A Comprehensive Guide to the New Tax Exemption for IFSC Issued Life Insurance Policies

Life insurance has always been a critical part of financial planning for both peace of mind and wealth protection. It not only provides security to loved ones but often offers tax benefits on maturity proceeds. Recently, the Indian government introduced a noteworthy change in the country’s tax landscape—from 1 April 2025, maturity amounts of life insurance policies issued by an IFSC (International Financial Services Centre) insurance intermediary office will be exempt from tax under Section 10(10D) of the Income Tax Act, 1961.

This blog explores what that means, who can benefit, and why many resident Indians might not be able to jump on the bandwagon due to certain regulatory restrictions. Whether you are a common taxpayer looking for simple explanations or an experienced professional wanting more depth, this guide aims to offer clear and balanced insights.

What Is Changing Under Section 10(10D)?

Section 10(10D) of the Income Tax Act, 1961 grants a tax exemption on the maturity proceeds of life insurance policies. Usually, this exemption comes with a few conditions—particularly relating to the total amount of premium paid each year. In recent times, high-value policies (for example, those with annual premiums above INR 2.5 lakh for certain Unit-Linked Insurance Plans or above INR 5 lakh for some traditional plans) could lose out on complete exemptions.

However, from 1 April 2025, if a life insurance policy is issued by an IFSC insurance intermediary office, its maturity proceeds are proposed to be fully exempt from tax. The major highlight is that this exemption applies irrespective of how high the policy premiums might be.

Decoding IFSC and GIFT City

An International Financial Services Centre (IFSC) is a special zone set up to conduct financial services transactions across borders, often providing tax and regulatory benefits to encourage international business. In India, GIFT City (Gujarat International Finance Tec-City) is the flagship IFSC location. It hosts various financial institutions, including insurance intermediaries, banks, and capital market entities operating under streamlined regulations and attractive tax incentives.

Why is GIFT City (IFSC) important here?

• Global Offerings: IFSC offices can sell insurance products in foreign currencies.
• Regulatory Simplifications: They operate under a special framework overseen by authorities like the International Financial Services Centres Authority (IFSCA).
• Tax Perks: Policies issued in these centers often enjoy preferential tax treatments—now extended even further for life insurance policyholders through the 2025 amendment.

Why Resident Indians May Not Always Benefit

At first glance, you might think: Let me buy an IFSC-based policy to get full tax exemption! But it is not that straightforward. FEMA (Foreign Exchange Management Act) Insurance Regulations and the Liberalized Remittance Scheme (LRS) Master Directions generally restrict resident Indians from purchasing policies from offshore or foreign jurisdictions, including IFSC-issued insurance, unless they have specific permissions from the Reserve Bank of India (RBI).

So, while the new law promises a significant tax break, most resident Indians may not automatically qualify to purchase such policies because of these foreign exchange rules. Exceptions exist, but they are uncommon and typically require explicit approvals.

Who Stands to Benefit the Most?

This new amendment really shines for Non-Resident Indians (NRIs) and other non-resident persons who have the freedom to buy life insurance policies in convertible foreign currencies. By purchasing a policy from an IFSC insurance intermediary, an NRI can:

• Pay premiums in foreign currency without violating FEMA or LRS norms.
• Enjoy full tax exemption on maturity proceeds, regardless of premium amount.
• Avoid caps like the INR 2.5 lakh or INR 5 lakh premium limits that often apply to resident-centric policies in India.
• For NRIs, this can be a powerful tool for estate planning, legacy building, or simply tax-efficient investing.

Key Points to Remember for Non-Resident Buyers

If you are an NRI or another category of non-resident considering IFSC-based life insurance, here are a few essential pointers:

Regulatory Compliance:

• Make sure the insurer or intermediary is officially approved to operate within an IFSC.
• Comply with all relevant FEMA guidelines regarding offshore insurance purchases.

Foreign Currency Denomination:

• These policies typically require premium payments in convertible foreign currency (e.g., USD, GBP, etc.).
• This aligns well if your income is earned abroad.

Due Diligence:

• Carefully compare features, costs, surrender values, and benefits of various policy options.
• Understand both the tax implications in India and in your country of residence to avoid surprises.

Check the Fine Print:

• Look for any clauses around early withdrawals, riders, or additional charges.
• Keep track of any changes in RBI Master Directions or IFSCA guidelines that might impact your policy ownership.

Government’s Vision: Promoting IFSCs

The Indian government has been proactive in making GIFT City a globally competitive hub for financial services. Recent measures—like tax exemptions and relaxed regulations - are meant to attract foreign investment and international business to operate in India’s IFSCs. By making certain insurance policies fully exempt from tax, the government hopes to:

• Encourage offshore financial transactions to route through Indian territory.
• Strengthen India’s reputation in insurance and reinsurance markets.
• Create more jobs and business opportunities in specialized financial services.

Summing It All Up

In a nutshell, the new policy under Section 10(10D) starting 1 April 2025 offers a major tax advantage for life insurance policies issued through IFSC insurance intermediary offices. While it looks attractive for any high-value policyholder, the FEMA and LRS restrictions largely prevent regular resident Indians from taking advantage—unless they secure specific approvals. Thus, NRIs and other non-resident individuals are best positioned to benefit from this new exemption.

Before rushing into any decisions, evaluate your overall financial goals and consult with experts, such as chartered accountants or registered financial advisors. This ensures you remain aligned with global tax rules and avoid regulatory pitfalls. When planned carefully, an IFSC-issued policy can be a valuable part of a non-resident’s financial strategy, offering both robust life coverage and a powerful tax advantage.