Taxing and reporting of Foreign Life insurance ULIP policy of tax return

@Nkm171964 , Namaste ji.

 What I get from your post is that you have invested  in an ULIP in India ( and under Indian laws ).  As I understand these have two components -- one is  a life insurance and another is  "investement " in the market -- these work together .  There is a black out period  and thereafter there is also a loan and/or partial withdrawal facility, generally.  I am not familiar with the Bajaj version -- I know about the HDFC  and a few others including some US ones in the market in India.

  A.      While  the value of the  ULIP policy is growing ( and assuming that you do let it run to maturity ), absent any distributions  there is NO constructive receipt/ distribution and you may be able to not have to declare the gains ( i.e. no mark-to-market ).  I say "may be " because  it is possible that IRS may claim that this is a PFIC account requiring you to recognize  un-realized gains /losses i.e. mark-to-market..  This would become a bit complicated because you would have to  recognize gain based on market value of the investment component and your contributions till that point . This would also mean that your basis  in the investment would change  and that when you finally take distribution  there may be no more taxation.  This would put you in a bind because if India taxes based on final value  ( I thought  these are taxed advantaged  investments under section 10 and 30 of the IITC  ??  ) because foreign tax credit does not work very well when  there is large Foreign tax but very low US tax on the same income  ( US-India Tax Treaty -- double taxation clause )

B.   Your questions:

1- I paid one year premium in April. So, in the coming 2024 tax return next year, what do I need to declare on my return?  US tax would consider this as a personal expense -- so no recognition.  ( absent a mark-to-market recognition -- see discussion  above )   I need to investigate this more 

2- Is premium deductible and what proof do I need in order to claim deduction?    None , even if this is not PFIC.  This is not a tax advantaged  investment / savings account like the 401s.

3- For tax return 2024, what information would I need to collect from the Insurance company for reporting purposes?   No matter whether PFIC or not , you would still need the amounts paid in ( your basis for the growth/investment component) and the total value of the investment at the end of the Calendar year.

4- The policy is also an investment, and the total policy amount has so far increased by 10%. Even though the policy will mature in 10 years, do I need to report this increase of 10% in the account value on my 2024 tax return and pay taxes? I will not receive any money until the policy matures.   See earlier comments.

5- For a question for long term- When policy matures, Indian government may collect taxes from me on any investment profits in Policy amount. Do I have to also pay taxes in US then? I have heard there is a treaty between India & US to avoid double taxation for a situation like this. Any help and clarification would be really appreciated.  See my general comments  above in A.

6- If I don't have to pay any tax on investment profits until policy matures in 10 years, but what information should I still collect NOW in 2024 that I might need to report on my 2024 tax return in US?   If  the contract allows no recognition/distribution till maturity  ( not  generally true for PFICs ), then you will need all the  records to show  pay-ins  for the investment component and the valuation over the years.   As I said I am not more inclined to believe that this will be treated as a  PFIC and therefore  need to  check on this a bit more.

BTW ---  if you have not signed the contract yet ( just getting ready to do so ) , please consider discussing this  with an tax attorney  ( there are many in Florida and NJ ) familiar with Indian Tax code  and  PFICs etc.   Generally  investments in PFIC  is discouraged  because of the mark-to-market requirements.

Is there more I can do for you ?

Namaste Nalin ji

pk

Hello!

I am in the same boat. I was unaware of PFIC and although I have included the ULIP-linked Policy in FBAR as an account for several years, I was not filing Form 8621 myself. Neither TurboTax nor the other software I have been using recently (HRB) prompted me during their tax prep questionnaire.

I just checked the complete list of forms available in their software (I used the download version) for the last couple of years, and Form 8621 is not part of it at all. So it looks like that will need to be done on your own OR you have to get a tax preparer to work with you.

I am also checking with a local CPA whose initial response was that unless it is realized (i.e., you have sold or surrendered the policy and the proceeds have been credited back to your bank account), Form 8621 does not need to be filed. They are going to double-check and come back to me on that.