For Indians who have worked abroad or expatriates qualifying as resident and ordinarily resident (ROR) taxpayers in India, reporting foreign retirement funds and the income from such funds is a crucial aspect of tax compliance. The reporting is done in Schedule FA (Foreign Assets) of the income-tax return, and the taxability of this income depends on the nature of the funds and the benefits available under Double Taxation Avoidance Agreements (DTAAs) with the respective countries.

 

When NRIs return to India and become Resident and Ordinarily Resident (ROR) or Resident but Not Ordinarily Resident (RNOR) taxpayers, their taxation begins from the year their status changes, not from the immediate year of their return. Pension income received from a foreign country's social security authorities is considered taxable as other sources of income, while pension from employer-funded plans outside India is treated as taxable salary income, both at the applicable slab rates.

 

To avoid double taxation, individuals can avail benefits under the DTAA between India and the foreign country. These benefits can take the form of (a) exemption from Indian tax or (b) foreign tax credit for taxes paid in the other country, depending on the individual's residential status under the DTAA.

 

For example, any benefit received from the US Social Security Authorities is taxable only in the US and exempt from Indian income tax as per the DTAA between India and the US. However, certain other earnings, such as interest, dividends, or capital gains from individual retirement account and 401K plans, will be taxable in India, and individuals can claim a foreign tax credit for taxes paid in the US.

 

To claim exemption under DTAA, Individuals need to file Form 10F electronically, along with a copy of the tax residency certificate issued by the foreign tax authorities. For those claiming foreign tax credit, Form 67 must be filed along with proof of taxes paid outside India before the end of the assessment year.

 

A helpful provision (Section 89A and Rule 21AAA) was adopted from FY21-22 to address the difference in taxation timing between India and some other nations. Under certain circumstances, this provision permits deferral of Indian taxation on accrued income from eligible retirement funds until the year of withdrawal, allowing people to claim a foreign tax credit in India at that time. Individuals must electronically submit Form 10EE before the tax return filing deadline in order to take advantage of this option. Unless the individual becomes a non-resident, this form is a one-time compliance that is valid for the given year and all succeeding years.

 

This rule applies to certain accounts maintained in notified countries when the income generated by such accounts is not taxable on an accrual basis but is subject to foreign taxation upon withdrawal or redemption. Currently, this clause only applies to the USA, Canada, and the UK.

 

In this context, the term "accrual" refers to the taxpayer having 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 when the funds are withdrawn in a subsequent year. It is essential to report the accrued income separately for which relief is claimed under Section 89A and the income for which relief is not claimed in the tax return.

 

The taxation of foreign retirement funds can be a complex matter, especially for returning NRIs. Seeking professional advice and understanding the tax provisions and DTAAs can help ensure tax compliance while optimizing the benefits available under the law.