Section 89A of the Income Tax Act

Earlier, taxpayers struggled with claiming foreign tax credits and Double Tax Avoidance Agreement (DTAA) benefits due to discrepancies in the taxable year. With the introduction of Section 89A of Income Tax Act in 2021, this issue was addressed.

Section 89A offers relief to residents with income from foreign retirement benefit accounts. To learn more about this section, read on.

What is Section 89A of Income Tax Act

The introduction of Section 89A offers tax relief to Indian residents earning income from foreign retirement accounts. The main objective of Section 89A is to tackle the problem of double taxation for returning residents.

Normally, India taxes income on an accrual basis. This implies that even if you have not withdrawn money from your foreign retirement account, the income earned within it could still be taxed in India. This can be a significant burden for those intending to use these funds later in life.

Suppose you worked in the United States for 15 years and contributed to a 401(k) retirement account during that time. Until FY 2022-23, you were a non-resident of India. In FY 2023-24, you returned to India and became a resident.

While you were an NRI, India did not tax any income accrued in your 401(k) up to FY 2022-23. However, from FY 2023-24 onward, as an Indian resident, you must pay tax in India on the income accrued in your 401(k). In contrast, the United States taxes this income only when you withdraw it, not when it accrues. Since you did not pay tax on your 401(k) income in the US during FY 2022-23, you cannot claim a foreign tax credit against your Indian tax liability for that period.

Section 89A brings a significant change by exempting income from foreign retirement accounts from taxation in India on an accrual basis, shifting the tax liability to the foreign country, which will tax the income only at the time of withdrawal. Effective April 1, 2022, this amendment applies from the Assessment Year (AY) 2022-23 onwards, ensuring that you and others in a similar situation avoid the burden of double taxation.

Who Can Claim Benefits Under Section 89A

The following entities can enjoy deduction under Section 89A:

  • Specified Person: It includes an Indian resident who, while residing outside India as a non-resident, opened a specified retirement account in a country recognised by the Central Government. 
  • Specified Account: A specified account is a retirement account held in a notified country. Income from such an account is not taxable in India upon accrual. Instead, taxation occurs in the notified country when funds are withdrawn.
  • Notified Country: This includes countries designated by the Central Government for the purposes of Section 89A. Currently, the USA, the UK, and Canada are countries where residents can establish specified accounts, and the tax treatment aligns with the regulations of those countries.

Rule 21AAA and Form 10-EE Under Section 89A

Rule 21AAA and Form 10-EE under Section 89A of Income Tax Act provide clear guidelines for taxpayers with income from foreign retirement benefit accounts. Rule 21AAA states that the income credited to such an account gets added to your total income for the year it is taxed in the country where the account is held.

However, the taxable income does not include amounts taxed in previous years or income that was not taxable in India during accrual due to non-residency or non-ordinary residency. To obtain relief, taxpayers need to e-file Form 10-EE before submitting their Income Tax Return (ITR). After selecting this option, it remains in effect for all future years, and you cannot change it.

Recent updates to ITR forms enable taxpayers to avail relief in Schedule S (income from salary) and Schedule OS (income from other sources) under Section 89A. This streamlines the process, allowing taxpayers to indicate the income claimed for relief from taxation u/s 89A and deduct it from their total income.

Section 89A of Income Tax Act is valuable, especially for those trying to navigate foreign retirement benefit accounts in India. It offers clarity on deductions and potential tax savings, making it easier for Indian residents to manage their foreign retirement income. The government has streamlined the process, providing a practical solution to ease the tax burden related to foreign retirement accounts.

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