Section 89A of Income Tax Act: Tax Relief on Income from Foreign Retirement Funds
Residents of India who work overseas and start contributing to foreign retirement accounts may be subject to double taxation upon their return to India. People who intend to use their retirement funds in the future may face financial difficulties because residents of India may be taxed on income earned in foreign retirement accounts even if they haven't taken money out yet because the country taxes income on an accounting system. In 2021, the Indian government enacted Section 89A of the Income Tax Act in response to these concerns. Returning residents who receive funds from foreign target pension plans are subject to tax relief under this section. In this article, we will explain Section 89 of the Income Tax Act in detail.
Table of Content
What is Section 89A of the Income Tax Act?
Section 89A of the Income Tax Act of 1961 (ITA) was incorporated by the Finance Act of 2021 to help citizens who received funds from foreign retirement benefits accounts. This is appropriate to Indian tax residents abroad who currently hold retirement funds in 401(k)s, IRAs, and other accounts. Income from overseas retirement benefits accounts is liable to receipt-based taxation in some nations. The money collected under such an account, however, is subject to accrual taxation in India. The discrepancy in the year of taxability made it tough for taxpayers to claim the foreign tax credit. Claiming the benefits of the Double Tax Avoidance Agreement (DTAA) was equally challenging. This problem influences non-resident Indians (NRIs) who decide to permanently settle in India after retirement.
Illustration:
A person was employed by a leading oil company in the United Kingdom for twenty years. He did not reside in India until the 2022–2023 financial year. While he was not a resident of India, he contributed to a retirement benefits account in the United Kingdom. He went back to India and settled there for FY 2023–2024. His retirement benefits account income until FY 2022–2023 is not eligible for tax as he was an NRI. He is, however, a citizen of India for FY 2023–2024. The accruals like dividends, Interest, and capital gain in retirement benefits accounts in the UK are taxable in India. However, income from the retirement benefits account is liable to receipt-based taxation in the UK (year of receipt). He cannot claim a foreign tax credit against his Indian tax liability in FY 2022-23 because no taxes were paid in the UK during that period (January through March). Under Section 89A, income from accounts created abroad is excluded from accrual taxation. When he withdraws his money, the foreign nation will charge his income. The change will take effect on April 1, 2022, and will be relevant starting in the Assessment Year (AY) 2022–2023.
According to Section 89A, the Central Government stipulates how and when a particular person's income from a designated account will be subject to taxes. A resident who opened a specified account in a notified country while residing there and not in India is regarded as a specified person. Central Board of Direct Taxes (CBDT)-listed nations for Section 89A of the ITA include:
The United States of America
Britain
Canada
The CBDT has provided NRIs with Form 10-EE and Rule 21AAA to enable them to register a Section 89A assertion for relaxation from income from foreign retirement funds.
Who Can Claim Benefits Under Section 89A
The following organisations are qualified for deductions under Section 89A:
Specified individual: It includes an Indian resident who opened an assigned retirement account in a nation recognised by the Central Government while living outside India as a non-resident.
Specified account: A retirement account is maintained in a notified country as a specified account. In India, income from such an account is not liable to accrual taxes. Taxes are paid in the country when money is withdrawn.
Notified nations include countries that the Central Government has identified by Section 89A. Residents can create specified accounts in the USA, UK, and Canada, and the tax procedure cooperates with local laws in those nations.
Rule 21AAA and e-Filing of Form No. 10-EE
According to Rule 21AAA, a taxpayer's total income for the previous year, taxed on such withdrawal or redemption in the notified country, should include any income they acquire in their overseas retirement benefits account. In the country where an account is kept, income is subject to taxes.
The following income will not be included in the income subject to taxation:
The income that was taxed in previous years by the ITA,
The income that was not taxable in India during the accrual year because the taxpayer was a Non-Resident (NR) or resident but not ordinarily resident (RNOR) in the years past, because the DTAA was applicable.
Before filing the Income Tax Return (ITR), the taxpayer must digitally file Form No. 10-EE. Once done, it cannot be withdrawn and will be appropriate for all successive years. It will be assumed, nevertheless, that the taxpayer has never exercised the option if, after exercising it, they have relocated out of the country. Following the exercise of such an option, the income earned in the designated account from the preceding year will be liable for tax during that year. Schedule OS (Other Source Income) and Schedule S (details of income from salary) were amended in the new ITR forms, empowering taxpayers to claim Section 89A tax relief in the manner defined. To postpone taxation of such dividend payments till the time of withdrawal, the taxpayer must report the gross received in the form of salary, capital gain, interest, or claim relief under section 89A.
Features of the Option Under Section 89A
The taxpayer must submit Form No. 10-EE before uploading the ITR.
After execution, the option under Section 89A cannot be revoked and will continue to appear for all subsequent years.
The option will be regarded as never to have been exercised if the taxpayer becomes a non-resident after exercising it. Furthermore, profits generated in the assigned accounts from the prior years the option was exercised will be liable for tax.
Steps to file Form 10EE
If you have a retirement account in the United States, United Kingdom, or Canada and your work status is resident and ordinarily resident. Additionally, you desire to delay paying taxes on your withdrawal from your retirement fund account because you have income in the form of interest, dividends, and capital gains.
Step 1: Open the income tax e-filing portal and sign in.
Step 2: Choose the e-file. Income tax forms >> Fill out income tax forms.
Step 3: From the list, pick Form 10EE.
Step 4: Choose the assessment year using the form that was opted.
Step 5: Insert the information under "basic information and details of the specified section."
Besides that, download the CSV template.
Step 6: Complete the template with the following details.
Retirement Fund Name
Account Number
Name of the Notified Nation
Retirement Fund Balance from the Previous Year
The year the account was created
How is retirement account income liable for tax in such a nation?
The year in which such an account can be closed
Income Categories: Salary, Dividends, Interest, and Other
Based on the accrual concept, any income from this retirement is included in the ITR.
The percentage of money that is not taxable due to the account's residential status
Whether or not a preceding year's income return is submitted, recognition of that return.
Step 7: Before uploading Form 10EE, remember to enclose such a retirement account statement.
Conclusion
The Income Tax Act's Section 89A is incredibly valuable for people attempting to understand foreign retirement benefit accounts in India. It helps Indian residents handle their foreign retirement income by providing clarification on deductions and potential tax savings. The procedure has been streamlined by the government, providing a feasible way to reduce the tax burden related to foreign retirement accounts.
FAQ
Q1. What is the exemption under 89A?
The Income Tax Act's Section 89A enables residents to delay paying taxes on income obtained from foreign retirement benefits accounts from the year it is earned until the year it is taken out. To receive relief under this section, the designated individual must submit Form No. 10-EE.
Q2. What is income from a retirement benefits account maintained in a notified country U.S. 89A?
Tax assistance is provided to individuals on income collected in a retirement benefit account kept in a notified country. The recommended method and year of taxation will pertain to such income.
Q3. What are the countries where relief is applicable under section 89A?
Under section 89A, only retirement savings in Canada, the United Kingdom, and the United States are eligible for relief.
Q4. What types of foreign retirement accounts are eligible to claim relief under Section 89A of the Income Tax Act?
You could be qualified for relaxation if you fulfil the criteria of Section 89A and have retirement accounts in one of the following accounts in a notified state:
Individual Retirement Accounts, or IRAs
401(k)
Registered Retirement Savings Plan (RRSP)
Self-Invested Personal Pension (SIPP)
Q5. Is Section 89A relief applicable under both the new and old tax regimes?
Indeed, the old and new tax regimes provide for Section 89A relief. You must submit Form 10-EE to become eligible for this relaxation.
Q6. I have a 401k account in the U.S.A. and currently reside in India. How does this provision affect me?
In the United States, income earned in a 401(k) is only liable for tax at the time of withdrawal. However, in India, this type of payment is relevant to accrual taxation. You can file Form 10-EE and delay the income accumulating in your 401(k) account as capital gains, dividends, or interest. It enables people to claim the federal tax withheld for filing as a relief under section 90 in India.
Q7. I am a Non-Resident in India. Do I have to declare my Foreign Retirement fund details?
No, since you have non-resident personal details, any income derived outside of India is excluded from Indian taxation, and you are not obliged to reveal any such income or the details of your foreign retirement fund account in India. Section 89A's provisions apply to Indian tax residents who have the status of resident or ordinarily resident.
Q8. What is the due date for filing Form 10-EE?
The deadline to submit Form 10-EE is either July 31 of the appropriate analysis year or the deadline stipulated in Section 139(1).
Q9. Can I claim Section 89A relief under the new regime?
Yes. Deferred income in a foreign retirement account comes under Section 89A. Consequently, you can claim Section 89A relief regardless of whether you choose the old regime or the new regime as long as you file Form 10-EE.
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