC Life, a wholly owned subsidiary of HDFC Life Insurance incorporated at Dubai International Financial Centre, opened its first overseas branch in GIFT City in August 2023.

The other life insurers at Gift City—Canara HSBC Life Insurance, Life Insurance Corporation, Tata AIA Life Insurance, and Star Union Dai-ichi Life Insurance—don’t have any products yet from Gift City.

While collected premiums will be in dollars for Gift City policies, insurance companies are free to invest in the Indian markets or abroad, as per exposure rules specified in IFSCA regulations. If the underlying equity funds in Gift City ULIPs are used to invest in the Indian stock market, NRIs will be able to clock tax-free capital gains.

Compare that against NRIs investing in Indian equity mutual funds, where long-term capital gains are taxed at 12.5% and short-term gains at 20%.

Also read |Gift City sovereign green bonds face currency hurdle

Not for resident Indians?

What if resident Indians buy a dollar-denominated ULIP or an endowment plan from Gift City? The law allows them to do so as long as the premium paid is under the $250,000 liberalized remittance scheme (LRS) limit.

Sidhant Agarwal, a chartered accountant and co-founder of India for NRI, a Delhi-based consultancy, said the Budget’s proposed amendment could result in a tax arbitrage opportunity for resident Indians as well, but needs clarification from the finance ministry.

Gandhi of IndiaFirst Life Insurance, however, pointed out the Budget memorandum only mentions non-resident Indians. “But since resident Indians can invest in such products it is unclear if they too will be eligible for tax-free gains. The industry will seek necessary clarifications on the matter,” said Gandhi.

The Budget’s proposed amendment on Gift City ULIPs and endowment plans for NRIs is in line with how Gift City mutual funds are treated for tax purposes—no tax is deducted on capital gains if NRIs invest through GIFT city mutual funds. But the rules are clear that resident Indians cannot invest in such funds.

Resident Indians can, however, invest in Gift City insurance policies with the Reserve Bank of India’s approval.

Also read |RBI allows NRIs to open rupee accounts abroad with authorized banks

The liberalised remittance clause

RBI issued a circular in July last year in the context of LRS stating that authorised persons may facilitate remittances for financial services or products as defined under the IFSCA Act.

“The LRS Circular operates within the confines of ‘permissible purposes under LRS’,” experts from law firm Cyril Amarchand Mangaldas said in a November article explaining LRS circular in the context of insurance products.

In other words, the phrase ‘permissible purposes under FEMA’ (Foreign Exchange Management Act) functions as a qualifier for any remittance under the LRS route to GIFT-IFSC, according to the article.

Per FEMA rules, purchasing general and life insurance policies is permissible subject to approval from relevant authorities. “Thus, a harmonious interpretation of the LRS Circular, FEMA Regulations and LRS Master Direction is essential to interpret the LRS Circular in so far as purchase of insurance policies by Indian residents from GIFT-IFSC is concerned,” the Cyril Amarchand Mangaldas experts wrote.

Interpreting the circular, Agarwal of India for NRI said RBI permission is not required under LRS in general. “It is required only for particular transactions. The central bank generally approves such transactions,” he said.

Lalit Jadhav, partner–financial services at tax and business advisory BDO India, and who has previously worked with banks at Gift City, said domestic lenders are still unclear about the regulations for life insurance products issued from Gift City.

“They take RBI permission and deduct applicable TCS (tax collected at source) if a resident Indian has to pay a premium for buying Gift City ULIPs or endowment plans under his or her LRS limit,” he said. “A suitable clarification from RBI can help.”