Tax Regulations in India for the US and Other Foreign Retirement Accounts

Tax regulations in India pertaining to foreign retirement assets have become easier

People who have worked abroad and have returned to India become tax residents in India, however, the taxation regulations on their foreign retirement accounts have been hurting them for a while now. While, the foreign country, from which they are receiving their taxes generally puts a tax on the FRAs if there is a withdrawal, there was no such provision pertaining to the same in India. On this account, they need to pay the tax for the years in which the income was earned and credited to their retirement accounts.

Assuming that someone only had limited physical presence in India in the past 10 years, they may qualify as a “Resident and Ordinarily Resident (ROR)” of India after 2 to 3 years of their return. Individuals qualifying as ROR are taxable on worldwide income in India and are required to report all foreign assets to the Indian ITR. The taxability of retirement funds will depend on the nature of the funds and the benefits available under the Double Taxation Avoidance Agreement (DTAA) between India and the US.

Now you might want to ask, how does it actually work? Well, gains from retirement funds through interest, dividends, and others may be exempted from income tax if they qualify as a “resident” of the US under the DTAA. However, a tax residency certificate will be required from the US tax authorities to prove the same. They might also be required to file Form 10F electronically, attach a copy of the tax residency certificate, and present it to the Indian tax authorities.

The entire process is quite tedious and has been nagging at India-returning citizens for quite a long time now. But there is a regulation that has been introduced that will benefit the incoming NRIs. It allows individuals to defer the taxation of retirement funds to the year of withdrawal to mitigate the mismatch of taxation of income in India and the US and claim a foreign tax credit of US taxes in India, which will be subjected to specified conditions. They are also recommended to take advice based on the type of retirement funds, type of income from retirement funds, and taxability of identified retirement funds in the US.