Section 89A of the Income-tax Act, 1961 (ITA)

The Finance Act, 2021, inserted a new Section 89A in the Income-tax Act, 1961, (ITA), to provide relief to residents who have income from foreign retirement benefits accounts.

A few countries tax income from such overseas retirement benefits accounts on a receipt basis. However, the amount withdrawn from such an account is chargeable to tax in India on an accrual basis. The taxpayers would face difficulties claiming the foreign tax credit because of the mismatch in the year of taxability. Similarly, claiming the double tax avoidance agreement (DTAA) benefits also was a challenge in such a situation. Non-resident Indians (NRIs) who chose to settle in India after retirement permanently would usually face this issue.

To cite an example, an individual worked with a petroleum giant in the UK for 20 years. He was a non-resident of India till the financial year (FY) 2020-21. He contributed to a retirement benefits account in the UK while he was a non-resident of India. In FY 2021-22, he returned and became a resident of India for FY 2021-22.

As he was an NRI to India, income accrued to his retirement benefits account up to FY 2020-21 is not taxable. However, for FY 2021-22, he is a resident of India. The accruals in retirement benefits accounts in the UK are taxable in India. On the other hand, income from the retirement benefits account is taxable in the UK on a receipt basis (year of receipt).

Considering that no tax was paid in the UK in FY 2021-22 (from January to March), he is not eligible to claim a foreign tax credit against Indian tax liability in FY 2021-22.

According to Section 89A, the income from the accounts opened in a foreign nation will not be taxable on an accrual basis. The foreign country will subject his income to taxation at the time of withdrawal. The amendment is effective from April 1, 2022, which will apply to the assessment year (AY) 2022-23 and subsequent AYs.

As per Section 89A, the Central government prescribes the manner and the year the income of a specified person from the specified account shall be taxed. A specified person means a resident who opened a specified account in a notified country while being a non-resident in India and resident in that country.

The US, the UK, Canada, and Northern Ireland are the notified countries for Section 89A of the ITA, as per the Central Board of Direct Taxes (CBDT).

The CBDT has also notified Rule 21AAA and Form 10-EE for NRIs to claim the relief under Section 89A regarding the income from foreign retirement funds.

Rule 21AAA and e-Filing of Form No. 10-EE

Rule 21AAA specifies that if a taxpayer has accrued any income in the overseas retirement benefits account, then the same shall be included in his/her total income of the previous year, in which it is taxed on withdrawal or redemption, in the notified country. Such income is taxed in the nation wherein such account is maintained.

The income to be taxed shall exclude the income:

• that has been already taxed in the earlier previous years as per the ITA,
• which was not taxable in India during the year of accrual – due to the taxpayer being a non-resident (NR) or resident, but not ordinarily resident (RNOR) during that previous year – or due to applicability of DTAA (if any)

The taxpayer is required to e-file Form No. 10-EE on or before furnishing the income-tax return (ITR). Once this option is exercised, it will apply to all subsequent previous years and cannot be withdrawn.

However, if the taxpayer has become a non-resident after exercising the option, then it shall be deemed that he/she has never exercised the option. Subsequently, the income accrued in the specified account from the previous year in which such an option was exercised shall be taxable during the relevant previous year.

The new income-tax return (ITR) forms have amended Schedule-S (details of income from salary), which allows taxpayers to claim relief from taxation under Section 89A in the prescribed manner. The taxpayer will now have to mention the relief amount claimed to be reduced from the gross total salary. A similar disclosure has to be made in the Schedule-OS income from other sources) in respect of the family pension.

Salient Features of the Option Under Section 89A

• The taxpayer is required to file Form No. 10-EE before the filing of the ITR
• The option under Section 89A, once exercised, shall apply to all subsequent years and cannot be subsequently withdrawn
• If a specified person becomes non-resident after exercising the option, then the option exercised shall be deemed to have never been exercised. Also, income accrued in the specified accounts shall be taxed from the previous years in which the option was exercised
• The Principal Director-General of Income-tax (Systems) or Director-General of Income-tax (Systems), as the case may be, shall specify the procedures, formats, and standards to ensure the secure capture and transmission of data. The said government official shall be responsible for evolving and implementing appropriate security, archival, and retrieval policies with respect to Form No. 10-EE

Frequently Asked Questions (FAQs)

As an NRI, can I completely avoid taxes under the Double Taxation Avoidance Agreement (DTAA)?

No, the DTAA does not mean that you can avoid taxes completely, but it does mean that you can avoid paying higher taxes in both countries. 

Can I initiate the process of filing the return of income now?

While the CBDT has made available all the income-tax return filing forms for the AY 2022-23, the income tax filing process will be initiated in June effectively when all tax deductions have filed the TDS returns. It is only after this process that the Form 26AS of taxpayers can reflect their right position of income as well as tax credits.

Do I need to furnish the country code and ZIP code in the new ITR form for a property purchased in a foreign country?

Yes, the new ITR forms now require the country code and ZIP code as well if the property is situated outside India.

File your returns in just 3 minutes

100% pre-fill. No manual data entry

File Now