People who work abroad and returned to India, become tax residents in India, and the taxation of their foreign retirement accounts (FRAs) has been a hurting point for a longer time. While the foreign country where they have their FRAs generally taxes this income only on withdrawal, there was no such provision in Indian tax rules. On this income, they need to furnish the tax for the years in which the income was earned and credited to their retirement accounts.
A loss of credit is thereafter seeing the mismatch in the year of taxation towards the taxes furnished in the foreign country. This tax was deducted at the source during the time of withdrawal in the foreign country, while the income will already be taxed in India in the former year when there was no tax deduction, and thus no tax credit. This resulted in double taxation once in India and then in a foreign country.
In the former year’s budget, an enabling provision came to remove these issues. This surrounded a person resident in India who opened a retirement account in a foreign country when he was non-resident in India and a resident of that country, in which the income from the retirement account was not taxable on accrual grounds however only during the withdrawal or redemption time. The compliance on this are made and shown and the related countries like USA, UK, and Canada is being reported.
The latest rule, which applies from 2021-22 used to furnish that an individual can do an irrevocable option to pose the income via these FRA taxed in the year of withdrawal or redemption, through furnishing a form 10EE prior to the due date of furnishing the ITR. the same option needs to be executed for all FRAs of the person, along with that the form news disclosure of all of them.
Income that has been taxed before would not be taxed during the time of withdrawal or redemption. Indeed the income that was not taxable in India in the year of the accrual because the individual is a non-resident or because of the Double Taxation Avoidance Agreement (DTAA), will not be taxed in India at all. But the tax credit will not be permitted for the foreign taxes furnished on this income which does not come under tax during the time of redemption or withdrawal.
The same is an important relief for people holding FRAs and this choice must be performed by the affected individual. They will now obtain the credit with respect to their Indian tax liability for the taxes furnished in the foreign country on the withdrawal or redemption. But it is applied to the year 2021-22. If any income has been provided to the tax in former years when the income is earned then the person will not get the advantage of claiming the credit of the foreign tax. Moreover, a person who has not furnished this income to tax in the former years of accrual but taxable looks to be placed effectively. This looks unfair as the complaint assessee finishes up furnishing the double tax for no fault of his.
One needs to resolve the income from these FRAs during the time of withdrawal to not include the incomes earned when the individual was a non-resident or when the income did not come under tax because of a tax treaty. The related foreign tax withholding and the payment will need to be bifurcated between the same furnished on the taxable income prior to 2021-22, the taxable income from 2021-22 along with the income not taxable in India is to avail the tax credit only for the income which comes under tax 2021-22.
