All You Need To Know 89A of Income Tax Act

Section 89A in the Income Tax Act provides relief to the residents who have income from foreign retirement benefits accounts. Section 89A was introduced through the Finance Act, 2021 to avoid the issue of double taxation for the residents working in foreign and returning to India. This is so because India follows taxation on an accrual basis. This means that even if the person has not withdrawn any money from his foreign retirement account, still he could be liable to pay tax on the income earned on that account in India. This can lead to more burden on the person who would be planning to use these funds in the future.

Traditionally, India taxes income on an accrual basis. This means even if you haven't withdrawn money from your foreign retirement account yet, the income earned within that account could be taxable in India. This can be a significant burden for individuals planning to use those funds later in life. Therefore, Section 89A was introduced because it works on a receipt basis, i.e., income will be taxed when it is received. Accordingly, Section 89A also addresses the issue of double taxation for returning residents.

How does Section 89A work?

To know how Section 89A works, we first need to know that Section 89A does not provide benefits to income from foreign retirement benefits accounts in all countries. It provides benefits only if the income from a foreign retirement benefits account is in the United States of America (USA), Canada and the United Kingdom UK).

Further, the retirement account must be a specified account which typically refers to government-sponsored or employer-sponsored retirement plans like 401(k)s and IRAs.

Once all these conditions are fulfilled, the individual can opt for Section 89A and accordingly, the income generated within this specified account will not be included in the taxable income in India during each financial year.

Who is eligible for benefits under Section 89A?

The benefits under Section 89A can be claimed by the following persons:

Specified Person: The benefit under Section 89A can be claimed by only that specified person who is an Indian resident at the time of opening a retirement account while residing outside India.

Specified Account Holder: In addition to the above, the specified person can claim benefits under Section 89A only if he has opened his retirement account in specified countries notified by the Indian Government. These countries, as of now are the USA, Canada and the UK.

List of Specified Retirement Accounts:

The person can claim benefits under Section 89A if he has funds in any of the following accounts:

• 401(k): This is an employer-sponsored defined contribution retirement account in the US.
• IRA (Individual Retirement Account): It is a personal retirement savings account available only in the USA.
• RRSP (Registered Retirement Savings Plan): This is a government-registered retirement savings plan in Canada.
• SIPP (Self-Invested Personal Pension): This is a personal pension plan in the UK.

Salient Features of Section 89A

The salient features of Section 89A are as follows:

• It avoids double taxation for individuals working in foreign countries and returning to settle back in India.
• To opt for Section 89A, the individual must file Form No. 10-EE before

filing the Income Tax Return.

• If the person is eligible to opt for Section 89A, then he can claim this benefit for all subsequent financial years.
• If a taxpayer becomes a non-resident after exercising the option, then the option exercised shall be deemed to have never been exercised. Also, income accrued in the specified accounts shall be taxed from the previous years in which the option was exercised.

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