Section 89A- Tax Relief on Income from Foreign Retirement Funds

What is Section 89a of Income Tax Act?

Section 89A, introduced in 2021, is a provision within the Income Tax Act of 1961 designed to provide tax relief for Indian residents with income accruing in foreign retirement accounts.

The key purpose of Section 89A is to address the issue of double taxation for returning residents. Traditionally, India taxes income on an accrual basis. This means even if you haven't withdrawn money from your foreign retirement account yet, the income earned within that account could be taxable in India. This can be a significant burden for individuals planning to use those funds later in life.

Accrual vs. Receipt Basis:

To understand the benefit of Section 89A, it's helpful to consider the two main approaches to income taxation: accrual and receipt basis.

• Accrual Basis: Income is taxed in the year it's earned, regardless of when it's actually received. This is the traditional approach used in India.
• Receipt Basis: Income is taxed in the year it's actually received (withdrawn).

Section 89A essentially allows residents with income from specified foreign retirement accounts to benefit from a receipt-based taxation approach for those specific accounts. This means they won't be taxed on the income earned in those accounts until they actually withdraw the money, aligning with the taxation approach of the foreign country where the account is held.

How Section 89A Works?

Section 89A offers a significant benefit for eligible residents: income from specified foreign retirement accounts is only taxed in India when it's taxed in the foreign country (typically upon withdrawal). This eliminates the double taxation burden that could arise under the traditional accrual-based system.

Here's how Section 89A works:

Specified Accounts & Countries:

• Only income from retirement accounts maintained in countries notified by the Indian government qualifies for relief under Section 89A. Currently, the US, Canada, and the UK are included.
• The retirement account itself must also be a "specified account," which typically refers to government-sponsored or employer-sponsored retirement plans like 401(k)s and IRAs.

Tax Deferral:

• By opting for Section 89A, the income generated within these specified accounts is not included in your taxable income in India for each year. This defers any tax liability until the funds are withdrawn from the account in the foreign country.

What are Rule 21AAA and Form 10-EE?

Rule 21AAA: How Income is Taxed

Any income earned in your overseas retirement account during a financial year is typically included in your total income for that year in India. However, with Section 89A, the tax on this income is deferred. The actual tax liability is shifted to the year the income is taxed in the foreign country (upon withdrawal or redemption). The income is ultimately taxed in the country where the retirement account is maintained.

Exclusions from Taxable Income

• Income already taxed in India under the Income Tax Act (ITA) in previous years is not taxed again.
• Income that wasn't taxable in India during the year it was earned due to your residency status (Non-Resident - NR or Resident but Not Ordinarily Resident - RNOR) is also excluded.
• Income exempt from taxation due to a Double Taxation Avoidance Agreement (DTAA) between India and the foreign country is not included.

Form 10-EE: Claiming Relief

• To claim tax relief under Section 89A, you must electronically file Form 10EE through the Income Tax Department's e-filing portal. The form needs to be submitted before the due date for filing your regular income tax return for that specific financial year.
• Once you file Form 10EE, opting for Section 89A benefits is irreversible. It applies to income from previous years as well, as long as the income wasn't already taxed in India and will be taxed in the foreign country.
• If you become a non-resident after opting for Section 89A, the benefit is considered null for the year you become a non-resident and onwards. However, the income accrued in the year you exercised the option might be taxable in India during that year.

ITR Forms and Reporting

Recent Income Tax Return (ITR) forms include updated Schedule-S (salary details) and Schedule OS (other source income). These sections allow taxpayers to claim relief under Section 89A in the prescribed manner. When filing your ITR, you'll need to report the gross income accrued in your specified account (salary, capital gains, interest, or dividend income) and claim relief under Section 89A to defer tax on that income until withdrawal.

Who is eligible for benefits under Section 89A?

Section 89A is designed to help a specific group of taxpayers:

• Specified Person: This refers to an Indian resident who opened a retirement account while residing outside India (meaning they were a Non-Resident - NR in India at that time).
• Specified Account: This refers to a retirement benefits account maintained in a country notified by the Indian government for the purposes of Section 89A. Currently, the list includes the US, Canada, and the UK.

Examples of Qualified Foreign Retirement Accounts:

If you meet the criteria above and have retirement savings in any of the following account types maintained in a notified country, you might benefit from Section 89A:

• 401(k): An employer-sponsored defined contribution retirement account in the US.
• IRA (Individual Retirement Account): A personal retirement savings account available in the US.
• RRSP (Registered Retirement Savings Plan): A government-registered retirement savings plan in Canada.
• SIP (Self-Invested Personal Pension): A personal pension plan in the UK.