Introductory – Returning NRIs, Foreign Citizens Dilemma About Tax Provisions In Relation To Their Foreign Retirement Benefit Accounts

Many Indians, who after working for a number of years, wish to come back to India either to take a break or settle in India. For these Returning NRIs, PIOs, one question which keep tickling in their mind is that what will be tax implications in relation to their Retirement Funds, which they are maintaining abroad. During their work life cycle, as per the prevailing schemes of respective foreign country, these NRIs contribute (employer as well employee share) towards various retirement and social security benefit schemes. According to the schemes, they are eligible to withdraw funds from these schemes either on attaining a specific age or on happening of some incidence. In many cases, where a person has worked for a longer period, they are maintaining a significant amount of corpus in these funds. Hence, taxation of income from these funds is a big question mark in their mind while returning back to India.

Retirement Schemes In Various Countries

Every country according to the need of their country people frame policies. According to these policies provisions for Retirement Plans are also framed. E.g. Canada has framed retirement saving plan with the name RRSP (i.e. Registered Retirement Saving Plan). Similarly in USA there are various schemes and prominent scheme is 401(k). In both these schemes RRSP and 401(k) provisions allow taxability in these countries at the time of withdrawal. In UK SIPP (i.e. Self-Invested Personal Pension) is popular scheme for this purpose. In Singapore it is Central Provident Fund (CPF) for the the retirement plan of employees. These schemes are recognised schemes of India, hence, taxation attracts like normal income under respective head as explained in next para.

Taxation In Foreign Countries Vs Tax Provisions In India

Foreign countries tax the retirement money differently. Eg in USA, generally there are two types of retirement saving plans i.e., Roth 401(k) and Traditional 401(k). In Roth 401(k) schemes, taxes are paid up front at the time of contribution; however, there is no tax payable at the time of withdrawal. In Traditional 401(k) plan, taxes are not payable at the time of contributions, however, taxes are payable at the time of withdrawal. Similarly, in other countries there are different kind of retirement saving plans, where taxation works differently. However, these employer-sponsored retirement saving plan schemes are not recognised schemes as per Indian Tax Provisions and hence does not attract any exemption in India. Income from these funds are taxed in India as per general provisions according to nature of income generated from these schemes annually.

Deferment of Tax – Foreign Retirement Investment Income – Tax Relief Under Indian Tax Regulations – Sec 89A and Rule 21AAA

Foreign countries tax the retirement schemes at the time of withdrawal; however, same is taxable in India on annual basis as per the nature of income generated from such funds. To align Indian laws with the foreign countries’ laws, Indian Govt has inserted provisions u/s 89A along with Rule 21AAA of Income Tax Regulations wef year 2022-23. These are relief provisions, which are optional for a taxpayer. If taxpayer wishes to choose it, he/she can file Form 10EE before the due date of filing of ITR. Once taxpayer opts so, taxation of his/her foreign retirement account will be deferred in India to the year of withdrawal, which would be in line with taxation of foreign country. Presently, this option is provided to three countries only i.e. UK, USA, and Canada. Hence, this is a welcome provision for those NRIs who have returned to India or are planning to return back to India. This relief provision will enable the taxpayer to claim the taxes credit of taxes paid in foreign countries on these schemes at withdrawal time. Also, deferrement of taxes will save immediate cash outflow for an income which is not yet received in bank account.

FAQs – Foreign Retirement Plans Taxation In India and Relief U/s 89A of Income Tax Act – Returned NRIs OCIs

Q – What is Form 10EE? How does it work to provide tax relief on Foreign Retirement Saving Accounts Withdrawals/Redemption/Annual Earnings?

Ans – Form 10EE is an Income Tax Form which can be filed by those Tax Residents who are maintaining Foreign Retirement Accounts i.e. 401(k). By filing form 10EE, specified person (i.e. taxpayer who opened a specified account i.e. Foreign Retirement Account, in notified country when he was working and residing in that country) opts that his income of current previous year be included in his total income of previous year relevant to assessment year in which  it will be taxable in the notified country as per their laws in the year of withdrawal/redemption. Hence, Form 10EE is a relief form or tax deferment form, which brings taxation in line with foreign country tax laws where income of current previous year from Foreign Retirement A/c can be deferred for taxation from the current year to the year of withdrawal/redemption from these specified accounts.

Q – I am a returned NRI living in Hyderabad. I have a traditional 401(k) account in USA. I want to defer my taxation in India to align it with US taxation. How can I file form 10EE to claim the benefit of section 89A (along with Rule 21AAA)? What information I need to file in Form 10EE?

Ans – Form 10EE can be filed for deferment of taxation of foreign retirement taxation in India. It has to be filed before due date of filing of ITR. Following information needs to be provided in Form 10EE

  • Name of Foreign Retirement Saving Plan, Account Name, and Country
  • Year, in which the account was opened
  • Eligible Year i.e., the year in which income from foreign fund can be withdrawn
  • Detail of Nature of Income
  • Foreign Fund Account balance as on last date of preceding year
  • Taxation mechanism in Notified Country i.e. how it is taxed in foreign country
  • Details of Income which is not taxable in India of those years when taxpayer was Non-resident/NOR in India
  • Details of Income, which is already offered for taxation in Indian ITR, if any

Q – I am a returned OCI and living in Bengalore, India. I have opted for relief u/s 89A and filed form 10EE last year. Since, my foreign retirement account income is deferred for taxation in India, Am I exempt from reporting these accounts in Indian ITR also?

Ans – Provisions of foreign assets disclosure in ITR are altogether different from tax relief u/s 89A. In Black Money Act also there is no provision for exemption for foreign asset disclosure in ITR form for foreign retirement accounts. If taxpayer is Ordinary resident, then he/she needs to disclose all foreign assets in the ITR form (including Foreign Retirement Accounts). There is no waiver from this reporting even if form 10EE is filed and taxes deferment is claimed under rule 21AAA of Income Tax Rules. Non-disclosure of these accounts in Indian ITR will attract penalty of Rs 10 Lakh under Black Money Act provisions.

Q – I am a returned OCI, living my retirement life in Kolkata, India. From my earlier abroad employment I have some pension income from Canada Govt, which I receive in my Indian Bank Account. Can I claim tax benefit under DTAA between India and Other Contracting State?

Ans – Under its cross border tax balancing mechanism, India has comprehensive Double Tax Avoidance Agreements (DTAA) with various countries, including USA, UK and Canada. In many DTAAs, taxation rights for pension income given by a Govt of these countries are given to these countries only. However, for other type of retirement income taxation rights are generally with resident country. In relation to Canada, in relation to the pension income, under the India-Canada Tax Treaty, in general taxation rights are with Canada. Hence, if taxation happens in Canada for periodic pension income, then the same may be claimed exempted in India.

Q – What is a Specified Account u/s 89A? What benefits are provided under this section and Rule 21AAA of Income Tax Rules to Returning Non Resident Indians?

Ans – Specified Account is defined as retirement benefit account in notified country (i.e. USA, UK, Canada presently), whose income is taxable in these countries not on accrual basis but it is taxable at the time of withdrawal/redemption. And this account was opened by taxpayer when he was Resident there and Non-resident in India. Under Rule 21AAA (1), in relation to income generated from specified account, taxpayer has an option that this income taxation should be aligned with taxation of notified country and hence be included in his total income of the year in which such income is taxed in notified country i.e. at the time of withdrawal/redemption.

Q – I have returned back to India from USA after working for 15 years. Now, I am staying in India and enjoying my retirement life in Chennai. Since, a big corpus of my Foreign Retirement Saving Plan is created when I was a non-resident in India, Is there any deduction available under Rule 21AAA in relation to Foreign Retirement Investment Plan?

Ans – Yes, Indian provisions provide deduction in relation to income which was generated while taxpayer was a Non-resident in India. Under Rule 21AAA, here are the deductions which is allowed from taxable income at the time of withdrawal

  • Income earned in specified account at the time when taxpayer was Non-resident/Not Ordinary Resident in India.
  • Any income from the specified account, on which taxpayer has already paid taxes in India i.e. the period when he has not opted for Rule 21AAA benefit.

Q – On my returning back to India, I have opted for form 10EE to defer taxation of my 401(k) income in India. What if I choose to go back USA again after sometime i.e. I be a non-resident in India in future years?

Ans – As per Income Tax Act provisions, income earned outside is not taxable in India in case of person is non-resident. Hence, in case of a taxpayer who has deferred taxation of his foreign retirement plan income by filing form 10EE, there is a taxation provision {under rule 21AAA(4)} if that taxpayer leaves India and become Non-resident in later on years. Hence, according to this provision, in such situation

  • It will be assumed that 10EE has never been filed and tax deferment has never been claimed and
  • the income earned in the specified account, during the period of exemption claimed in India by opting rule 21AAA, shall be taxable during the previous year immediately preceding the year he/she is leaving India and tax shall be paid on that in India accordingly.

Non Resident Taxation, RBI Laws Services – By S Lohia & Associates NRI Service Team