- Date : 14/03/2023
- Read: 4 mins
Your residential status determines how much of your income will be taxable in India. Find out how foreign retirement funds are taxed in India and how Section 89A helps returning NRIs by preventing them from being taxed twice and making it easier for them to get tax credits.
When it comes to NRI taxation, a crucial question in many people's minds is how foreign retirement funds are taxed in India. To begin with, let's understand that your residential status determines how much of your income will be taxable in India.
What is Your Residential Status?
The Income Tax Act says that every fiscal year, your residency status needs to be checked.
If you are a taxpayer in India, your tax obligations depend on whether you live there or not. Most people don't live there. In these situations, any income earned, received, or thought to have been received in India is taxed.
But if you meet the requirements for a resident taxpayer, you have to pay taxes on all of your income, no matter where it comes from. This means that India can tax both your income from India and your income from other countries.
Reporting Foreign Income in ITR
According to the ITR form, Indian residents must report any income from foreign assets and pay the correct taxes when they file their ITR.
So, if you are a non-resident or a resident who does not live in India most of the time, any retirement income you get from a country other than India is not taxed in India.
However, circumstances may vary if you meet the criteria of being a resident taxpayer. It is essential to check Double Taxation Avoidance Agreements (DTAA) established between two countries to prevent double taxation on the same income.
Also Read: 8 Ways to Help You Pursue Your Financial Goals
New Section 89A in the Income-Tax Act
Section 89A was added to the Income Tax Act of 1961 by the Finance Act of 2021. This was done to help Indian residents who get money from foreign retirement benefit accounts. The goal of the budget for the fiscal year 2021–22 was to stop non-resident Indians (NRIs) from being taxed twice on their income from foreign retirement accounts.
Under Section 89A, people who have income from foreign retirement accounts and pay taxes on it in India can get a tax break in the same year.
The deduction is the lower of the following amounts:
- The Indian tax liability on such income is
- The foreign taxes paid on such income
This relief is only for residents who have paid taxes on their income in another country, and it starts in FY 2021–22.
The government introduced this provision due to the existing discrepancy between the taxability years of such funds in India and their respective foreign countries. Finance Minister Nirmala Sitharaman, in her budget speech in 2023, highlighted the difficulties faced by returning non-resident Indians (NRIs) with their accumulated funds in foreign retirement accounts.
Also Read: Are You Maximizing Your Retirement Potential?
The fact that these accounts have different tax years at different times can make it hard to claim the foreign tax credit and get the benefits of the Double Tax Avoidance Agreement (DTAA). In some countries, the money taken out of these accounts is taxed when it is received. In India, however, the money is taxed when it is earned.
To address this issue, the government has provided a provision allowing returning NRIs to defer taxes on their retirement funds until withdrawal. This provision aims to prevent any mismatch between Indian and foreign taxation.
Conclusion
In India, NRI taxation is a hot topic, and foreign retirement funds are at the top of the list. The extent to which your income is taxed depends on your residence.
The new Section 89A relieves returning NRIs by avoiding double taxation and easing tax credit claims. It aims to eliminate the difficulties NRIs face in settling in India after retirement, ensuring fair treatment and peace of mind. The government has also made a way for people to put off paying taxes on their retirement funds until they take money out of them.
When it comes to NRI taxation, a crucial question in many people's minds is how foreign retirement funds are taxed in India. To begin with, let's understand that your residential status determines how much of your income will be taxable in India.
What is Your Residential Status?
The Income Tax Act says that every fiscal year, your residency status needs to be checked.
If you are a taxpayer in India, your tax obligations depend on whether you live there or not. Most people don't live there. In these situations, any income earned, received, or thought to have been received in India is taxed.
But if you meet the requirements for a resident taxpayer, you have to pay taxes on all of your income, no matter where it comes from. This means that India can tax both your income from India and your income from other countries.
Reporting Foreign Income in ITR
According to the ITR form, Indian residents must report any income from foreign assets and pay the correct taxes when they file their ITR.
So, if you are a non-resident or a resident who does not live in India most of the time, any retirement income you get from a country other than India is not taxed in India.
However, circumstances may vary if you meet the criteria of being a resident taxpayer. It is essential to check Double Taxation Avoidance Agreements (DTAA) established between two countries to prevent double taxation on the same income.
Also Read: 8 Ways to Help You Pursue Your Financial Goals
New Section 89A in the Income-Tax Act
Section 89A was added to the Income Tax Act of 1961 by the Finance Act of 2021. This was done to help Indian residents who get money from foreign retirement benefit accounts. The goal of the budget for the fiscal year 2021–22 was to stop non-resident Indians (NRIs) from being taxed twice on their income from foreign retirement accounts.
Under Section 89A, people who have income from foreign retirement accounts and pay taxes on it in India can get a tax break in the same year.
The deduction is the lower of the following amounts:
- The Indian tax liability on such income is
- The foreign taxes paid on such income
This relief is only for residents who have paid taxes on their income in another country, and it starts in FY 2021–22.
The government introduced this provision due to the existing discrepancy between the taxability years of such funds in India and their respective foreign countries. Finance Minister Nirmala Sitharaman, in her budget speech in 2023, highlighted the difficulties faced by returning non-resident Indians (NRIs) with their accumulated funds in foreign retirement accounts.
Also Read: Are You Maximizing Your Retirement Potential?
The fact that these accounts have different tax years at different times can make it hard to claim the foreign tax credit and get the benefits of the Double Tax Avoidance Agreement (DTAA). In some countries, the money taken out of these accounts is taxed when it is received. In India, however, the money is taxed when it is earned.
To address this issue, the government has provided a provision allowing returning NRIs to defer taxes on their retirement funds until withdrawal. This provision aims to prevent any mismatch between Indian and foreign taxation.
Conclusion
In India, NRI taxation is a hot topic, and foreign retirement funds are at the top of the list. The extent to which your income is taxed depends on your residence.
The new Section 89A relieves returning NRIs by avoiding double taxation and easing tax credit claims. It aims to eliminate the difficulties NRIs face in settling in India after retirement, ensuring fair treatment and peace of mind. The government has also made a way for people to put off paying taxes on their retirement funds until they take money out of them.
