Non-resident Indians (NRIs) planning to settle down in India after retirement with foreign retirement benefits accounts often faces a lot of difficulties in claiming the benefits under Double Taxation Avoidance Agreement (DTAA). DTAA allows NRIs to claim tax credits or tax exemptions on their foreign income and avoids double taxation on the same income. Tax credit can be claimed only in the country of residence, whereas tax exemption can be claimed in any one of the 2 countries. In the case of foreign retirement benefits accounts NRIs cannot claim any foreign tax credit or tax exemption benefits because of the mismatch in the year of taxability. This is because some countries tax income from such foreign retirement benefits accounts on a receipt basis. But in India, it is chargeable to tax on an accrual basis.
Let’s say, Mr. X worked in the UK for the past 20 years. He was a non-resident of India till the financial year 2022-2023. During this period he contributed to a retirement benefits account in the UK. In FY 2023-24, he returned to India 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 2022-2023 is not taxable. However, from FY 2023-24, he is a resident of India. The accruals in retirement benefits account 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 i.e., in the year of receipt. As he has not paid any tax in the UK, he cannot claim a foreign tax credit against Indian tax liability in FY 2023-2024.
In order to overcome this issue, The Finance Act, 2021, Section 89A of the Income-tax Act, 1961, (ITA), was introduced to provide relief from taxation in income from retirement benefit accounts maintained in a notified country. According to Section 89A where a specified person has income accrued in a specified account, such income shall be taxed in such manner and in such year as may be prescribed. The Central government prescribes the manner and the year the income of a specified person from the specified account shall be taxed.
Let us first understand the below terms:
- Specified person – 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.
- Specified account – An account maintained in a notified country in respect of retirement benefits and the income from such account is not taxable on an accrual basis but is taxed by such country at the time of withdrawal or redemption.
- Notified country – Notified country means a country that may be notified by the Central Government. As per the Central Board of Direct Taxes (CBDT) US, the UK, Canada, and Northern Ireland are the notified countries for Section 89A of the ITA.
Therefore, as per Section 89A states that 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 or redemption. The amendment is effective from April 1, 2022, which will apply to the assessment year 2022-23 and subsequent Assessment Years.
Conditions to exercise the option under section 89A
- The taxpayer is required to file Form 10-EE on or before the filing of Income-tax returns.
- Once the option is exercised it shall apply to all subsequent previous years and cannot be withdrawn.
- If a specified person becomes non-resident after exercising the option, then the option exercised shall be deemed to have been never exercised. Further, Income accrued in the specified accounts shall be taxed from the previous years in which the option was exercised.
As per Rule 21 AAA, If a taxpayer has accrued any income in the foreign 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 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 relief under Section 89A is available only for the taxpayers who have opted for the new tax regime introduced by the Finance Act, 2020, and have a pending claim or return under any of the provisions mentioned in the section.
With the introduction of Sec 89A the income from the foreign retirement benefits accounts will not be taxable on an accrual basis. The foreign country will subject his income to taxation at the time of withdrawal or redemption which relieves the NRIs from the complex tax liability calculations on their income from their foreign retirement benefits accounts.
This article should not be construed as investment advice, please consult your Investment Adviser before making any sound investment decision.
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