For Non-Resident Indians (NRIs), navigating the taxation and remittance of income earned in India can be complex, particularly when it involves tax-exempt proceeds such as Life Insurance Corporation (LIC) maturity proceeds or Employees’ Provident Fund (EPF) withdrawals. While such income is generally exempt from taxation in India, challenges arise when NRIs attempt to remit these amounts abroad, as banks often apply Tax Deducted at Source (TDS) or Tax Collected at Source (TCS) incorrectly due to regulatory ambiguities.
This article provides a comprehensive guide on the taxation, remittance, and procedural aspects related to LIC maturity proceeds and EPF withdrawals for NRIs.
1. Taxation of LIC Maturity Proceeds for NRIs
A. When LIC Maturity Proceeds are Fully Exempt
Under Section 10(10D) of the Income Tax Act, 1961, the maturity proceeds of a life insurance policy (including bonuses) are exempt from tax, provided:
• The premium paid does not exceed 10% of the sum assured (for policies issued on or after April 1, 2012).
• The premium paid does not exceed 20% of the sum assured (for policies issued before April 1, 2012).
• The policy is not a Keyman Insurance Policy (taken for business purposes).
If these conditions are met, the LIC proceeds are entirely tax-free, and no TDS should be deducted.
B. When LIC Maturity Proceeds are Taxable
If the above conditions are not met, the maturity proceeds become taxable, and LIC will deduct TDS at 5% on the net maturity amount (i.e., maturity proceeds minus total premium paid) under Section 194DA.
For NRIs, this income will also be taxable at applicable slab rates under Section 115B (if no relief under a Double Taxation Avoidance Agreement (DTAA) applies).
2. Taxation of EPF Withdrawals for NRIs
The Employees’ Provident Fund (EPF) withdrawal is exempt from tax if:
• The employee has completed 5 years of continuous service.
• The withdrawal is due to retirement, resignation, or permanent migration abroad.
A. When EPF Withdrawal is Fully Exempt
• If the 5-year service condition is met, the entire EPF corpus (both employee and employer contributions along with interest) is tax-free, and no TDS is deducted.
B. When EPF Withdrawal is Taxable
• If the withdrawal is made before completing 5 years of service, the amount is taxable as follows:
• Employee’s contribution: Tax-free but eligible for deduction under Section 80C (if claimed earlier, it will be added to taxable income).
• Employer’s contribution & interest: Taxable as per applicable slab rates.
• Interest on employee’s contribution: Taxed as “Income from Other Sources.”
• TDS at 10% (or 30% for NRIs without PAN) under Section 192A will be deducted if the withdrawal exceeds ₹50,000.
If EPF is withdrawn before five years but transferred to another EPF account, it remains tax-free.
3. Remitting LIC & EPF Proceeds to an NRI’s Foreign Account
Once the maturity proceeds of LIC or EPF are received in the NRO account, the NRI may remit the amount abroad under the Liberalized Remittance Scheme (LRS) or Repatriation Rules. However, banks may apply Tax Collected at Source (TCS) at 20%, which can be incorrect in many cases.
A. TCS on Foreign Remittance (Section 206C(1G))
• If the total remittance in a financial year exceeds ₹7 lakh, 5% TCS applies.
• If the NRI does not have a PAN, a higher TCS rate of 20% applies.
• If the NRI can prove the source of funds as tax-exempt income (like LIC proceeds under Section 10(10D)), they can seek TCS exemption.
B. How to Avoid Incorrect TCS Deductions
NRIs should ensure:
1. Bank has updated their PAN details to avoid 20% TCS deduction.
2. Submit Form 15CA & 15CB (if required) before remittance.
3. Provide proof of tax exemption (such as LIC policy documents or Form 16A for EPF).
4. If excess TCS is deducted, it can be claimed as a refund while filing an ITR in India.
4. Procedure to Remit Tax-Exempt LIC or EPF Proceeds Abroad
1. Receive the amount in an NRO account in India.
2. Submit Form 15CA (self-declaration) and Form 15CB (CA certificate, if required) for remittance.
3. Provide supporting documents (LIC policy statement, EPF settlement statement, or tax exemption proofs).
4. Request remittance through the bank under permissible RBI limits.
If the bank wrongly applies 20% TCS, escalate the matter to:
• The bank’s taxation team for clarification.
• The RBI Ombudsman for incorrect tax collection under LRS guidelines.
5. Key Takeaways
LIC maturity proceeds are fully exempt under Section 10(10D) if premium limits are met; otherwise, TDS at 5% applies.
EPF proceeds are tax-free if withdrawn after 5 years; early withdrawals attract TDS at 10% for NRIs.
Banks may incorrectly apply 20% TCS on foreign remittance unless PAN is updated and proper documentation is provided.
Form 15CA & 15CB submission ensures smooth remittance of tax-exempt income abroad.
Excess TDS/TCS can be claimed as a refund while filing an Indian tax return.
Final Thoughts
For NRIs, receiving tax-exempt LIC maturity proceeds or EPF withdrawals in India is straightforward, but remitting them abroad requires careful tax planning. To avoid unnecessary deductions, it is essential to ensure PAN details are updated, proper documentation is provided, and tax exemption proofs are shared with the bank.
If banks wrongly impose TCS or TDS, NRIs must escalate the issue to ensure compliance with Indian tax laws and RBI remittance rules. With proper planning, NRIs can maximize their tax-exempt income and remit funds abroad smoothly.
For further guidance on NRI taxation, remittances, and tax compliance, feel free to reach out to a Chartered Accountant specializing in NRI tax matters.
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