A Breakdown of Tax Reliefs Received by Non-Resident Indians in Budget 2022

Do you want to understand how the Indian Government plans to provide relief to NRIs willing to settle in India after retiring in a foreign country? If yes, read the article.

Relief for NRI taxpayers

Non Resident Indians (NRIs) who have income from foreign retirement accounts often face the issue of double taxation due to a mismatch in the year of taxability of such funds in India and other countries. The previous budget proposed to give NRIs a tax break from double taxation on money earned in foreign retirement benefits accounts by allowing them to claim relief on the income tax deducted in India.  This article will discuss how this provision in the budget can provide NRIs benefits and tax relief.

The IT Act, 1961, has been amended by the Finance Act, 2021, to include a new Section 89A, which aims to provide tax relief to NRIs with earnings from accounts for foreign retirement benefits. The Budget 2021-22 had previously proposed to alleviate the burden of double taxation for NRIs on funds accumulated in foreign retirement benefits accounts, by allowing them to claim relief on tax deducted on such money in India. However, the discrepancy in the taxation year of such funds between India and the foreign country has been an issue that this section aims to address.

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What was the need for adding Section 89A to IT Act?

At present, money withdrawn from foreign retirement funds may be subject to taxation based on the time of receipt in the foreign country, whereas it is taxed on an accrual basis in India. This inconsistency creates a genuine hardship for NRIs. To address this issue and alleviate the hardship, the budget document has proposed the addition of a new Section 89A to the Act. This new section will allow the income of a specified person from a specified account to be taxed according to the method and year prescribed by the Central Government.

A few countries tax earnings from overseas retirement benefits account on a receipt basis, while in India, the amount withdrawn from such an account is chargeable to tax on an accrual basis. This creates difficulties for NRI taxpayers in claiming foreign tax credits due to the mismatch in the year of taxability. Similarly, utilizing the double tax avoidance agreement (DTAA) benefits is also challenging. Non-resident Indians who prefer to stay in India permanently after retirement tend to face this issue, as explained by ClearTax.

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How can an NRI benefit from Section 89A of the IT Act?

For example, someone who had been employed at a large chemical company in the United Kingdom (UK) for 15 years as a non-resident of India up until the 2020-21 financial year. While he was a non-resident, he contributed to a retirement benefits account in the UK. In 2021-22, he returned to India and became a resident for that financial year.

For an individual, who was an NRI, the earnings collected in his/her account for retirement benefits up to FY 2020-21 cannot be taxed. However, for FY 2021-22, he becomes a resident of India. The amount in the account of retirement benefits in the United Kingdom is taxable in India. However, earnings from the retirement benefits account are taxable in the United Kingdom based on the year of receipt, according to Clear.

Due to the fact that no tax was paid in the UK for the financial year 2021-22 (from January to March), the individual is not able to claim a foreign tax credit against his Indian tax liability for the same financial year.

Under Section 89A, income earned from accounts opened in foreign nations is not subject to taxation on an accrual basis. This amendment, which will take effect on April 1, 2022, pertains to the assessment year 2022-23 and all future assessment years, and the foreign country is authorized to impose taxation upon withdrawal of the income.

Are benefits from Section 89A of the IT Act applicable to NRI from all countries?

As per the Central Board of Direct Taxes (CBDT), the US, the UK, Canada, and Northern Ireland are the notified countries for Section 89A of the ITA.

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The inclusion of Section 89A in the IT Act 1961 will go a long way in helping NRI working in the US, the UK, Canada and Northern Ireland to save taxes on their retirement funds accrued abroad and settle in India after retirement. The Government in future can consider making benefits available under this section to NRIs residing in other countries as well.

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