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

Indian residents working overseas and contributing to foreign retirement accounts often face double taxation when they return to India. To avoid this issue, section 89A of the Income Tax Act provides tax relief to residents of India who receive income from their foreign benefit accounts.

The section was introduced by the Income Tax Act to prevent double taxation for NRIs moving back to India after working overseas. It allows them to defer tax on income from specified foreign retirement accounts until it is taxable in the foreign country.

Want to know more about section 89A and who can claim tax benefits under this section? Read the blog and get your answers.

What is Section 89A of the Income Tax Act?

Section 89A of the Income Tax Act, 1961 (ITA) was introduced in the Finance Act 2021. The section aims to provide tax relief to residents who have income from their foreign retirement benefits accounts. The qualified foreign retirement accounts include 401(k), IRA (Individual Retirement Account), RRSP (Registered Retirement Savings Plan), and SIPP (Self-Invested Personal Pension), subject to the notified country and specified account conditions under Section 89A. The primary purpose of this section is to resolve the issue of double taxation faced by NRIs who returned to India after working overseas.

On a receipt basis, a few countries impose tax on income generated from overseas retirement benefits accounts. However, in India, the amount withdrawn from such an account is taxable on an accrual basis. Therefore, because of the mismatch in the taxability year, taxpayers face difficulties in claiming the foreign tax credit. Similarly, in such a situation, it was difficult for taxpayers to claim the Double Tax Avoidance Agreement (DTAA). This issue is generally faced by the NRIs who choose to settle in India permanently after retirement.

Who Can Claim Benefits Under Section 89A of Income Tax Act?

Section 89A of the Income Tax Act is available to individuals who meet the following criteria:

• Specified Person: A resident taxpayer who opened and maintained a specified retirement account in a notified foreign country while being a non-resident in India.
• Specified Account: Income from a specified foreign retirement account is not exempt from tax, but taxation is deferred in India until the year specified under Section 89A.

As per the Central Board of Direct Taxes (CBDT), the notified countries for Section 89A of the ITA are as follows:

• United States of America (USA)
• United Kingdom
• Canada

Apart from this, the CBDT has also stated Rule 21AAA and Form 10-EE for NRIs to claim tax relief under Section 89A of the ITA regarding their income from foreign retirement funds. Moving further, let's know about this in the next section.

Rule 21AAA and e-Filing of Form No. 10-EE

Rule 21AAA states that income accrued from an overseas retirement benefit account should be added to the total income of the taxpayer in the year in which it is taxed for redemption or withdrawal in the notified country. This type of income is taxed in the country where such an account is maintained. The rule also excludes:

• Income that has been taxed already in the previous years.
• Income that was tax-exempt from Indian taxes during the period when you were an NRI or non-ordinary resident (RNOR).
• Income is exempt from taxes due to the DTAA between India and the foreign nation.

To claim tax relief under Section 89A, you need to fill out Form 10EE electronically through the e-filing portal of the Income Tax Department. You need to submit the form before the due date of your income tax return for that specific financial year.

Once you file Form 10EE, it applies to all subsequent previous years, and you cannot withdraw from it. However, after exercising this option, if you become an NRI, the tax benefits under section 89A will no longer be available for the year you became an NRI and onwards. If you subsequently become a non-resident, the option under Section 89A ceases to apply from the relevant year, and taxation will thereafter be governed by the applicable provisions of the Income-tax Act and Rule 21AAA.

Subsequently, the income accrued in the year you opted for this option might be taxable in India during that financial year. Additionally, the tax treatment will thereafter be determined in accordance with the applicable provisions of the Income-tax Act and Rule 21AAA.

Further, the new ITR forms have updated Schedule S (salary details) and Schedule OS (other source income). Through these sections, taxpayers can, in the prescribed manner, claim tax relief under section 89A. When filing your ITR, you need to mention your gross income incurred in your specified account. It includes salary, capital gains, dividend or interest income, and claim tax relief under this section to defer tax until withdrawal on that income.

This was all about Rule 21AAA and e-filing Form 10EE. Moving forward, let's know the steps to fill out Form 10EE.

What Are the Steps to File Form 10EE?

If you are a resident and ordinarily resident (ROR) in India with a foreign retirement account in countries like the UK, USA, or Canada. Additionally, want to defer the income from these accounts in the form of interest, capital gains, and dividends until withdrawal, follow the steps below:

• Step 1: Visit the income tax e-filing portal and log in to your account.
• Step 2: Select e-file → Income tax forms → File income tax forms.
• Step 3: From the list, choose Form 10EE.
• Step 4: Select the relevant Assessment Year
• Step 5: Mention the requested details in the "basic information and details of the specified section." After that, download the CSV template.
• Step 6: In the template, provide the following details:
• Account number
• Name of retirement fund
• Name of notified country (e.g., UK, USA, or Canada)
• Account balance in the retirement fund in the previous year
• The year you open the retirement account
• How is the income generated from the retirement account taxable in that country
• Year in which such an account qualifies for withdrawal
• Nature of income, i.e., salary, interest, dividend, other
• Based on the accrual concept, any income from this retirement account is already included in your ITR
• The income amount from the account is not taxable because of your Residential status
• Return of income filed for previous years.
• Step 7: As a supporting document, attach a statement of your foreign retirement account.
• Step 8: Carefully review the form, ensure all the mentioned details are accurate, and submit the form.

So, this is how you can simply fill out Form 10EE.

Final Thoughts

Lastly, section 89A of the Income Tax Act is a vital step towards resolving double taxation issues for returning NRIs with foreign retirement accounts. It provides fair tax relief- you pay tax in India only when you withdraw the income overseas, mirroring how the foreign nation taxes it. To claim the tax benefits under this section, comply with Rule 21AAA and timely file Form 10EE.

Furthermore, for expert guidance on NRI taxation and taxation on foreign income, connect with Savetaxs. We have a team of tax experts who ensure your global retirement savings are handled smoothly without any issues.