Budget 2021: Retirement account- Relief for NRIs facing double taxation

February 05, 2021 1:00 AM

Union Budget 2021 India: The new Section 89A aims to solve the issue of double taxation on retirement accounts of NRI employees

Taxation of income from such contributions poses a major challenge for such employees in India.Taxation of income from such contributions poses a major challenge for such employees in India.

By Sudin Sabnis & Yogesh Kale

Indian Union Budget 2021-22: With countries across the world opening their economies, the boundaries among them are becoming hazier day by day. As a natural fallout, global mobility of the workforce is assuming increasing importance. Global mobility leads to a win-win situation for everyone, as it leads to easy availability of workforce and talent in a cost-effective manner. However, it also gives rise to a host of peculiar issues, mainly due to reasons like differences in labour and taxation laws.

Usually, mobile employees are required to mandatorily open social security / retirement fund accounts in the host country; it also acts as an effective way of tax deferral in such countries as income from such contributions are tax deferred to the year of withdrawal / closure of such accounts.

Tax resident
This is a common tool adopted by most Indian employees who are seconded to countries like the US and in majority of such cases, the employees are non-resident in India in the year of opening the accounts / making contributions whereas at the time of maturity / closure of the account, such employees who are already back home, become tax resident in India. Taxation of income from such contributions poses a major challenge for such employees in India.

For instance, in the USA, there are no tax implications on periodic accretions to an Individual Retirement Account (IRA) or 401(k) account up to the time of withdrawal at the time of maturity / otherwise. As against this, in India, the accretions to IRA may be taxable on accrual basis every year depending on the residential status of such employee who was sent from India to the USA. As taxation of such income may precede taxation in the US, availability of Foreign Tax Credit due to the difference in the point and basis of taxation in the two countries always poses a challenge and the employee could often end up being doubly taxed in respect of the same income, albeit in different tax years.

Budget reduces hardship
Taking a cognisance of this difficulty and various representations in this regard, the finance minister has proposed to introduce a mechanism via a new provision, viz. Section 89A in the Income Tax Act, 1961, to reduce the hardship caused to such employees with effect from financial year 2021-22. The proposed section provides tax income accrued to a specified person in a specified account in such manner and in such a year as may be prescribed.

While this is certainly a welcome step, it would be interesting to see the rules that will be issued prescribing the manner in which the proposed section is given effect to, which countries are notified for the purpose of this section and which retirement benefit accounts in such countries are eventually covered by the section. Given the intention of the government to bring relief to the affected employees, it is expected to notify the specified person, account as well as the year of taxation at the earliest and to align the same with the corresponding point of taxability in the country of such investment. It may also be worthwhile to clarify the applicability of this provision also to taxability of income from existing investments.

Double taxation

  • NRI employees are required to open social security / retirement fund accounts in the host country
  • It is an effective way of tax deferral in such countries as income from such contributions are tax deferred to the year of withdrawal / closure of such accounts
  • The proposed section provides taxation of income accrued to a specified person in a specified account in such manner and in such a year as may be prescribed by the Indian government

Sabnis is partner and Kale is director, Nangia Andersen LLP

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