Foreign Retirement Fund Accounts – Taxability in India – Returned NRIs, OCIs

Background – Returned NRIs, OCIs Maintaining Retirement Benefit A/c Abroad

Many Indians go abroad for work. Many of them want to come back after some time. During their work abroad, they contribute to various Retirement Funds as per the prevailing employment retirement plans in that country. Once they quit their employment abroad and plan to come back to India, one major question confronts their mind: what would be the taxability of the annual accretion/withdrawal/redemption from these Retirement Funds while they become Resident in India? This question is more significant when the taxation in these countries is altogether different from taxation in India. One major reason for different taxation is that India does not recognise these Retirement Funds; hence, there are no specific tax relief provisions in the Income Tax Act. However, recently, the Government of India has recognised this issue and provided some relief in the form of section 89A & Rule 21AAA wef 2022-23, which is applicable for notified countries (presently USA, UK and Canada). Under the new income tax law i.e. Income Tax Act 2025 and Income Tax Rules 2026 new section, rule and form are section 158 (earlier 89A), Rule 74 (earlier 21AAA) and form 40 (earlier 10EE).

Section 158 (earlier 89A) and Rule 74 (earlier 21AAA) of Income Tax Act In India – Needed Relief for Relocating NRIs

Section 158 (earlier 89A) has been inserted in the Income Tax Act, 1961 wef AY 2022-23. It is a relief section, which provides that if tax payer opts then income earned from Specified Account {Specified Account is account maintained in a notified country i.e. presently USA, UK and Canada, by a Specified Person (India Tax Resident, opened Specified A/c in notified country when he was Resident in that country and Non-resident in India) in respect of his retirement benefits} shall be taxed in the year of withdrawal/redemption of the Specified Account (i.e. Retirement Fund A/c) when it is taxable in the notified country as per their laws at the time of withdrawal/redemption of this fund.

In other words, section 158 (earlier 89A) read with rule 74 (earlier 21AAA) provides tax deferment relief to the taxpayer in relation to Retirement Benefit Account which was opened in the notified country (i.e., USA, UK, Canada presently) at the time when he was employed there. Since the laws of these countries do not tax Retirement Benefit A/c income on an accrual basis, but either don’t tax it or tax it at the time of Withdrawal/Redemption. These provisions inserted in the Indian Tax system wef AY 2022-23, with the intention to tax income of these funds at the time of Withdrawal/Redemption, i.e., to keep taxation in line with notified country laws. It will provide multiple benefits to the taxpayer; the one major one is that the taxpayer is able to set off taxes paid in the notified country with the tax payable in India. It will also ease the tax burden on the taxpayer from the year of notional earning to actual receipt, hence, ease the cash outflow of the taxpayer.

Sub Rule 2 of Rule 74 (earlier 21AAA) – Deductions Available – Simplify Taxation For NRIs

If option under rule 74 (1) is chosen and form 40 is filed, then in the year of withdrawal/redemption, following amounts shall be eligible for deduction while calculating taxable income in India

• Foreign Retirement Benefit A/c Income on which tax is already paid in India in earlier years
• Income which was not taxable in India, either due to taxpayer Non Resident/Not Ordinary residential status or Due to applicability of DTAA

Hence, unlike a foreign country that may be taxing on complete withdrawal amount, India will provide relief in the form of deductions as mentioned above. And since there is a withdrawal limit up to which a foreign country does not tax in many cases, the taxpayer can choose to optimise his/her taxation in the most efficient way by applying limits of those countries and by seeking benefit of deductions in India.

Sub Rule 4 of Rule 74 (earlier 21AAA) – If Specified Person Becomes Non-Resident Again

If specified person, who has opted for Rule 74 (earlier 21AAA) benefits in India, leaves India in later years and becomes Non-Resident In India again, then the income of the specified account for the period which has not be taxed in India (due to rule 74) shall be taxable in India during the previous year immediately preceding the relevant previous year and tax shall be paid on that in that year.

Hence, here the caveat is that the taxpayer should still keep track of the accruals (dividends, interest and capital gains) as he may need to pay taxes on them if he were to become a non-resident again. This unfortunately may expose the taxpayer to double taxation as he may have to pay taxes in the notified country also in the year of withdrawal.

Form 40 (earlier 10EE) – To Defer Taxation of Foreign Retirement Benefit Account

As per rule 74 of the India Income Tax Rules 2026, if a taxpayer opts for this rule and decides that his income from a Foreign Retirement  A/c be taxable in the year of withdrawal or redemption, then he/she will have to file Form 40 (earlier 10EE) with the Income Tax Department on or before the due date of filing of his/her ITR. This Form has to be filed electronically on the income tax ITR filing portal.

Form 40 (earlier 10EE) – Information To Be Filed In Relation To Foreign Retirement A/c

Taxpayer needs to provide various information in relation to his/her Foreign Retirement A/c. Information required in this Form are as under

• Foreign Retirement Fund Name, Account Name and Country Name
• Year of Opening this A/c
• Eligible Year when income from this specified A/c can be withdrawn
• Foreign Retirement A/c balance as on last date of previous year
• Nature of Income
• Taxation Methodology in Notified Country
• Details of Income, if any, which is already offered for taxation in India
• Details of Income, which was not taxable in India, due to Non Resident/NOR status

Retirement Accounts In Notified Countries – Maintained By NRIs, OCIs

NRIs, PIOs, OCIs working in notified countries are maintaining various kinds of Retirement Benefit Accounts. Here are details of Retirement Benefit Accounts generally maintained in the USA by employees as well as self-employed people working there

• Individual Retirement Account (IRA): It is opened by employees as well as self-employed people themselves.

• Employer Sponsored: It is opened by Employers for their employees. The popular account opened for private sector employees is 401K. It can be Traditional, i.e., pre-tax A/c, where proceeds are taxable at the time of withdrawal/redemption. Or a 401 (k) account can be a Roth A/c, which is a post-tax A/c where taxability is done at the time of salary payment by the employer, and hence withdrawals /redemption of these accounts are not taxable in the hands of employees (i.e., returned NRIs in reference to this article).

In the USA, IRA 401K can be withdrawn before 59½ years of age with a 10% penalty. It can also be withdrawn penalty-free for medical expenses/purchasing a home or for any reason using the rule 72(t)  which requires a series of substantially equal periodic payments. The taxpayer can also delay any withdrawal until age 73 when the required minimum distributions kick in.

Disclosure of Retirement Accounts In ITR Form – Black Money Act Provisions

Those, who are maintaining Foreign Retirement Funds Account (in any form), have to report these accounts in the ITR form if their Residential status is Ordinary Resident in India. Under the Black Money Act provisions, there is a penalty of Rs 10 Lakh for non-disclosure/mis reporting of foreign assets in ITR.

Double Tax Avoidance Agreement (DTAA) Provisions Vs Foreign Retirement Benefits

India has signed DTAAs with various countries. India has signed DTAAs with the USA, UK, and Canada, which are notified countries under section 158 (earlier law section 89A) of the Income Tax Act. Generally, there are beneficial provisions available in these DTAAs in relation to pension income, where taxation rights are with these countries if these countries are paying pension and that pension is being paid by the Government of these countries to those who worked with these governments as employees. However, in relation to private company employees, taxation rights are given to the country also where the payee is resident. However, in case of a few countries (e.g., Canada), there are some additional benefits wrt pension income for private company employees also. Hence, according to the nature of retirement benefits, DTAA provisions can also be explored for tax treatment of these benefits in India.

NRI Tax, RBI Laws Services – Various Topics – By NRI Tax Service Team

• NRI Tax Litigation Services – Notice Sec 148, 148A, 131(1A), Appeal Services In Delhi, Mumbai, Bangalore, Other Cities
• Important Points for Filing Latest ITR in India
• Repatriation of Money – NRO Account – NRI 15CA 15CB Services
• Lower TDS Certificate Services For NRIs, OCIs – In Delhi, Bangalore, Kolkata, Other Cities

Frequently Asked Questions (FAQs) on Foreign Retirement Funds Taxation And Disclosures Requirement In India – Returning NRIs/Foreign Citizens