When NRIs return to India and become ROR taxpayers, their taxation starts from that year, not from the immediate year of their return
Indians who have worked overseas or expatriates qualifying as resident and ordinarily resident (ROR) taxpayer in India need to report their foreign retirement funds and income from such funds in Schedule FA of their income-tax return. When NRIs return to India and become ROR taxpayers, their taxation starts from that year, not from the immediate year of their return, according to Sonu Iyer, Partner and National Leader – People Advisory Services, EY India and Siddharth Deb, Senior Tax Professional with EY in an article for livemint.com.
Indians who have worked overseas or expatriates qualifying as resident and ordinarily resident (ROR) taxpayer in India need to report their foreign retirement funds and income from such funds in Schedule FA of their income-tax return. When NRIs return to India and become ROR taxpayers, their taxation starts from that year, not from the immediate year of their return.
The taxability of income from foreign retirement funds depends on the type of funds and the benefits offered under the applicable Double Taxation Avoidance Agreements (DTAAs). Pension income from a foreign country’s social security authorities is taxable as other sources of income, while pension from employer-funded plans outside India is taxable as salary income. Both are subject to the applicable slab rates.
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This rule applies to specified accounts, which are accounts maintained in a notified country by a specified person for their retirement benefits. Income from such accounts is not taxable on an accrual basis but is taxed by that country upon withdrawal or redemption
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Currently, only three countries are notified for this provision: Canada, the UK, and the USA
In cases of double taxation, individuals can claim benefits under the DTAA between India and the other country. These benefits may include exemption from Indian tax or foreign tax credit for taxes paid in the other country, depending on the individual’s residential status under the DTAA.
For instance, if an individual receives benefits from the US Social Security Authorities, it is taxable only in the US and exempt from Indian income tax under the India-US DTAA. However, interest, dividends, or capital gains from individual retirement accounts and 401K plans will be taxable in India, and the individual can claim a foreign tax credit for taxes paid in the US. To claim exemption under the DTAA as a tax resident of the US, Form 10F and a copy of the tax residency certificate issued by the US IRS must be filed electronically. If foreign tax credit is claimed, Form 67 along with proof of taxes paid outside India should be filed before the end of the assessment year.
A mismatch in claiming foreign tax credit may occur in some countries like the US, where the retirement funds’ accretions may not be taxable until withdrawal. This creates a situation where tax liability arises in India when the income accrues, while the other country taxes it only upon withdrawal or redemption of the retirement funds, potentially resulting in double taxation.
To address this mismatch, a beneficial provision was introduced under the Act (Section 89A and Rule 21AAA) effective from fiscal year 2021-22. This provision allows the deferral of Indian taxation on accrued income from eligible retirement funds until withdrawal and enables claiming foreign tax credit in India in the withdrawal year, subject to specified conditions. To exercise this option, Form 10EE needs to be filed electronically before the due date for filing the tax return. Form 10EE is a one-time compliance and remains applicable for that year and all subsequent years, unless the individual becomes a non-resident of India.
This rule applies to specified accounts, which are accounts maintained in a notified country by a specified person for their retirement benefits. Income from such accounts is not taxable on an accrual basis but is taxed by that country upon withdrawal or redemption. Currently, only three countries are notified for this provision: Canada, the UK, and the USA.
The term “accrual” in this provision implies that the taxpayer has an ascertained entitlement and an enforceable right, with a corresponding obligation on the other party to pay the taxpayer. Relief under Section 89A becomes relevant when an individual is a resident in India, but taxation in a foreign country occurs only in a subsequent year when the funds are withdrawn. The accrued income for which relief is claimed under Section 89A and the accrued income for which relief is not claimed must be reported separately in the tax return.
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