For non-residents who have worked abroad and subsequently returned to India and became tax residents here, or expatriates who have become tax residents in India, taxation on their Foreign Retirement Accounts (FRAs) has been a long-standing one. It has been a painful issue. While the foreign country in which they have FRAs generally taxed such income only on withdrawals, there was no such provision in the Indian tax laws. They had to pay tax on such income for the years in which the income was earned and deposited in their retirement accounts.
This mismatch in the year of taxation resulted in loss of credit for taxes paid abroad. Such tax was deducted at source at the time of withdrawal in the foreign country, whereas the income would have already been taxed in India in an earlier year, at which time there was no tax deduction, and hence no tax credit. This resulted in double taxation – once in India and then, in a foreign country.
An enabling provision was made in last year’s budget to eliminate such problems. It covered a person resident in India who opened a retirement account in a foreign country when he was a non-resident in India and was a resident of a country where income from retirement account is not taxable on an accrual basis but only at the time of withdrawal or redemption. Rules on this have just been framed and notified, and the respective countries (USA, UK and Canada) have also been notified.
The new rule, which comes into force from 2021-22, provides that a person may, by filing Form 10EE before the due date of filing of income tax, exercise an irrevocable option to receive income from such FRA in the year of withdrawal or redemption. can use. Return. This option has to be exercised for all FRAs of an individual and all of them are required to be disclosed in the form.
Income which has been taxed earlier will not be taxed at the time of withdrawal or redemption. Also, income taxable in India in the year of accrual on account of that person being a non-resident or on account of Double Taxation Avoidance Agreement (DTAA) will not be taxable in India at all. However, tax credit will not be allowed for foreign taxes paid on such income which is not taxable at the time of redemption or withdrawal.
This is a significant relief for the people having FRA and this option should definitely be exercised by the affected persons. They will now get credit against their Indian tax liability for taxes paid abroad on withdrawal or redemption. However, this only applies prospectively from 2021-22. If an income has been offered to be taxed in the previous years when the income was earned, the person will lose the benefit of claiming credit of foreign tax. Conversely, a person who has not offered such income for tax in the years prior to accrual, though taxable, appears to have been placed in a better position. This seems unfair, as the compliant taxpayer has to pay double tax through no fault of his own.
Further, one now has to reconcile income from such FRA at the time of withdrawal to exclude income earned when the person was a non-resident or when the income was not taxable due to tax treaty. Relevant foreign tax withholding and payment will have to be divided between taxable income from 2021-22 and taxable income in India, paid on taxable income before 2021-22, for tax credit only for income taxable from 2021-22 to claim.
Gautam Nayak is a Partner at CNK & Associates LLP.
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