Section 89A of Income Tax Act 1961 was introduced in 2021 to provide relief for resident of India having the Income from foreign retirement benefit accounts. This provision have been made for resident of India previously working in notified countries and accumulated his retirement savings in accounts like 401(k)s or IRAs and such persons are now living in India. At the time of withdrawal of income from these foreign retirement accounts, such income is taxed in some countries. In India, such income are taxed at the time of accrual, however this is mismatch of timing of taxation which make it difficult to claim the credit of foreign tax paid. This mismatch also makes it difficult to take the benefit from double tax avoidance agreements (DTAAs). This issue is often faced by NRIs returning to India after retirement. To address this mismatch, Section 89A of Income tax Act was introduced which aims to ease the tax process for retired individuals having foreign retirement savings to take the benefits of DTAA and tax credits.
Table of Contents
What is Section 89A of Income Tax Act 1961?
As per Section 89A of Income Tax Act, 1961, income from foreign retirement accounts will not be taxed on an accrual basis in India in the hands of specified person. However, it will be taxed by the foreign country at the time of withdrawal of such income. This amendment applies to the assessment year 2022-23 and onwards. This section gives the power to the Central Government to decide how and when the income from such foreign accounts will be taxed.
Specified Person: Specified person refers to an individual who is currently a resident of India and had opened a retirement account in a notified country while he was a non-resident of India and a resident of that notified country.
Specified Account: A retirement benefits account opened in a notified country where the income is not taxed on an accrual basis but taxed by that country when such income is withdrawn or redeemed.
Notified Country: A notified country is one that has been notified by the Central Government. Currently, the notified countries for section 89A of Income tax act include:
- United Kingdom
- United States
- Canada
Benefits of Section 89A of Income Tax Act
Alignment with Domestic Practices: This section make sure that foreign retirement accounts receive similar tax treatment to domestic retirement accounts in India, where employer contributions are exempt from tax, and the accumulated amount is taxed upon withdrawal.
Reducing Tax Burden: By postponing the tax liability until the income is actually received, Section 89A gives you to take advantage of potential future changes in tax brackets or other tax benefits.
How Section 89A Provides Relief
Mr. X worked for an oil gas company in the United Kingdom for 25 years. He was a non-resident of India till FY 2020-21. During this period of non-residency, he opened a retirement benefit account in United Kingdom and deposited some amounts in this account. He returned to India and became a resident in India in FY 2021-22. The income accrued in such account till FY 2020-21 was not taxed in India during the period of non-residency in India. However dividends, interest, and capital gains accrued in this retirement account are taxed in India as a resident of India from FY 2021-22. On the other hand, the income from this retirement account is taxed in United Kingdom taxes on a receipt basis.
He cannot claim credit of a foreign tax against his tax liability in India for that period, since no tax was paid in the United Kingdom from January to March of FY 2020-21.
What are the conditions to exercise the option under section 89A?
If you want to claim the relief under section 89A, you need to fulfill the below conditions to exercise the option under section 89A:
- Irrevocable Option: Once this option is exercised, it will apply to all subsequent years and cannot be revoked.
- Non-Resident Status: If after exercising the option the specified person becomes a non-resident of India at any point of time, it will be considered as if the option was never exercised. In addition to that, the income accrued in the specified accounts will be taxed from the previous years when the option was initially exercised.
- Form 10-EE: You need to form 10-EE before submitting your Income tax return.
Read also: Section 80EEA of Income Tax Act, 1961
Final Words
Section 89A of Income Tax Act provides a major tax benefits for residents of India with foreign retirement benefit accounts in notified countries. It allows the deferral of tax on income earned from these accounts until the funds are actually received in India.
Frequently Asked Questions (FAQ)
Yes, it is must to file form 10EE before submitting ITR to exercise the option under section 89A of Income Tax Act.