An Indian ULIP isn’t automatically a PFIC (passive foreign investment company) for NRIs who are US tax residents, but many ULIPs end up being taxed harshly under US rules. It depends first on whether the policy qualifies as life insurance under US tax law. If it doesn’t, its growth can be taxed every year, and the funds inside it may be treated as PFICs. Either way, the policy usually has to be reported to the IRS.
The Test That Decides It
US tax law first asks whether a ULIP qualifies as life insurance under Section 7702 of the Internal Revenue Code. This section sets strict limits on how much cash value a policy can build compared with its cover. If the policy qualifies, its growth is generally tax-deferred, and PFIC rules usually don’t apply to the funds inside it.
The difficulty is that foreign policies are rarely designed around those US limits. A ULIP for NRIs in the USA from an Indian insurer is still an Indian contract built for Indian rules, so it may not meet them.
Who These Rules Apply To
The Section 7702 test, PFIC rules and US reporting apply to US persons: citizens, green card holders and anyone who meets the substantial presence test. You meet that test if you’re in the US for at least 31 days this year and 183 days over three years, counting all of this year’s days, a third of last year’s days and a sixth of the days from the year before. Most H-1B and L-1 workers meet it, whatever their status under Indian law.
It doesn’t matter when you bought the policy. A ULIP started before you moved falls under US rules from the day you became a US person, and so do the accounts that fund it. If you’re unsure what NRE and NRO accounts are, they’re the rupee accounts Indian banks offer to non-residents. For US tax purposes, NRE interest is still income even though India doesn’t tax it, and both accounts count toward the FBAR threshold along with your ULIP.
If the ULIP Fails Section 7702
Under Section 7702(g), a policy that fails the test has its “income on the contract” taxed every year as ordinary income, even if you withdraw nothing. That income is broadly the increase in surrender value, plus the cost of your life cover, minus the premiums paid that year. In an illustrative case where this comes to ₹1.5 lakh, or about USD 1,580 at ₹95 to the dollar, a 24% federal tax bracket means roughly USD 380 in tax, before any state tax. Only the part of the death benefit above the surrender value stays tax-free.
The PFIC risk comes on top of this. Some advisors treat the funds inside a failed policy as PFICs. Each fund is then reported on Form 8621 and may be taxed under the excess distribution rules, which apply the highest tax rate plus an interest charge unless an election was made in time. Practitioners don’t all agree on how these rules apply to ULIP funds.
Reporting Needed Even If the Policy Qualifies
A foreign policy with cash value must be reported on the FBAR once your foreign accounts together exceed USD 10,000 at any point in the year. That total includes your NRE and NRO balances, so you may cross the threshold sooner than you expect.
The policy is also a specified foreign financial asset for Form 8938. For a single filer living in the US, this form is required above USD 50,000 at year-end or USD 75,000 at any time during the year. Filing the FBAR doesn’t replace it.
The 1% Excise Tax on Premiums
Premiums paid to a foreign life insurer attract a 1% US federal excise tax under Section 4371, reported on Form 720. If the insurer doesn’t collect it, you may be liable as the policyholder. On ₹2 lakh of premium a year, that’s about ₹2,000, or roughly USD 21.
The India-US tax treaty is one of the treaties that can exempt these premiums, but only if the insurer has a closing agreement with the IRS for that period. The IRS publishes a list of insurers with such agreements, so check whether yours is on it before assuming you’re exempt.
India’s Own Rules Still Apply
For the tax year starting April 1, 2026, ULIP maturity proceeds can be tax-free in India under Section 11 read with Schedule II of the Income-tax Act, 2025 (formerly Section 10(10D)). To qualify, each year’s premium must stay within 10% of the sum assured, and total annual premiums across all ULIPs issued on or after February 1, 2021, must stay within ₹2.5 lakh.
This exemption doesn’t reduce your US tax. The India-US treaty gives credit only for Indian tax you’ve actually paid, so if India doesn’t tax the payout, there’s no credit to use against your US tax.
What to Do Now
If you plan to stay in the US long term, new ULIP premiums rarely make sense once you count the reporting and the possible yearly tax. For an existing policy, ask a cross-border CPA or actuary to run the Section 7702 test using the policy wording, the benefit illustration and the yearly surrender values from your insurer statements. Check your lock-in date too, since withdrawals generally aren’t allowed in the first five years. If you’re returning to India within a few years, compare the remaining compliance cost with what the policy will be worth by then.
If you’ve told your tax preparer that you hold no foreign investments, revisit that answer. Have the policy tested before you file this year’s return, because missed foreign reporting is much harder to fix later.
