Tag: HDFC Life Policy and UK Taxation

Taxation of Indian Life Insurance policy in UK

How to compute tax on maturity of Indian insurance policy

Amounts received under life Insurance policies are exempt1 from tax in India thus are received without any tax deduction but in case it is received by an UK tax resident they will need to pay tax on any gain to HMRC2 and 3.

Please note similar rules are for all foreign life insurance policies thus this blog is not limited to Indian life insurance policies.

First thing to note is that gains is treated as income not as capital gains thus we do not get Annual CGT allowance4.

Top slicing relief (but no notional credit9) will benefit where gain straddles basic to higher or higher to additional rate5 but will be reduced by the period of non-residence6.

A simple example given below without top slicing relief7 and without taking in account policies partial payouts8.

Recently, my LIC life insurance policy matured. It was a Jeevan Surbhi policy with following payouts.

Income : Receipts


Details of life insurance premium paid is given below:

Time apportioned reductions [see IPTM3730 and 3731]

As I was non-resident for 8 years out of 20 years of insurance term. I could reduce the gain proportionately i.e. 66,540 divided by 20 (policy term) x 12 (years tax resident in UK) = INR 39,924

FX rate to convert foreign gain – method IPTM3700

Now we can convert this foreign life insurance gain to GBP using FX rate on date of maturity say 16 September 2020 which is 98.65.

Foreign life insurance gain in £405.

As this gain is lower than Personal savings allowance, thus no tax is payable.

Please note we will still need to disclose the gain even if not tax is payable.

Source:

  1. Institute of Chartered Accountants of India has produced a helpful guide for NRI taxation.
  2. HMRC Help sheet HS321
  3. Please note foreign life insurance policies issued before 18 November 1983 and capital redemption policies issued before 23 February 1984 are treated same as UK policies. [ICTA 1988, Sch 15 Pt11]
  4. [ITTOIA 2005, s 465(5)]
  5. [ITTOIA 2005, s 535-537 ]
  6. [ITTOIA 2005, s 536(7)(8)]
  7. [ITTOIA 2005 s537]
  8. [ITTOIA 2005, s507].
  9. [ITTOIA 2005, s531] – Foreign policies do not get notional credit.

Bonus

  1. LIC also operates in the UK market. Policies issued by the UK establishment can be qualifying policies and exempt for UK income tax. If you have such a policy please contact them they should be able to provide more guidance.
  2. For tax relief for foreign life insurance policies of EU insurers see [ITTOIA 2005, s 532]
  3. Loan taken on insurance policy is considered partial surrender. see IPTM3545
  4. Deficiency relief: In case taxpayer makes a loss on the policy. He can claim this relief. Please note, a loss on one policy cannot be set against a gain on another. Deficiency relief available only is tax payer has income chargeable at higher rate. see IPTM3860, IPTM3880 and IPTM3870
  5. Gains under a policy of life assurance are always taxable on the full amount on the arising basis, irrespective of your domicile or residency status.[RDRM31110]
  6. For further reading, visit our Worldwide Disclosure blog.