Probing Hidden Wealth: Foreign Life Insurance Policies of Wealthy Indians Under Scrutiny

In this article, we will delve deeper into the investigation and the potential implications for those involved.

The tax office in India is currently investigating the involvement of wealthy Indians, particularly those in the close-knit community of diamantaires, in foreign life insurance policies worth millions of dollars. Many of these individuals have either failed to disclose that they were nominees in foreign life policies or have been found to have purchased life insurance from an offshore company without obtaining permission from the Reserve Bank of India. This investigation, which is being conducted under section 131 of the Income Tax Act, aims to uncover any potential violations of laws mandating the disclosure of foreign assets and to determine if the failure to disclose these assets was due to negligence or was a deliberate act.

Summons Served Under Income Tax Act

Summons were served under section 131 of the Income Tax Act, which empowers tax authorities to conduct enquiries, according to two sources familiar with the development. A tax official stated that the enquiries are based on specific information, and assesses have been asked to explain why they failed to disclose their involvement in these foreign assets (FA) in their I-T returns as mandated by law.

Interest in Large Overseas Life Covers Rises During Pandemic

Until now, the tax office has primarily received information on overseas bank accounts under information sharing agreements between India and other countries. However, foreign insurance companies have also begun sharing data on policy nominees with Indian addresses. The Schedule FA for reporting of offshore assets and incomes was introduced in the assessment year 2012-13, and specific requirements to report foreign insurance policies were added in the return for assessment year 2019-20.

Use of RBI’s Liberalized Remittance Scheme for Premium Payment

Even if a resident Indian is not the insured, but is named as a nominee in the policy documents, they are required to disclose the details in their tax return. A nominee of a policy holds the beneficial interest. The probe is to determine whether the failure to disclose these foreign assets was due to negligence or was deliberate and constitutes a violation of the Foreign Exchange Management Act (FEMA). Based on the investigation, cases could also be referred under the Black Money Act, provided the amount is above the permissible threshold. The threshold amount of 5 Lakh Rs is generally applicable to overseas bank accounts, and it is not yet clear how the threshold will be determined for insurance policies.

Discrepancies in Disclosures and Information Received from Different Countries

Interest in large overseas life covers, known as jumbo policies in the trade, has risen sharply since the pandemic. After obtaining permission from the RBI, individuals can buy such policies by transferring the premium amount using the RBI’s liberalized remittance scheme (LRS), which allows residents to invest up to $250,000 a year in stocks, bonds, properties and debt mutual funds.

Expansion of Financial Intelligence Pool

In October 2022, the I-T department received its third tranche of information as part of the annual automatic information exchange arrangement with various countries. For over one lakh assesses, there are discrepancies between the disclosures made in their tax returns and the information received from different countries. These will be taken up by field officers across the country. Unlike in the past, the information has come not just from foreign banks but also other institutions, thereby expanding the financial intelligence pool.