Introduction
Many NRIs spend years working in countries such as the United States, Canada, or the United Kingdom and contribute regularly to retirement accounts available in those countries. However, when they return to India and become tax residents again, a major tax question arises.
Should the yearly income accumulating inside those foreign retirement accounts be taxed in India every year, even though the foreign country may tax the account only at the time of withdrawal or maturity?
Without a special provision, this situation could create double taxation. India may tax the annual accruals because the individual has become a resident, while the foreign country may tax the same income again when the retirement account matures.
To address this issue, the Income Tax Act introduced a special tax deferral mechanism. Under the old law, this was covered by Section 89A. Under the Income Tax Act, 2025, the corresponding provision is Section 158.
Main Discussion
Why Was Section 158 Introduced?
As a general rule, an Indian resident is taxed on global income.
Normal Tax Position for Residents
| Particulars | Taxability in India |
|---|---|
| Indian Income | Taxable |
| Foreign Income | Taxable |
| Global Income | Taxable |
This means that once a person becomes a resident in India, income earned anywhere in the world may become taxable in India.
The problem arises when the foreign country follows a different taxation system for retirement accounts.
Typical Retirement Account Situation
| Stage | Foreign Country Treatment |
|---|---|
| Annual Accruals | Not taxed |
| Retirement / Maturity | Taxed |
For example, a retirement account may earn interest, dividends, and capital gains every year, but the foreign country may tax the account only when funds are withdrawn at retirement.
India, however, could tax those yearly accruals immediately because the individual has become an Indian resident.
This creates a potential double taxation issue.
What Relief Does Section 158 Provide?
Section 158 provides tax deferral.
Instead of paying tax in India every year on the accruals inside the retirement account, the taxation can be postponed until the year in which the foreign country taxes the retirement account.
Benefit Available
| Particulars | Treatment |
|---|---|
| Annual Accruals | Tax Deferred |
| Tax Payment in India | Postponed |
| Taxation at Maturity | Applicable |
| Foreign Tax Credit | Available subject to conditions |
This ensures that both countries tax the income broadly at the same stage, reducing double taxation concerns.
Who Can Claim the Benefit?
The benefit is not available to everyone.
Three important conditions must be satisfied.
Condition 1: Specified Person
The taxpayer must be a resident individual in India.
| Requirement | Condition |
|---|---|
| Individual | Mandatory |
| Resident in India | Mandatory |
Condition 2: Specified Account
The retirement account must have been opened when the person was a non-resident.
| Requirement | Condition |
|---|---|
| Retirement Account | Mandatory |
| Opened While Non-Resident | Mandatory |
For example, if a person worked in the US and opened a retirement account while living there, this condition may be satisfied.
Condition 3: Notified Country
Currently, the relief applies only to specified countries.
Notified Countries
| Country | Eligible |
|---|---|
| United States | Yes |
| United Kingdom | Yes |
| Canada | Yes |
At present, these are the notified countries covered under the provisions.
Form Filing Requirement
To claim tax deferral, the prescribed form must be filed.
Relevant Forms
| Law | Form |
|---|---|
| Earlier Law | Form 10EE |
| Income Tax Act, 2025 | Form 40 |
The form should be filed before the due date of filing the Income Tax Return.
The form contains details such as:
- Retirement account information
- Opening details
- Balance details
- Accumulated income
- Expected maturity details
Once the form is properly filed, annual taxation can be deferred under the prescribed conditions.
Is the Form Required Every Year?
This is a common concern among returning NRIs.
A practical issue arose regarding whether the declaration must be filed every year or only once.
The interpretation discussed in the transcript is that the form is intended as a one-time declaration rather than a recurring annual filing.
Filing Requirement
| Particulars | Position |
|---|---|
| Initial Filing | Required |
| Annual Re-Filing | Generally not required |
| Benefit Continuation | Continues subject to conditions |
This provides practical relief to taxpayers who have already opted for the tax deferral mechanism.
How Does Taxation Work at Maturity?
Let us understand the practical outcome.
Assume a retirement account earns income every year for several years after the individual becomes an Indian resident.
Instead of taxing those accruals every year, India defers taxation.
When the account matures:
- The foreign country taxes the retirement account.
- India taxes the deferred income relevant to the resident period.
- Foreign tax credit may be claimed subject to applicable provisions.
Maturity Stage
| Event | Tax Treatment |
|---|---|
| Foreign Tax Paid | Credit may be available |
| Deferred Indian Tax | Becomes taxable |
| Double Taxation Relief | Available through credit mechanism |
This is the core purpose behind the introduction of the provision.
What Happens If You Become Non-Resident Again?
Another important situation can arise.
Suppose a returning NRI becomes resident in India, claims tax deferral, and then moves abroad again before the retirement account matures.
In such a case, the tax deferral benefit may cease.
Change in Residential Status
| Situation | Consequence |
|---|---|
| Remains Resident Until Maturity | Deferral continues |
| Becomes Non-Resident Before Maturity | Special rules apply |
The rules generally provide that the deferred income may become taxable before the person exits Indian tax residency.
This prevents permanent avoidance of taxation through repeated changes in residential status.
Practical Impact
Returning NRIs with retirement accounts in the US, UK, or Canada should carefully review their tax position after becoming Indian residents.
Practical Checklist
| Item | Action |
|---|---|
| Check residency status | Mandatory |
| Identify retirement account | Mandatory |
| Confirm notified country | Mandatory |
| File prescribed form | Mandatory |
| Track future maturity | Important |
| Maintain tax records | Important |
| Preserve foreign tax documents | Important |
Proper compliance can help avoid unnecessary annual taxation and future double taxation issues.
Conclusion
Section 158 provides significant relief for returning NRIs who hold retirement accounts in the United States, Canada, or the United Kingdom. Without this provision, annual accruals inside these accounts could become taxable in India every year while the foreign country may tax the same income only at maturity.
The tax deferral mechanism aligns the timing of taxation and allows taxpayers to claim appropriate foreign tax credit when the account eventually matures. For returning NRIs, understanding these provisions is essential to ensure smooth tax compliance and avoid unintended double taxation.
Key Takeaways
- Section 158 replaces the earlier Section 89A framework under the new law.
- It provides tax deferral for eligible foreign retirement accounts.
- The benefit applies to specified retirement accounts in the US, UK, and Canada.
- The account must have been opened while the individual was a non-resident.
- Form 40 is the prescribed form under the new law.
- Tax on annual accruals can be deferred until maturity.
- Foreign tax credit may be claimed when taxation eventually occurs.
- Special rules apply if the taxpayer becomes non-resident again before maturity.
- Proper compliance helps avoid double taxation.
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