Section 89A of the Income-tax Act: Relief for Residents with Foreign Retirement Benefits Accounts

The Finance Act of 2021 brought about significant changes to the Income Tax Act of 1961 (ITA), with the introduction of a new provision known as Section 89A. This section was specifically designed to provide relief to residents who have income from foreign retirement benefits accounts. Prior to this amendment, taxpayers faced challenges in claiming foreign tax credits and Double Tax Avoidance Agreement (DTAA) benefits due to a mismatch in the year of taxability.

The Challenge of Mismatched Taxability for Residents with Foreign Retirement Benefits Accounts

In certain countries, income from overseas retirement benefits accounts is taxed on a receipt basis, meaning that tax is imposed when withdrawals are made. However, in India, the amount withdrawn from such accounts is chargeable to tax on an accrual basis. This discrepancy in the year of taxability created difficulties for taxpayers in claiming foreign tax credits and DTAA benefits, particularly for non-resident Indians (NRIs) who chose to settle in India after retirement.

To illustrate this challenge, let's consider the case of an individual who worked with a petroleum giant in the UK for 20 years. Until the Financial Year (FY) 2020-21, he was a non-resident of India. During his time as a non-resident, he contributed to a retirement benefits account in the UK. However, in FY 2021-22, he returned to India and became a resident for that year.

As a non-resident, the income accrued to his retirement benefits account up to FY 2020-21 was not taxable in India. However, as a resident of India for FY 2021-22, the accruals in his retirement benefits account in the UK became taxable in India. On the other hand, income from the retirement benefits account is taxable in the UK on a receipt basis.

The problem arises when no tax has been paid in the UK during FY 2021-22. In such cases, taxpayers are not eligible to claim a foreign tax credit against their Indian tax liability for that year.

Introducing Section 89A: Relief for Residents with Foreign Retirement Benefits Accounts

To address this issue, the Finance Act, 2021, introduced Section 89A in the Income Tax Act, 1961. This new provision ensures that income from accounts opened in foreign nations will not be taxable on an accrual basis in India. Instead, the foreign country will subject the individual's income to taxation at the time of withdrawal.

The amendment came into effect on April 1, 2022, and applies from the Assessment Year (AY) 2022-23 onwards.

Notified Countries for Section 89A

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

Rule 21AAA and Form 10-EE: Claiming Relief Under Section 89A

To claim relief under Section 89A regarding income from foreign retirement funds, the CBDT has notified Rule 21AAA and Form 10-EE for non-resident Indians (NRIs).

Rule 21AAA: Taxation of Income in Overseas Retirement Benefits Accounts

Rule 21AAA specifies that if a taxpayer has accrued any income in an overseas retirement benefits account, it should be included in their total income for the previous year in which it is taxed on withdrawal or redemption in the notified country where the account is maintained. The income is taxed by the country where the account is maintained.

However, certain types of income are excluded from taxation under Rule 21AAA. These include income that has already been taxed in previous years as per the ITA, income that was not taxable in India during the year of accrual due to the taxpayer being a non-resident or resident but not ordinarily resident (RNOR), and income exempted under the DTAA (if applicable).

Form 10-EE: Filing for Relief under Section 89A

Taxpayers are required to e-file Form No. 10-EE before filing their Income Tax Return (ITR) to claim relief under Section 89A. Once this option is exercised, it applies to all subsequent previous years and cannot be withdrawn.

However, if a taxpayer becomes a non-resident after exercising the option, it is deemed that they have never exercised the option. Consequently, the income accrued in the specified account from the previous year in which the option was exercised becomes taxable during the relevant previous year.

Amendments to ITR Forms for Section 89A

The new Income Tax Return (ITR) forms have been amended to accommodate the provisions of Section 89A. Schedule-S, which details income from salary, now allows taxpayers to claim relief from taxation under Section 89A in the prescribed manner. Taxpayers are required to mention the relief amount claimed to be reduced from the gross total salary. A similar disclosure must be made in Schedule-OS for income from other sources, specifically in regards to family pensions.

Salient Features of the Option Under Section 89A

To summarize, here are the salient features of the option available under Section 89A:

1. Taxpayers must file Form No.10-EE before filing their ITR.
2. Once the option is exercised, it applies to all subsequent years and cannot be withdrawn.
3. If a specified person becomes a non-resident after exercising the option, it is deemed that the option was never exercised. Consequently, the income accrued in the specified account from the previous year in which the option was exercised becomes taxable in the relevant previous year.
4. The Principal Director-General of Income-tax (Systems) or Director-General of Income-tax (Systems) is responsible for specifying the procedures, formats, and standards for the secure capture and transmission of data. They are also responsible for implementing appropriate security, archival, and retrieval policies with respect to Form No.10-EE.

Conclusion

Section 89A of the Income-tax Act, 1961, provides relief to residents with income from foreign retirement benefits accounts. By ensuring that income from such accounts is not taxable on an accrual basis in India, but rather at the time of withdrawal in the foreign country, this provision addresses the challenges faced by taxpayers in claiming foreign tax credits and DTAA benefits. To claim relief under Section 89A, taxpayers must file Form No.10-EE and adhere to the prescribed procedures. These amendments aim to streamline the taxation process for individuals with foreign retirement benefits accounts and promote ease of compliance.

Frequently Asked Questions (FAQs)

Q: As an NRI, can I completely avoid taxes under the Double Taxation Avoidance Agreement (DTAA)?

A: No, the DTAA does not allow you to completely avoid taxes. However, it does provide a mechanism to avoid paying higher taxes in both countries.

Q: Can I initiate the process of filing the return of income now?

A: While the CBDT has made all income-tax return filing forms for the AY 2022-23 available, the income tax filing process will officially begin in June, once all tax deductions have filed their TDS returns. Only after this process can taxpayers' Form 26AS reflect their accurate income and tax credits.

Q: Do I need to furnish the country code and ZIP code in the new ITR form for a property purchased in a foreign country?

A: Yes, the new ITR forms now require the country code and ZIP code for properties situated outside India