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US based NRI Taxation on endowment plan taken in India

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askshaffi

2 Points Joined July 2024

How is the premium payment of ₹5,00,000 for an endowment plan in India, made through an NRO account by a US-based NRI, treated for tax purposes in the US?

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Rama chary Rachakonda

Master in Accounts & high court Advocate

8979 Points Joined December 2011

The premium payment of ₹5,00,000 for an endowment plan in India, made through an NRO account by a US-based NRI, would be treated as follows for tax purposes in the US:

Taxation in the US 1. *Foreign Earned Income Exclusion*: As a US-based NRI, you might be eligible for the Foreign Earned Income Exclusion (FEIE).

However, premium payments for an endowment plan are not considered "earned income" and thus do not qualify for FEIE.

2. *Foreign Tax Credit*: You might be able to claim a foreign tax credit in the US for taxes paid in India on the investment income earned from the endowment plan.

However, this would not apply to the premium payments themselves.

3. *Investment Income*: The investment income earned from the endowment plan would be subject to taxation in the US.

You would need to report this income on your US tax return (Form 1040) and pay taxes accordingly.

Reporting Requirements

1. *FBAR (FinCEN Form 114)*: As a US-based NRI, you are required to file the FBAR if the aggregate value of your foreign financial accounts exceeds $10,000 at any time during the calendar year.

Your NRO account would likely be reportable on the FBAR.

2. *Form 8938 (Statement of Specified Foreign Financial Assets)*: You might also need to file Form 8938 with your US tax return, reporting your interest in the NRO account and the endowment plan. Important Considerations

1. *US-India Tax Treaty*: The US-India tax treaty can help reduce taxation on investment income earned in India.

However, the treaty does not exempt premium payments for an endowment plan from US taxation.

2. *Tax Implications in India*: It is essential to consider the tax implications in India for the endowment plan, including any taxes deducted at source (TDS) on the investment income earned.

To ensure compliance with US tax laws and regulations, it is highly recommended that you consult with a qualified US tax professional or financial advisor who has experience in handling international tax matters, particularly those related to India and the US.

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