Section 89A - Tax Relief on Income from Foreign Retirement Funds

Section 89A - Tax Relief on Income from Foreign Retirement Funds

Section 89A - Tax Relief on Income from Foreign Retirement Funds

By Mayashree Acharya | Updated on: March 14th, 2024 | 9 min read

The Finance Act of 2021 introduced a new Section 89A in the Income Tax Act, 1961 (ITA) to provide relief to residents who receive income from foreign retirement benefit accounts.

This provision applies to Indian tax residents who have worked overseas and have accumulated retirement funds in the form of 401k, IRA, etc., and are currently residents of India.

Certain countries tax income from overseas retirement benefit accounts when it is received. However, in India, the amount withdrawn from such accounts is subject to tax on an accrual basis. This mismatch in the timing of tax liability created challenges for taxpayers in claiming foreign tax credit and Double Tax Avoidance Agreement (DTAA) benefits. This issue particularly affected non-resident Indians (NRIs) who chose to permanently settle in India after retirement.

For example, let's consider an individual who worked for a petroleum giant in the UK for 20 years. He was a non-resident of India until the Financial Year (FY) 2022-23. During his non-resident period, he contributed to a retirement benefit account in the UK. In FY 2023-24, he returned to India and became a resident for that year.

As an NRI, the income accrued in his retirement account up to FY 2022-23 is not taxable. However, for FY 2023-24, he is a resident of India, and any dividends, interest, or capital gains from his retirement account in the UK are subject to taxation in India. Conversely, the UK taxes income from the retirement account when it is received.

Since no tax was paid in the UK from January to March of FY 2022-23, the individual is not eligible to claim a foreign tax credit against his Indian tax liability for that year.

Under Section 89A, income from foreign retirement accounts will not be taxed on an accrual basis in India. Instead, the foreign country will tax the income at the time of withdrawal. This amendment took effect on April 1, 2022, and applies from the Assessment Year (AY) 2022-23 and subsequent AYs.

According to Section 89A, the Central Government will prescribe the manner and year in which the income of a specified person from a specified account will be taxed. A specified person refers to a resident who opened a specified account in a notified country while being a non-resident in India and a resident in that country.

The Central Board of Direct Taxes (CBDT) has notified the United States of America, United Kingdom, and Canada as the notified countries for Section 89A of the ITA.

To claim relief under Section 89A for income from foreign retirement funds, NRIs need to follow Rule 21AAA and file Form 10-EE.

Rule 21AAA states that any income accrued in an overseas retirement benefit account shall be included in the taxpayer's total income for the previous year and will be taxed upon withdrawal or redemption in the notified country where the account is maintained. This excludes income that has already been taxed in previous years as per the ITA, income that was not taxable in India during the year of accrual due to non-resident or resident but not ordinarily resident status, or income covered by a DTAA.

Taxpayers must e-file Form 10-EE before filing their Income Tax Return (ITR). Once this option is exercised, it applies to all subsequent previous years and cannot be withdrawn. However, if the taxpayer becomes a non-resident after exercising the option, it will be deemed that the option was never exercised, and the accrued income from the specified account will be taxed during the relevant previous year.

The new ITR forms have updated Schedule-S (details of income from salary) and Schedule OS (other source income) to allow taxpayers to claim relief under Section 89A in the prescribed manner. Taxpayers need to mention the gross income accrued in the form of salary, capital gains, interest, or dividend income and claim relief u/s 89A to defer taxation until withdrawal.

Salient Features of the Option Under Section 89A:

1. Taxpayers must file Form No. 10-EE before filing the ITR.

2. Once the option under Section 89A is exercised, it applies to all subsequent years and cannot be withdrawn.

3. If a taxpayer becomes a non-resident after exercising the option, the option will be deemed to have never been exercised, and the accrued income in the specified accounts will be taxed from the previous years in which the option was exercised.

For those eligible to claim relief under Section 89A, the process of filing Form 10-EE involves the following steps:

Step 1: Login to the income tax e-filing portal.

Step 2: Select e-file >> Income tax forms >> File Income tax forms.

Step 3: Choose Form 10-EE from the list.

Step 4: Select the assessment year.

Step 5: Provide the necessary details in the form such as account number, name of retirement fund, name of notified country, balance in the retirement fund in the previous year, year of account opening, taxation rules in the specified country, eligible year for withdrawal, nature of income, any previously included income, and details of filed returns.

Step 6: Upload the retirement account statement as an attachment.

Step 7: Submit Form 10EE.

Section 89A - Tax Relief on Income from Foreign Retirement Funds

By Mayashree Acharya | Updated on: March 14th, 2024 | 9 min read

The Finance Act of 2021 introduced a new Section 89A in the Income Tax Act, 1961 (ITA) to provide relief to residents who receive income from foreign retirement benefit accounts.

This provision applies to Indian tax residents who have worked overseas and have accumulated retirement funds in the form of 401k, IRA, etc., and are currently residents of India.

Certain countries tax income from overseas retirement benefit accounts when it is received. However, in India, the amount withdrawn from such accounts is subject to tax on an accrual basis. This mismatch in the timing of tax liability created challenges for taxpayers in claiming foreign tax credit and Double Tax Avoidance Agreement (DTAA) benefits. This issue particularly affected non-resident Indians (NRIs) who chose to permanently settle in India after retirement.

For example, let's consider an individual who worked for a petroleum giant in the UK for 20 years. He was a non-resident of India until the Financial Year (FY) 2022-23. During his non-resident period, he contributed to a retirement benefit account in the UK. In FY 2023-24, he returned to India and became a resident for that year.

As an NRI, the income accrued in his retirement account up to FY 2022-23 is not taxable. However, for FY 2023-24, he is a resident of India, and any dividends, interest, or capital gains from his retirement account in the UK are subject to taxation in India. Conversely, the UK taxes income from the retirement account when it is received.

Since no tax was paid in the UK from January to March of FY 2022-23, the individual is not eligible to claim a foreign tax credit against his Indian tax liability for that year.

Under Section 89A, income from foreign retirement accounts will not be taxed on an accrual basis in India. Instead, the foreign country will tax the income at the time of withdrawal. This amendment took effect on April 1, 2022, and applies from the Assessment Year (AY) 2022-23 and subsequent AYs.

According to Section 89A, the Central Government will prescribe the manner and year in which the income of a specified person from a specified account will be taxed. A specified person refers to a resident who opened a specified account in a notified country while being a non-resident in India and a resident in that country.

The Central Board of Direct Taxes (CBDT) has notified the United States of America, United Kingdom, and Canada as the notified countries for Section 89A of the ITA.

To claim relief under Section 89A for income from foreign retirement funds, NRIs need to follow Rule 21AAA and file Form 10-EE.

Rule 21AAA states that any income accrued in an overseas retirement benefit account shall be included in the taxpayer's total income for the previous year and will be taxed upon withdrawal or redemption in the notified country where the account is maintained. This excludes income that has already been taxed in previous years as per the ITA, income that was not taxable in India during the year of accrual due to non-resident or resident but not ordinarily resident status, or income covered by a DTAA.

Taxpayers must e-file Form 10-EE before filing their Income Tax Return (ITR). Once this option is exercised, it applies to all subsequent previous years and cannot be withdrawn. However, if the taxpayer becomes a non-resident after exercising the option, it will be deemed that the option was never exercised, and the accrued income from the specified account will be taxed during the relevant previous year.

The new ITR forms have updated Schedule-S (details of income from salary) and Schedule OS (other source income) to allow taxpayers to claim relief under Section 89A in the prescribed manner. Taxpayers need to mention the gross income accrued in the form of salary, capital gains, interest, or dividend income and claim relief u/s 89A to defer taxation until withdrawal.

Salient Features of the Option Under Section 89A:

1. Taxpayers must file Form No. 10-EE before filing the ITR.

2. Once the option under Section 89A is exercised, it applies to all subsequent years and cannot be withdrawn.

3. If a taxpayer becomes a non-resident after exercising the option, the option will be deemed to have never been exercised, and the accrued income in the specified accounts will be taxed from the previous years in which the option was exercised.

For those eligible to claim relief under Section 89A, the process of filing Form 10-EE involves the following steps:

Step 1: Login to the income tax e-filing portal.

Step 2: Select e-file >> Income tax forms >> File Income tax forms.

Step 3: Choose Form 10-EE from the list.

Step 4: Select the assessment year.

Step 5: Provide the necessary details in the form such as account number, name of retirement fund, name of notified country, balance in the retirement fund in the previous year, year of account opening, taxation rules in the specified country, eligible year for withdrawal, nature of income, any previously included income, and details of filed returns.

Step 6: Upload the retirement account statement as an attachment.

Step 7: Submit Form 10EE.

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