Budget 2021: Relief for NRIs facing double taxation issue on retirement accounts

Currently, the withdrawal from foreign retirement accounts may be taxed on receipt basis in those countries, while on an accrual basis in India.

Union finance minister Nirmala Sitharaman on Monday announced relaxation for non-resident Indians (NRIs) while presenting the Union Budget 2021. Sitharaman said that when NRIs return to India, they face issues related to their accrued incomes in their foreign retirement accounts, which mainly occurs due to mismatch in taxation periods. She also highlighted their difficulties in getting credit for Indian taxes in foreign jurisdictions, leading to double taxation.

“When Non-Resident Indians return to India, they have issues with respect to their accrued incomes in their foreign retirement accounts. This is usually due to a mismatch in taxation periods. They also face difficulties in getting credit for Indian taxes in foreign jurisdictions. I propose to notify rules for removing their hardship of double taxation,” the finance minister said during her 110-minute-long budget speech.

According to the memorandum explaining the provisions of Finance Bill, 2021, a mismatch was recorded in the year of taxability of withdrawal from retirement funds that were opened while residing in foreign countries. Currently, the withdrawal may be taxed on receipt basis in foreign countries, while on an accrual basis in India.

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In order to address the mismatch in the taxation of income from the notified overseas retirement fund, the government has proposed a new section 89A to the Income-tax Act, 1961. After the amendment, the income of such “specified person” from the “specified account” will be taxed in the manner and in the year as prescribed by the Central Government.

The expression “specified person” will be defined as the person who is residing in India but opened the “specified account” while resident in that foreign country. The finance ministry has proposed to define “specified account” as an account maintained by NRIs in a foreign nation for retirement benefits. The income from such account is not taxable on an accrual basis and is taxed by the foreign country at the time of withdrawal or redemption. The amendment will take effect from April 1, 2022, and will accordingly apply to the assessment year 2022-23 and subsequent assessment years.