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 wants to come back after sometime. 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 that what would be 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 India Income Tax Act. However, recently, Govt 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).

Section 89A and Rule 21AAA of Income Tax Act In India – Needed Relief To Returned NRIs

Section 89A has been inserted in 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 89A (read with rule 21AAA) provides tax deferment relief to taxpayer in relation to Retirement Benefit Account which was opened in notified country (i.e. USA, UK, Canada presently) at the time when he was employed there. Since, laws of these countries do not tax Retirement Benefit A/c income on accrual basis but they either don’t tax it or tax it tax at the time of Withdrawal/Redemption. Section 89A along with Rule 21AAA inserted in 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 taxpayer, the one major one is the taxpayer is able to set off taxes paid in 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 taxpayer.

Sub Rule 2 of Rule 21AAA – Deductions Available – Simplify Taxation For NRIs

If option under rule 21AAA (1) is chosen and form 10EE 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 foreign country who 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 upto which foreign country does not tax in many case, taxpayer can choose to optimise his/her taxation in best efficient way by applying limits of those countries and by seeking benefit of deductions in India.

Sub Rule 4 of Rule 21AAA – If Specified Person Becomes Non-Resident Again

If specified person, who has opted for Rule 21AAA benefits in India, leaves India in later years and becomes Non-Resident In India again, then the income of specified account for the period which has not be taxed in India (due to rule 21AAA) 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 exposes the taxpayer to double taxation as he may have to pay taxes in notified country also in the year of withdrawal.

Form 10EE – To Defer Taxation of Foreign Retirement Benefit Account

As per rule 21AAA of India Income Tax Rules, if a taxpayer opts this rule and decided that his income of Foreign Retirement A/c be taxable in the year of withdrawal or redemption then he/she will have to file Form 10EE with the Income Tax Department on or before the due date of filing of his/her ITR. This form 10EE has to be filed electronically on the income tax ITR filing portal.

Form 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 form 10EE 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 kind of Retirement Benefit Accounts. Here are details of Retirement Benefit Accounts generally maintained in USA by employees as well self-employed people working there

Individual Retirement Account (IRA): It is opened by employee as well 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 401K account can be Roth A/c, which is post tax A/c where taxability is done at the time of salary payment by 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 USA, IRA 401K can be withdrawn before 59½ years of age with 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

Indian has signed DTAAs with various countries. India has signed DTAAs with USA, UK and Canada also who are notified countries under section 89A of 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 Govt of these countries to those who worked with these governments as employee. However, in relation to private company employees, taxation rights are given to country also where the payee is resident. However, in case of 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 benefit DTAA provisions can also be explored for tax treatment of these benefits in India.

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

Question – What is Form 10EE, and what is the due date of filing Form 10EE to defer taxation of Foreign Retirement Funds Income to the year of withdrawal?

Ans – An Individual, who is Resident in India and an Ordinary Resident, can opt to defer the taxation of Foreign Retirement Accounts under the provisions of section 89A read with rule 21AAA. On opting this provision, taxation of Foreign Retirement Fund will be taxed in India in the year when he/she withdraws the funds from that account. Hence, taxability of annual accrual of income can be deferred to the year of withdrawal i.e. in line with the foreign country laws. In this regard, the taxpayer has to file a Form 10EE duly filled with all the required information about the foreign retirement fund account. This form is required to be submitted before the due date of ITR filing date applicable to respective taxpayer.

Question – If Returning NRI/OCI choose to opt section 89A provisions (read with Rule 21AAA) and file form 10EE, does he still need to disclose Foreign Retirement Fund Asset details in ITR form in India?

Ans – A returning NRIs/OCIs, once he/she is categorized as Ordinary Resident in India, there is a requirement of declaration of all foreign assets in FA schedule in ITR form. Black Money Act 2015 specifically provides for a penalty of Rs 10 Lakh in case of non-disclosure or mis reporting of foreign assets in India ITR by RORs. Form 10EE (read with section 89A & Rule 21AAA) is a tax relief provision and it align the taxation in India with tax provisions of notified countries. However, section 89A/Rule 21AAA/Form 10EE does not provide any immunity from foreign assets disclosure which is a mandatory requirement of ITR form as well Black Money Act 2015.

Question – Hi. I am a Non-Resident and working in Singapore since last 10-12 years. Now I am planning to return back to India and settle in Bangalore for my retirement life. What will be the tax treatment in India for my Retirement Benefits I receive from my Singapore Retirement Schemes/Accounts?

Ans – Singapore is not a notified country as per section 89A of Income Tax Act in India. Hence, benefits of deferment of taxation (of Sec 89A/Rule 21AAA) are not available for Singapore Retirement Benefit Schemes/Accounts. Once your status in India is Ordinary Resident, your income from Singapore (in relation to Retirement Schemes and other sources) is taxable in India as per the normal provisions of Income Tax Act in India. This taxability will be on accrual basis.

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

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