For non-residents who’ve labored overseas and have thereafter returned to India and turn out to be tax residents right here, or expatriates who’ve turn out to be tax residents in India, taxation of their overseas retirement accounts (FRAs) has lengthy been a sore level. While the overseas nation wherein they’ve their FRAs typically taxes such revenue solely on withdrawal, there was no such provision in Indian tax legal guidelines. They needed to pay tax on such revenue for the years wherein the revenue was earned and credited to their retirement accounts.
This mismatch within the 12 months of taxation additionally led to a lack of credit score for taxes paid within the overseas nation. Such tax was deducted at supply on the time of withdrawal within the overseas nation, whereas the revenue would have already got been taxed in India in an earlier 12 months at which level of time there was no tax deduction, and due to this fact no tax credit score. This resulted in double taxation—as soon as in India after which, abroad.
In final 12 months’s finances, an enabling provision was enacted to eradicate such issues. This lined an individual resident in India who opened a retirement account abroad, when he was non-resident in India and a resident of that nation, the place the revenue from the retirement account was not taxable on an accrual foundation however solely on the time of withdrawal or redemption. The guidelines on this have simply been framed and notified, and the related nations (the USA, UK, and Canada) have additionally been notified.
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The new rule, which applies from 2021-22, supplies that an individual can train an irrevocable choice to have revenue from such an FRA taxed within the 12 months of withdrawal or redemption, by submitting a type 10EE earlier than the due date of submitting the revenue tax return. This choice needs to be exercised for all FRAs of a person, and the shape requires disclosure of all of them.
Income that has been taxed earlier is not going to be taxed on the time of withdrawal or redemption. Also, revenue that was not taxable in India within the 12 months of accrual as a result of individual being a non-resident or as a consequence of a Double Taxation Avoidance Agreement (DTAA), wouldn’t be taxed in India in any respect. However, the tax credit score wouldn’t be allowed for overseas taxes paid on such revenue which isn’t taxable on the time of redemption or withdrawal.
This is a big aid for individuals holding FRAs and this selection ought to definitely be exercised by affected individuals. They would now get credit score in opposition to their Indian tax legal responsibility for the taxes paid within the overseas nation on withdrawal or redemption. However, this is applicable solely prospectively from 2021-22. If any revenue has been provided to tax in earlier years when the revenue accrued, the individual would lose the advantage of claiming credit score of the overseas tax. In distinction, an individual who has not provided such revenue to tax within the earlier years of accrual, although taxable, appears to be positioned higher off. This does appear unfair, because the compliant taxpayer finally ends up paying double tax for no fault of his.
Also, one would now need to reconcile the revenue from such FRAs on the time of withdrawal, to exclude the incomes accrued when the individual was a non-resident or when the revenue was not taxable as a consequence of a tax treaty. The related overseas tax withholding and cost must be bifurcated between that paid on taxable revenue earlier than 2021-22, taxable revenue from 2021-22 and revenue not taxable in India, to assert tax credit score just for taxable revenue from 2021-22.
Gautam Nayak is accomplice, CNK and Associates LLP.
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