Section 89A - Tax Relief on Income from Foreign Retirement Funds
Introduction
For Indian residents who have lived and worked abroad, managing foreign retirement savings can be challenging due to differences in taxation laws. Many countries tax retirement income only when it is withdrawn, while India typically taxes income as it accrues, even if it hasn’t been received yet. This mismatch can lead to double taxation, where individuals may be taxed on their foreign retirement savings in India before they have access to the funds, impacting their financial planning.
Section 89A of the Income Tax Act was introduced in Budget 2021 to address this issue, providing tax relief to individuals with income from specified foreign retirement accounts. It allows taxpayers to defer tax payments on such income until the year of withdrawal, ensuring taxation aligns with the foreign country’s tax rules and preventing undue financial burden.
In this guide, we’ll explore how Section 89A works, its benefits, compliance requirements, and the steps to claim relief, helping returning expatriates manage their foreign retirement funds more effectively.
What is Section 89A of the Income Tax Act?
Section 89A was introduced to prevent double taxation on income from foreign retirement funds. Under this provision:
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Indian tax residents with retirement savings in notified foreign countries (currently USA, UK, and Canada) can defer tax payments until the income is taxed in the foreign country.
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The retirement account should be government-recognized or employer-sponsored, such as 401(k) accounts in the US, RRSP in Canada, or SIP in the UK.
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Instead of being taxed in India on an accrual basis, income from these accounts will be taxed at the time of withdrawal, reducing the financial burden.
How Section 89A Works?
Under India’s normal taxation system, income is taxed on an accrual basis, meaning even if you haven’t withdrawn funds from your retirement account, you may still be liable to pay tax on it in India.
However, some foreign countries follow a receipt-based taxation system, where tax is levied only when funds are withdrawn.
Section 89A allows taxpayers to defer taxation in India until the amount is withdrawn and taxed in the foreign country to prevent this mismatch. This eliminates double taxation and aligns tax obligations with the country where the account is held.
How Section 89A Benefits Taxpayers?
1. Prevents Double Taxation
Section 89A ensures that income is not taxed twice—once in India (on accrual) and again in a foreign country (on withdrawal).
2. Aligns Taxation with Foreign Jurisdictions
The provision aligns India’s tax rules with those of notified countries, ensuring that retirement savings are taxed fairly.
3. Simplifies Tax Compliance for Returning NRIs
Returning NRIs can better plan their finances, knowing they won’t be taxed prematurely on foreign retirement savings.
4. Enhances Investment Decisions
Taxpayers can time their withdrawals strategically based on financial needs and tax implications.
What are Rule 21AAA and Form 10-EE?
To implement Section 89A, the Central Board of Direct Taxes (CBDT) introduced Rule 21AAA and Form 10-EE.
Rule 21AAA: Aligning Taxation with Foreign Jurisdictions
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This rule states that foreign retirement income will be taxed in India only when taxed in a foreign country.
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In previous years, income already taxed in India will not be taxed again upon withdrawal.
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If a taxpayer later becomes a Non-Resident Indian (NRI), the benefit of Section 89A ceases, and previously deferred income may be taxed retrospectively.
Steps to File Form 10EE
To claim tax relief under Section 89A, taxpayers must file Form 10EE electronically before submitting their Income Tax Return (ITR).
Steps to File Form 10EE on the Income Tax Portal
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Login to the Income Tax e-Filing Portal
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Navigate to e-file > Income Tax Forms > File Income Tax Forms
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Select Form 10EE from the list
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Provide the following details:
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Retirement Account Number
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Name of Retirement Fund
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Notified Country (USA, UK, or Canada)
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Balance in Retirement Fund
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Year of Account Opening
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Nature of Income – Salary, Interest, Dividend, or Others
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Whether any portion of the income has already been taxed in India
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Income not taxable in India due to prior NRI status
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Upload a Statement of the Retirement Fund
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Review and Submit Form 10EE
Who is Eligible for Benefits Under Section 89A?
To claim relief under Section 89A, taxpayers must meet the following criteria:
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Specified Person: Must be an Indian resident who opened a foreign retirement account while being a Non-Resident (NRI).
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Specified Account: The account must be held in a notified country (USA, UK, or Canada).
Common Types of Foreign Retirement Accounts Eligible Under Section 89A
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Country
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Eligible Retirement Accounts
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USA
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401(k), IRA (Traditional and Roth)
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Canada
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RRSP (Registered Retirement Savings Plan)
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UK
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SIP (Self-Invested Personal Pension)
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What is the Procedure for Foreign Subsidiary Company Registration in India?
Foreign companies looking to expand their operations in India often set up subsidiary companies. The registration process involves:
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Obtaining a Digital Signature Certificate (DSC) and Director Identification Number (DIN).
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Applying for Company Name Approval through Form INC-1.
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Filing Incorporation Forms (INC-7, INC-22, and DIR-12).
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Payment of Stamp Duty and Registration Fees.
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Receiving the Incorporation Certificate upon approval.
For professional assistance with foreign subsidiary company registration in India, contact ADCA (Anil D’Souza & Associates).
What are the Compliances for a Subsidiary of a Foreign Company in India?
A foreign subsidiary in India must comply with the following:
Key Highlights of Opting for Tax Relief Under Section 89A of the Income Tax Act
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Mandatory Filing of Form 10-EE before submitting ITR.
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Irrevocable Option – Once exercised, it cannot be changed.
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Reversion in Case of Non-Residency – If a taxpayer becomes NRI, benefits under Section 89A cease.
Conclusion
For Indian residents with foreign retirement funds, Section 89A provides a much-needed tax relief mechanism. It aligns India’s tax rules with foreign jurisdictions and prevents double taxation. By filing Form 10EE, eligible taxpayers can defer tax payments until they receive their retirement benefits.
Understanding these provisions and ensuring timely compliance is crucial for individuals returning to India after working abroad. If you need assistance with Section 89A tax relief, foreign subsidiary registration, or any tax compliance matters, contact – Anil D’Souza & Associates for expert guidance.
Need Help with Section 89A Tax Relief?
Contact ADCA Today!
Frequently Asked Questions (FAQs)
1. Do Non-Residents Need to Declare Their Foreign Retirement Fund Details in India?
No, non-residents (NRIs) are not required to declare their foreign retirement fund details in India. However, once they become tax residents of India, they need to disclose these accounts in Schedule FA (Foreign Assets) of the ITR.
2. What Is the Deadline for Filing Form 10-EE?
Form 10-EE must be filed electronically before the due date of filing the Income Tax Return (ITR) for the relevant financial year. Typically, this is 31st July for individuals unless extended by the government.
3. Can Section 89A Relief Be Claimed Under the New Tax Regime?
Yes, Section 89A relief is available under both the old and new tax regimes. It allows taxpayers to defer tax on income from specified foreign retirement accounts until withdrawal in the foreign country.
4. Is Section 89A Relief Available for All Taxpayers?
No, only specified residents who were previously NRIs and contributed to foreign retirement accounts in notified countries can claim relief under Section 89A.
5. How Can Taxpayers Determine Eligibility for Relief Under Section 89A?
A taxpayer must meet the following criteria to claim relief under Section 89A:
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Must be a resident of India.
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Should have opened a foreign retirement account while being an NRI.
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The retirement account must be held in a notified country under this section.
6. What Is the Exemption Under 89A?
Section 89A allows tax deferral on income accrued in a foreign retirement account until it is taxed in the foreign country at the time of withdrawal. This helps avoid double taxation.
7. What Countries Are Notified for Section 89A?
As of now, the notified countries under Section 89A are:
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United States (USA)
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United Kingdom (UK)
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Canada
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Northern Ireland
(Subject to updates from the Central Board of Direct Taxes (CBDT)).
