NRI’s Dubai life insurance payout triggered ₹40 lakh tax dispute, why ITAT ruled in his favour

An Indian resident who bought a life insurance policy while working in Dubai has won a tax dispute after the Income Tax Appellate Tribunal ruled that the maturity proceeds could not be treated as undisclosed foreign income under the Black Money Act.

The Delhi Bench of the ITAT, in the case of Sarvesh Naidu for Assessment Year 2017-18, deleted an addition of ₹40.03 lakh made by the tax department under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

The tribunal also held that the exemption under Section 10(10D) of the Income-tax Act could not be denied merely because the life insurance policy had been issued by a foreign insurer.

Why the tax department flagged the Dubai insurance payout

Naidu received $52,896.76, equivalent to about ₹35.25 lakh, when his foreign life insurance policy matured in 2016. He had not offered the maturity proceeds to tax in his return for AY 2017-18, claiming exemption under Section 10(10D) of the Income-tax Act.

The tax department took a different view and treated the amount as an undisclosed foreign asset under the Black Money Act. The Assessing Officer also questioned the applicability of the Section 10(10D) exemption because the policy had been issued by a foreign insurer.

The resulting addition was ₹40.03 lakh.

The dispute eventually reached the Delhi ITAT, which examined both the tax treatment of the insurance proceeds and whether the policy could be considered an undisclosed foreign asset.

NRI had bought the policy before returning to India

Naidu worked in Dubai from April 2001 and was a non-resident for Indian tax purposes until July 2007. While he was working there, he and his wife jointly purchased a life insurance policy from Scottish Life International, an insurer based in the Isle of Man that later became RL360 Insurance Company Ltd.

The policy was purchased on 4 March 2005, when Naidu was still a non-resident. The annual premium was $8,898. The initial premiums were paid from his salary earned in Dubai.

After returning to India in July 2007, Naidu continued paying the premiums from his Indian salary. The tribunal noted that the subsequent payments were made through his Indian bank accounts, including Citi Bank and later HDFC Bank.

Naidu did not maintain an overseas bank account after returning to India.

The policy eventually matured and the proceeds were credited to his HDFC Bank account on 24 June 2016.

The key issue before the tribunal was whether an asset purchased while the taxpayer was a non-resident, using income that was not taxable in India, could subsequently be treated as an undisclosed foreign asset.

ITAT explains why the foreign policy was not undisclosed

The ITAT found that the source of the premium payments had been explained.

The initial premiums were paid from Naidu's Dubai salary during the period when he was a non-resident. That income was not chargeable to tax in India. The premiums paid after his return were funded from his taxable Indian salary.

The tribunal also referred to CBDT Circular No. 13/2015 dated 6 July 2015. The circular clarifies that where a person acquired a foreign asset while being a non-resident using income that was not chargeable to tax in India, the asset would not be treated as an undisclosed foreign asset under the Black Money Act.

The tribunal therefore held that the foreign insurance policy could not be treated as an undisclosed foreign asset merely because it was held abroad.

The ITAT also rejected the tax department's interpretation of Section 10(10D). The section does not stipulate that a life insurance policy must be issued by an Indian insurer for the exemption to apply. The tribunal held that a definition contained elsewhere in the Income-tax Act could not simply be imported into Section 10(10D) when the provision itself does not make such a reference.

The tribunal consequently allowed Naidu's appeal and deleted the ₹40.03 lakh addition.

The case is relevant to NRIs and returning NRIs who hold insurance policies or other foreign assets acquired while they were living and working overseas. The ruling indicates that an overseas asset is not automatically an undisclosed foreign asset under the Black Money Act if its source can be explained and the funds used to acquire it were not taxable in India at the time.