The Finance Act, 2021, inserted a new Section 89A in the Income-tax Act, 1961, (ITA), to provide relief to residents who have income from foreign retirement benefits accounts. Budget 2021-22 had proposed to provide relief from double taxation for non-resident Indians (NRIs) on money accrued in foreign retirement accounts by claiming relief on tax deducted on such money in India. Up until now there has been a mismatch in the year of taxability of such funds in India and the respective foreign country.
Finance minister Nirmala Sitharaman had said in the budget speech that when NRIs return to India, they face issues concerning their accrued corpus in foreign retirement accounts. This is usually due to a mismatch in the timing of taxation of such income in the foreign country and India. They may also face difficulties in getting credit for Indian taxes in foreign jurisdictions.
“At present, the withdrawal from such funds may be taxed on receipt basis in such foreign countries, while on an accrual basis in India. To address this mismatch and remove this genuine hardship, it is proposed to insert a new Section 89A to the Act to provide that the income of a specified person from a specified account shall be taxed in the manner and the year as prescribed by the Central Government,” said the budget document.
” A few countries tax income from such overseas retirement benefits accounts on a receipt basis. However, the amount withdrawn from such an account is chargeable to tax in India on an accrual basis. The taxpayers would face difficulties claiming the foreign tax credit because of the mismatch in the year of taxability. Similarly, claiming the double tax avoidance agreement (DTAA) benefits also was a challenge in such a situation. Non-resident Indians (NRIs) who chose to settle in India after retirement permanently would usually face this issue,” explains ClearTax.
For instance an individual worked with a petroleum giant in the UK for 20 years. He was a non-resident of India till the financial year (FY) 2020-21. He contributed to a retirement benefits account in the UK while he was a non-resident of India. In FY 2021-22, he returned and became a resident of India for FY 2021-22.
“As he was an NRI to India, income accrued to his retirement benefits account up to FY 2020-21 is not taxable. However, for FY 2021-22, he is a resident of India. The accruals in retirement benefits accounts in the UK are taxable in India. On the other hand, income from the retirement benefits account is taxable in the UK on a receipt basis (year of receipt),” said Clear.
Considering that no tax was paid in the UK in FY 2021-22 (from January to March), he is not eligible to claim a foreign tax credit against Indian tax liability in FY 2021-22.
According to Section 89A, the income from the accounts opened in a foreign nation will not be taxable on an accrual basis. The foreign country will subject his income to taxation at the time of withdrawal. The amendment is effective from April 1, 2022, which will apply to the assessment year (AY) 2022-23 and subsequent AYs.
The US, the UK, Canada, and Northern Ireland are the notified countries for Section 89A of the ITA, as per the Central Board of Direct Taxes (CBDT).
Finance minister Nirmala Sitharaman had said in the budget speech that when NRIs return to India, they face issues concerning their accrued corpus in foreign retirement accounts. This is usually due to a mismatch in the timing of taxation of such income in the foreign country and India. They may also face difficulties in getting credit for Indian taxes in foreign jurisdictions.
“At present, the withdrawal from such funds may be taxed on receipt basis in such foreign countries, while on an accrual basis in India. To address this mismatch and remove this genuine hardship, it is proposed to insert a new Section 89A to the Act to provide that the income of a specified person from a specified account shall be taxed in the manner and the year as prescribed by the Central Government,” said the budget document.
” A few countries tax income from such overseas retirement benefits accounts on a receipt basis. However, the amount withdrawn from such an account is chargeable to tax in India on an accrual basis. The taxpayers would face difficulties claiming the foreign tax credit because of the mismatch in the year of taxability. Similarly, claiming the double tax avoidance agreement (DTAA) benefits also was a challenge in such a situation. Non-resident Indians (NRIs) who chose to settle in India after retirement permanently would usually face this issue,” explains ClearTax.
For instance an individual worked with a petroleum giant in the UK for 20 years. He was a non-resident of India till the financial year (FY) 2020-21. He contributed to a retirement benefits account in the UK while he was a non-resident of India. In FY 2021-22, he returned and became a resident of India for FY 2021-22.
“As he was an NRI to India, income accrued to his retirement benefits account up to FY 2020-21 is not taxable. However, for FY 2021-22, he is a resident of India. The accruals in retirement benefits accounts in the UK are taxable in India. On the other hand, income from the retirement benefits account is taxable in the UK on a receipt basis (year of receipt),” said Clear.
Considering that no tax was paid in the UK in FY 2021-22 (from January to March), he is not eligible to claim a foreign tax credit against Indian tax liability in FY 2021-22.
According to Section 89A, the income from the accounts opened in a foreign nation will not be taxable on an accrual basis. The foreign country will subject his income to taxation at the time of withdrawal. The amendment is effective from April 1, 2022, which will apply to the assessment year (AY) 2022-23 and subsequent AYs.
The US, the UK, Canada, and Northern Ireland are the notified countries for Section 89A of the ITA, as per the Central Board of Direct Taxes (CBDT).
