Section 89A of the Income Tax Act, effective April 1, 2022 (AY 2022–23 onwards), allows taxpayers residing in India who hold foreign retirement accounts (like 401(k), IRA, RRSP, SIPP) opened while non-residents to defer taxation in India until the money is actually withdrawn or received in the foreign country. This aligns Indian tax timing with the foreign country’s rules and prevents double taxation under accrual vs. receipt mismatch.
Objectives & Purpose
- Fix timing mismatch: India taxes on accrual (yearly earnings), countries on receipt (withdrawals), causing foreign tax credit issues.
- Avoid double taxation: Ensures Indian residents aren’t taxed twice when India and the foreign country tax in different years.
- Simplify compliance: Brings clarity and ease for Indians returning home after retirement abroad.
Who Can Claim Relief?
You can claim if:
- You are resident in India in the relevant financial year.
- You opened a foreign retirement account in a notified country (USA, UK, Canada, Northern Ireland) while you were a resident there and non-resident in India.
- The foreign country taxes these funds only upon withdrawal, not accrual.
Compliance: Rule 21AAA & Form 10‑EE
- Under Rule 21AAA, you opt to defer including foreign retirement income in India until withdrawal.
- To claim, file Form 10‑EE on or before your ITR due date (typically July 31) for that year.
- Mention the deferred income in updated ITR schedules (Schedule S/OS/FA) as per the form.
- This option is irrevocable and stays effective for all future years unless you permanently become non-resident again.
Example
- Worked in the UK till FY 2022–23, contributed to a SIPP.
- Moved to India in FY 2023–24 and became resident.
- Income accrued (dividends, interest, gains) now taxable under 89A only when withdrawn, as UK taxes on receipt; India defers accrual taxation until then.
Benefits
- Avoids double taxation when Indian accrual and foreign receipt years don’t match.
- Reduces cash outflow early, aligning tax payment with actual fund receipt .
- DTAA alignment: Easier to claim foreign tax credits later upon withdrawal.
Challenges & Considerations
- Must file Form 10‑EE correctly and on time; missing it voids relief.
- One-time, irrevocable for a given account; changes require permanent non-resident status.
- Covers only notified countries/accounts; income from other retirement accounts remains taxable on accrual.
- Disclosure of foreign assets still mandatory under Schedule FA, even if tax deferred.
- If you leave India again after opting in, relief is treated as never exercised for that year.
Quick Summary
| Feature | Detail |
|---|---|
| Section 89A | Defers tax on foreign retirement income to withdrawal year |
| Eligibility | Resident who opened specified account abroad while NRI in US/UK/Canada |
| Compliance | File Form 10‑EE by ITR deadline; report in ITR schedules |
| Benefit | Prevents double taxation; aligns with foreign tax timelines |
| Catch | Irrevocable, timely filing, applicable only to specified accounts |
Final Takeaway
Section 89A gives returning Indian residents a fair tax relief—you pay tax in India only when you withdraw the money, mirroring how the foreign country taxes it. Just make sure to comply with Rule 21AAA and file Form 10‑EE timely.
