Retire Internationally, File Locally: Taxes on Foreign Retirement Funds
When individuals return to India after working abroad, one of the most important areas that requires attention is the taxation of foreign retirement accounts.
Many returning professionals have accumulated retirement funds like 401(k), IRA, UK RSPP or Singapore CPF during the stay overseas. The tax treatment of these accounts changes significantly once the individual becomes Resident and Ordinarily Resident (ROR) in India.
Understanding how and when these accounts are taxed can help avoid unnecessary tax exposure and double taxation.
TAXATION IN INDIA:
India taxes individuals based on their residential status under Income tax Act.
| Non-Resident (NRI) | Resident but Not Ordinarily Resident (RNOR) | Resident and Ordinarily Resident (ROR) |
| Only income earned or received in India is Taxable | Only income earned or received in India is Taxable. Foreign Income is generally not Taxable in India | Global Income Taxable in India |
Once you attain your ROR Status in India, your worldwide income becomes taxable, regardless of whether it is earned or received in India or overseas including income accruing in foreign retirement accounts.
FOREIGN RETIREMENT ACCOUNTS:
Individuals who have previously lived and worked overseas typically accumulate long-term savings through Foreign Retirement accounts, such as Pension Plans or Provident funds, to support their post-retirement financial goals.
For Example:
- U.S.A. – 401(k), Traditional Individual Retirement Accounts (IRA),
- U.K. – Pension funds, Self-Invested Personal Pension (SIPP), and
- Canada – Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF)
In many of these foreign countries, income from retirement accounts is taxed only at the time of withdrawal or distribution and not while it accumulates. However, On the other hand, India generally taxes such income on an accrual basis.
ISSUE OF DOUBLE TAXATION:
If a person is treated as a ROR in India, then the global income – whether earned and received in India or in another country is taxable in India. This income might also be subject to taxation in the other country where it was earned.
This leads to double taxation, where the person ends us paying tax in both countries on the same income.
To prevent such double taxation, India has Double Taxation Avoidance Agreement (DTAA) with many countries, where they can claim foreign tax credit for the taxes paid abroad on the income earned in that Country.
This means, they don’t have to pay tax twice on the same income, and the tax paid abroad is adjusted to the tax payable in India, while filing the Income Tax returns.
However, in case of foreign retirement accounts, the mismatch in timing of taxation often results in double taxation of the same income – first in India on an accrual basis and later in the foreign country upon withdrawal. As a result, foreign tax credits may not be available in the same year, leading to practical double taxation.
TAX RELIEF ON INCOME FROM FOREIGN RETIREMENT FUNDS:
To address this hardship, the Indian legislature introduced Section 89A along with Rule 21AAA under the Income Tax Act, 1961. This relief continues under Section 158 under the Income Tax Act, 2025.
In short, this provision allows eligible individuals to defer taxation in India on income earned in specified foreign retirement accounts until the year in which the income is taxed in the foreign country typically at time of withdrawal.
In effect, the Indian’s taxation is aligned with foreign country’s taxation.
As a result, it helps to eliminate double taxation and allows proper claim of foreign tax credit.
For example, if income in a U.S. 401(k) account in 2026 but is taxed in U.S. only in 2040 upon withdrawal, then such income shall be taxable in India in 2040 and not in 2026, provided the individual has opted for relief under Section 89A.
Who can claim this Tax relief under Section 89A?
An Individual who –
- Had opened a retirement account* in a foreign country** that has been officially notified by the Indian Government**
- Had been a resident of that foreign country and Non-Resident in India when the retirement account was opened.
* The Retirement Account is designed to provide retirement benefits in the form of pension or withdrawals.
**The Foreign country taxes the income from such retirement accounts only upon withdrawal or distribution, not on accrual.
***The countries notified by the Indian Government for Financial year 2025-26 and onwards are United States of America (U.S.A.), United Kingdom of Great Britain and Northern Ireland (U.K.) and Canada.
NOTE: The relief will be applied for the tax year when the taxpayer is ROR, where income from such retirement accounts is taxed on an accrual basis in India. Income accrued includes Dividends, Capital Gains, or other taxable income.
FILING REQUIREMENTS – FORM 10-EE:
To claim the relief under Section 89A, the taxpayer is required to file Form 10-EE specifying the details of the Specified Retirement Account on or before the due date of filing the Income Tax Returns as applicable in your case.
Important points to note:
- The option to claim relief is exercised through this form
- It is a one-time option and shall be valid for all subsequent years
- Option cannot be withdrawal once exercised
- If that individual becomes non-resident again, specific tax consequences may apply.
If the Individual becomes non-resident again, the income accrued from the period when the option was first exercised becomes taxable in India as an accrued Income and not in the year of withdrawal or distribution.
Therefore, it is important to review the tax implications before opting for the Tax Relief.
Documentation and Compliance:
You are required to maintain proper documentation, including:
- Proof that the account qualifies as a Retirement Benefits Account
- Proof of Resident status at the time of opening the account
- Statement showing income accrued in the Account
- Tax Treatment abroad on the Retirement Accounts
- Copy of filed Form 10 EE
These documents may be required by the Income Tax department during assessment or scrutiny proceedings.
CONCLUSION:
Once an individual becomes a ROR, global income including the income accrued in the foreign retirement accounts such as 401(k), IRA, US Pension or RRSP becomes taxable in India.
Due to the timing differences in taxation between India and other foreign countries, double taxation can arise.
Section 89A provides relief by allowing deferment of taxation in India until the year in which the income is taxed in the foreign country. This benefit is available only if Form 10 EE is filed within the prescribed time.
Proper planning and timely compliance are essential to ensure tax efficiency and avoid unintended tax exposure when returning to India.
This article is written by Parkave B, Manager at V Ramaratnam and Company, Chartered Accountants. For expert guidance on NRI Taxation and taxation on foreign Income, Contact Us today and ensure your global retirement savings are handled tax-efficiently.
