Out of India

Sums received under a Royal Skandia life assurance product will not qualify for tax exemption under the Income Tax Act 1961 (ITA) unless the policy fulfils the conditions laid down in this regard in the ITA.
 
Resident Indians
 
A person resident in India cannot take out a life assurance policy issued by a foreign insurer without the approval of the Reserve Bank of India (RBI). The Remittance Scheme of the RBI (as amended from time to time) has modified this, allowing a person resident in India to remit up to US$200,000 on aggregate in a financial year for any non-prohibited purpose.
 
As payment of an insurance premium to a foreign insurer is a non-prohibited purpose, each financial year a person resident in India can remit insurance premiums to a foreign insurer of up to US$200,000.

Non-resident Indians
 
Non-resident Indians are not taxed in India on their foreign sourced income, even if the payment is subsequently remitted to India.

There is, however, no such restriction on a person resident outside India. Therefore non-resident Indians can effect Royal Skandia products without any restrictions, providing all advice and form completion takes place outside India.

 Returning non-resident Indians
 
If a non-resident Indian returning to India chooses to fully encash their policy, any tax payable would, on general principles of tax law, be charged on the gain that has been made, i.e the difference between the amount received under the policy and the premium paid in respect of the policy.

Defining a non-resident Indian
 
The definition of a non-resident Indian can be found in two pieces of legislation: the ITA and the Indian Foreign Exchange Management Act 1999 (FEMA). Under ITA an individual is said to be resident in India in a financial year (1 April to 31 March) if they are:

• in India for 182 days or more in the relevant financial year; or

• in India for 60 days or more in the relevant financial year and have stayed in India for a total of 365 days or more in the preceding four financial years.

In the case of an Indian citizen who leaves India for purposes of employment outside India, and in the case of an Indian citizen or a person of Indian origin who stays outside India and comes on a visit to India, the period of 60 days is extended to 182 days.  Under FEMA, an individual will be regarded as a non-resident Indian if he has left India or:

• stays outside of India on taking up employment outside India;

• carry on a business or vocation outside India; or

• for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period.

Where a returning non-resident chooses to encash part of their policy, any tax payable is likely to be based on the full encashment gain expressed as a percentage of the original investment and applied to the encashment amount, as shown in the example below.

Original investment of US$100,000. Full policy value at the date of the encashment of US$150,000 and they encash US$50,000.

Value of policy at the date of encashment - original investment = gain/original investment = gain expressed as a percentage of original investment

US$150,000 - US$100,000 = US$50,000/US$100,000 = 50%

Percentage x amount of encashment = taxable gain on encashment

50% x US$50,000 = US$25,000

Using the cash system the amount of actual taxable gain is US$25,000 (although US$50,000 is actually encashed).

 

Tax reporting

There are two accounting methods for tax reporting in India: the cash system and the mercantile system. Where an individual employs the cash system of accounting regularly, the tax will be payable on the gain when proceeds are received in India. Where an individual employs the mercantile system of accounting regularly, tax will be payable on the amount of the gain accruing and due for payment during the financial year, even though they may not have received any payment during that year.

Premiums
 
If premiums for a Royal Skandia policy continue to be paid from their foreign currency account on the individual's return to India then there is no requirement to remit the maturity or surrender proceeds to India.
 
However, if any of the premiums have been made by payments from India, clients are obliged to repatriate the maturity or surrender proceeds of the policy to India within seven days.
 
Where tax or any higher tax than is legally due is demanded by the tax officer, the individual could appeal against this taxation on the basis that it forms part repayment of the original investment amount and therefore no tax is payable until the part encashments exceed the original amount.

India has exchange control laws which restrict residents from making foreign investments. A person resident in India can currently remit up to US$200,000 on aggregate in a financial year for any non-prohibited current account or capital account transactions, including payment of premiums on a life insurance policy taken from a foreign insurer.

There is no compulsion on a 'person resident in India' to repatriate the foreign investments made when they were resident outside India. A non-resident Indian holding a foreign bank account who becomes resident can continue to hold their foreign bank account without restriction.

There are also no requirements on non-residents to provide information about their foreign insurance policies to the Indian tax authorities.

Under the Indian tax law, income received in respect of units of:
 
(i) a mutual fund registered under the Securities and Exchange Board of India Act, 1992;
 
(ii) a mutual fund set up by a public sector bank or a public financial institution or authorised by the Reserve Bank of India; or
 
(iii) the Unit Trust of India issued under the Unit Scheme 1964
 
is exempt from income tax. 
 
The exemption of income in respect of units of the mutual funds referred to in (i) and (ii) above is subject to the condition that the fund is an 'equity orientated fund', that is the investible funds are invested in equity shares of domestic companies to the extent of more than 65 percent of the total proceeds of the fund.  Therefore, tax exemption under Indian tax law is not available in respect of units of foreign mutual funds.
 
Please remember it is also important to consider the taxation of any assets in your clients' current country of residence.
 
In view of this, offshore life insurance policies such as those offered by Royal Skandia should be more tax advantageous than an offshore mutual fund for a returning Indian client.

Redemption contracts are considered to be investment products and are treated differently to life assurance policies in India.

Resident Indians

A person resident in India who invests in foreign securities or investments issued by a foreign company will be taxable at their marginal rate of tax on income, interest or dividend payments (if any). Any tax treated as paid in the country which the foreign company is domiciled can be claimed as a tax credit for the tax paid but this is limited to the amount of tax payable in India.

Where the foreign security of investment is partially or fully encashed whilst the person is still resident in India there are currently no regulations which require the person to remit the proceeds to be remitted to India. However, the proceeds will be liable to capital gains tax, in India:

a) at a rate of 20.6%, if the security or investment has been held for longer than 12 months; or

b) at the tax rate applicable to the policyholder if the security or investment has been held for 12 months or less.

Some of the proposed important changes of relevance to high net worth individuals include:

• 1% wealth-tax will be extended to include works of art; deposits in foreign banks; interests of a beneficiary in a foreign trust; and shares in a controlled foreign company.

• Income attributable to a controlled foreign company will be taxed in the hands of resident shareholders.

• A general anti-avoidance rule will be incorporated into the Code.