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

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.

This is applicable for those Indian tax residents who were working overseas and have retirement corpus accumulated in the form of 401k, IRA etc, and currently are tax residents of India.

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 However, the amount withdrawn from such an account is chargeable to tax on an accrual basis in India.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

For 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) 2022-23. He contributed to a retirement benefits account in the UK while he was a non-resident of India. In FY 2023-24, he returned and became a resident of India for FY 2023-24.

As he was an NRI, income accrued to his retirement benefits account up to FY 2022-23 is not taxable. However, for FY 2023-24, he is a resident of India. The accruals like dividend, Interest, and capital gain 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 2022-23 (from January to March), he is not eligible to claim a foreign tax credit against Indian tax liability in FY 2022-23.

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, and will apply from 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 a resident in that country.

Notified countries for Section 89A of the ITA, as per the Central Board of Direct Taxes (CBDT).

1. United States of America
2. United Kingdom
3. Canada

The CBDT has also notified Rule 21AAA and Form 10-EE for NRIs to claim 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, which is taxed on withdrawal or redemption in the notified country. Such income is taxed in the nation wherein such an 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 ITR forms have amended Schedule-S (details of income from salary) and Schedule OS (Other source income), which allows taxpayers to claim relief from taxation under Section 89A in the prescribed manner. The taxpayer will now have to mention the gross income accrued in the form of salary, capital gain, Interest or dividend income and claim relief u/s 89A to defer tax of such income to the time of withdrawal.

 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 taxpayer becomes a 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.
• Where an income is not included in the total income of the specified person, the tax paid on such income outside India, if any, shall be ignored from the computation of foreign tax credit.

You can download FORM 10EE here

Steps to file Form 10EE

If your residential status is Resident and Ordinarily resident, having a retirement account in the U.S.A, U.K., or Canada. And you have income in the form of Interest, Dividend, and capital gain getting accrued in your retirement fund account and want to defer the taxation at the time of withdrawal

Step 1: Login to your income tax e-filing Portal. 

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

Step 3: Select Form 10EE from the list

Step 4: Select the assessment year from the selected form

Step 5: In ‘basic information and details of specified section’, provide the details 

And download the CSV template.

Step 6: Provide the following details in the template

1. Account Number
2. Name of Retirement Fund
3. Name of Notified Country 
4. Balance in Retirement fund in the previous year
5. The year in which the account was opened
6. How is income from a retirement account taxable in such a country
7. Year in which such account is eligible for withdrawal
8. Nature of Income - Salary, Interest, Dividend, Others
9. Any income out of this retirement already included in ITR based on the accrual concept 
10. Amount of Income from the account not taxable because of the residential status
11. Whether a return of income for the previous year is filed, Acknowledgment of such return

Step 7: You will have to upload such a Retirement account statement as an attachment before you submit Form 10EE.