Certain residents invest in foreign retirement benefit accounts. Some countries tax Income from such accounts on a receipt basis. Income-tax Act however taxes Income from foreign retirement benefit accounts on an accrual basis. This results in a mismatch in the year of taxability because of which the assessees face problems to claim the foreign tax credit.
The Department has recognised this issue and has introduced section 89A by the Finance Act, 2021, w.e.f. 1-4-2022. According to section 89A, if a specified person has income accrued in a specified account, such income shall be taxed in such manner and in such year as may be prescribed.
Let us first understand certain terms:
- Specified person - A specified person means a resident who opened a specified account in a notified country while being non-resident in India and resident in that country.
- Specified account - Specified account means an account maintained in a notified country in respect of retirement benefits and the Income from such account is not taxable on an accrual basis but is taxed by such country at the time of withdrawal or redemption.
- Notified country - Notified country means a country as may be notified by the Central Government. At present notified countries are UK, USA & Canada.
How is Income from the Foreign Retirement Benefits Account taxed?
If a specified person has Income accrued in a specified account then the same shall be included in the total income of the previous year in which such income is taxed in the country wherein such account is maintained. For Ex. Mr X, a resident of India have a retirement benefits account in the USA and his income from such account was taxed in the USA in FY 2021-22, then such income will also be included in total income in India in FY 2021-22. However, Mr X can claim relief for taxes paid in the USA.
What are the conditions to exercise the option under section 89A?
- The taxpayer is required to file Form 10-EE before filing of Income-tax Return.
- An option once exercised shall apply to all subsequent years and cannot be subsequently withdrawn.
- If a specified person becomes non-resident after exercising the option then the option exercised shall be deemed to have been never exercised. Further, Income accrued in the specified accounts shall be taxed from the previous years in which the option was exercised.