Section 89A of Income Tax Act

Taxation u/s 89A of the Income Tax Act provides much-needed tax relief to Indian residents earning income from foreign retirement accounts. Its primary purpose is to resolve the issue of double taxation faced by individuals who return to India after working abroad.

In India, income is generally taxed on an accrual basis. This means that even if you haven’t withdrawn funds from your foreign retirement account, the income earned within it can still be subject to taxation in India. For individuals planning to use these funds during retirement, this can pose a significant financial burden.

Suppose you worked in the United States for 15 years and contributed to a 401(k) retirement account, which accrued an annual income of ₹10,00,000. Until FY 2022-23, as a Non-Resident Indian (NRI), this income was not taxed in India. However, upon your return to India in FY 2023-24, you became a resident, and India’s tax laws required you to pay tax on this ₹10,00,000 accrued in your 401(k) account.

Meanwhile, the United States taxes this income only when you withdraw it. If you didn’t withdraw any amount in FY 2023-24, the U.S. tax authority will not impose any tax, leaving you unable to claim a foreign tax credit in India. This results in a double taxation scenario, where India taxes the ₹10,00,000 on accrual, and the U.S. taxes it upon withdrawal.

Section 89A addresses this problem by ensuring that income from foreign retirement accounts is no longer taxed in India on an accrual basis. Instead, the tax liability is deferred to the foreign country, which taxes the income only at the time of withdrawal. 

This amendment applies from April 1, 2022, to the Assessment Year (AY) 2022-23 onwards, offering substantial relief to returning residents and eliminating the stress of double taxation.

Section 89A provides tax relief to individuals who meet the following criteria:

• Specified Person: An Indian resident who, while living abroad as a non-resident, opened a retirement account in a foreign country recognised by the Indian government.
• Specified Account: This refers to a foreign retirement account in a country notified by the Indian government. Under Section 89A, income earned in such accounts is not taxed. 

Notified Country: These are countries designated by the Indian government for the purpose of Section 89A. Currently, the United States, United Kingdom and Canada are included. Residents who have retirement accounts in these countries benefit from aligned tax treatment, avoiding double taxation.

While Section 89A does not specify a strict deadline for claiming relief, it is advisable to do so promptly, particularly when opting for the new tax regime. Filing your claim early helps streamline the process and ensures timely relief without unnecessary delays.

The relief provided under Section 89A is specific to claims or returns associated with income from specified foreign retirement accounts. Taxpayers cannot claim relief under this section for pending claims or returns filed under other provisions of the Income Tax Act.

By understanding these boundaries, taxpayers can better manage their filings and avoid confusion, ensuring they benefit from Section 89A while adhering to the specified conditions.

For income claimed for relief from taxation u/s 89A, taxpayers must meet specific criteria and fulfil compliance requirements:

•  Eligibility Criteria 
• Indian residents earning income from foreign retirement accounts are eligible, provided the Central Government notifies these accounts.
• Only income from specified accounts in recognised countries can benefit from the tax relief offered under Section 89A.
• Documentation Requirements 
• Taxpayers must maintain accurate and detailed records of their foreign retirement accounts.
• Essential documents include account statements, proof of tax payments made abroad and any other relevant paperwork.
• Proper documentation is crucial for substantiating claims and ensuring smooth compliance with tax regulations.
• Filing Requirements
• Taxpayers must disclose all details of their foreign retirement account income in their annual income tax returns.
• This includes reporting the income accrued, taxes paid overseas and claiming the appropriate tax relief under Section 89A.
• Accurate reporting helps prevent double taxation and streamlines the management of tax liabilities.

•  Improved Financial Planning 

Section 89A plays a critical role in enabling effective financial planning for Indian residents with foreign retirement accounts. By clarifying how retirement income from overseas will be taxed in India, it will help taxpayers anticipate and manage their tax liabilities.

This foresight prevents unexpected financial burdens and ensures that individuals can make informed decisions about their retirement savings.

• Enhanced Tax Efficiency 

One of Section 89A's most significant advantages is the elimination of double taxation on foreign retirement income. By aligning tax rules with those of notified countries, the provision streamlines the compliance process and reduces tax-related complexities. 

This ensures that taxpayers benefit from a fair tax system while easing the administrative burden associated with cross-border taxation.

•  Support for Global Workforce 

Section 89A offers crucial support for individuals who have worked abroad or are planning to return to India after an international career. It addresses the unique tax challenges posed by cross-border retirement accounts and ensures that Indian residents are not penalised for their overseas financial arrangements. 

This provision provides much-needed clarity and stability for managing international retirement income.

Rule 21AAA specifies that income from a foreign retirement account is added to the taxpayer’s total income in the year it is taxed in the foreign country where the account is held. This prevents double taxation and ensures alignment with the taxation timeline of the foreign jurisdiction.

The rule also excludes:

• Income that was already taxed in earlier years.
• Income that was exempt from taxation in India during the period of non-residency or non-ordinary residency.
• This ensures that taxpayers are not taxed twice on the same income and provides relief for periods when they were not liable to Indian taxes.
•  Form 10-EE: A Crucial Step for Claiming Relief 

To avail of the tax benefits under Section 89A, taxpayers must electronically file Form 10-EE before submitting their Income Tax Return (ITR). Filing this form activates the relief option for the current and all subsequent financial years. However, once this option is exercised, it cannot be changed.

Recent updates to ITR forms have further simplified the process. Taxpayers can now claim relief under Section 89A through:

• Schedule S for income categorised as salary.
• Schedule OS for income from other sources.

These updates enable taxpayers to explicitly indicate the income eligible for relief and deduct it from their total taxable income.

• A Practical Solution for Managing Foreign Retirement Accounts 

By integrating Rule 21AAA and Form 10-EE, Section 89A provides clarity and a streamlined process for Indian residents managing foreign retirement income. It ensures:

• Transparent guidelines for tax deductions.
• Relief from the complexities of cross-border taxation.
• A practical framework to reduce the financial burden on taxpayers.

This provision underscores the government’s efforts to ease tax compliance for individuals with global income, particularly those navigating the complexities of foreign retirement accounts. It is a valuable step in supporting taxpayers with international financial ties.

Section 89A provides an effective mechanism to address double taxation on income from foreign retirement accounts, but taxpayers must carefully consider its features before opting for relief. Here are the key highlights:

• Mandatory Filing of Form 10-EE: To claim benefits under Section 89A, taxpayers must file Form No. 10-EE electronically before submitting their Income Tax Return (ITR). This step is crucial to activate the tax relief provision.
• Irrevocable Option: Once the option under Section 89A is exercised, it applies to all subsequent financial years and cannot be revoked. Taxpayers should evaluate their financial and tax scenarios carefully before opting for this provision, as it locks in their choice for the long term.
• Reversion in Case of Non-Residency: If a taxpayer who has exercised the option becomes a non-resident in subsequent years, the relief under Section 89A will be deemed invalid. In such cases:
• The tax relief exercised under Section 89A will be considered as if it was never applied.
• Income accrued in the specified foreign retirement accounts will be retrospectively taxed for the previous years when the option was active.

If you are a Resident and Ordinarily Resident (ROR) in India, holding a retirement account in countries like the USA, UK or Canada, and wish to defer taxation of income (e.g., interest, dividends or capital gains) from such accounts until withdrawal, follow these steps to file Form 10EE through the Income Tax e-filing portal:

• Step 1: Visit the Income Tax e-filing portal and log in using your credentials.
• Step 2: Go to e-file > Income Tax Forms > File Income Tax Forms.
• Step 3: From the list of available forms, choose Form 10EE.
• Step 4: Select the appropriate Assessment Year for which you are filing the form.
• Step 5: In the section titled Basic Information and Details of Specified Section, provide the requested details and download the CSV template for further inputs.
• Step 6: Enter the following details in the downloaded template:
• The account number of your foreign retirement fund.
• The name of the retirement account.
• Name of Notified Country (e.g., USA, UK or Canada).
• Balance in the Retirement Fund
• Year of Account Opening
• Taxation of Income in the Notified Country
• Year Eligible for Withdrawal
• Classify the income as Salary, Interest, Dividend or Others.
• Mention any income already reported in India under the accrual concept.
• Provide details of income not taxable in India due to your prior non-resident status.
• Return of Income Filed for Previous Years
• Step 7: Attach a statement of your foreign retirement account as supporting documentation.
• Step 8: Review the form carefully, ensure all details are accurate and submit Form 10EE.

Indian residents who meet the eligibility criteria of Section 89A and hold retirement accounts in notified countries such as the United States, Canada or the United Kingdom may benefit from the tax relief provided by this provision. 

Below are examples of qualified foreign retirement accounts that align with the requirements of Section 89A:

• 401(k) Plan (United States) 

The 401(k) is a popular employer-sponsored retirement plan in the US. It allows employees to contribute a portion of their pre-tax salary into an investment account, often partially matched by the employer. The income within the 401(k) grows tax-deferred, and withdrawals are taxed in the US. 

Under Section 89A, Indian residents can avoid being taxed on accrual in India while ensuring compliance with US tax laws at the time of withdrawal.

• IRA – Individual Retirement Account (United States) 

The IRA is a personal retirement savings account in the US that enables individuals to save for retirement with tax advantages. It includes variations like the Traditional IRA, which offers tax-deferred growth, and the Roth IRA, where contributions are taxed upfront, but withdrawals are tax-free. 

Income from an IRA held by Indian residents in the US qualifies for relief under Section 89A, ensuring seamless cross-border tax management.

• RRSP – Registered Retirement Savings Plan (Canada) 

The RRSP is a government-regulated retirement savings plan in Canada that encourages individuals to save for retirement by providing tax-deferred growth on investments. Contributions to an RRSP are deductible from taxable income in Canada, and withdrawals are taxed upon retirement. 

Section 89A ensures that Indian residents with RRSP accounts are taxed only during withdrawals, aligning with Canadian tax rules and preventing double taxation.

•  SIP – Self-Invested Personal Pension (United Kingdom)

The SIP is a flexible personal pension plan in the UK that allows individuals to invest in a wide range of assets for their retirement. Contributions to a SIP often qualify for tax relief in the UK, while withdrawals are taxed as income. 

Section 89A ensures that Indian residents with SIPs are not taxed on accrued income in India, maintaining consistency with UK tax treatment.

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