Specified account

Some people work abroad for years, build a retirement account there, and then settle in India.

That used to create a tax clash. The foreign country taxed the money when it was withdrawn. India taxed it as it built up, year by year. The same money was taxed twice, in two different years, with no credit to match.

Section 89A fixes the mismatch for a defined set of accounts. The workbook calls them specified accounts.

For an Indian resident, income from a specified retirement account is taxed at the time of withdrawal of funds from that account. It is no longer taxed on accrual.

Only three countries have been notified so far: the United States of America, Canada and the United Kingdom.

Where it comes from. The Finance Act 2021 inserted Section 89A to remove what the workbook calls a genuine hardship: non-residents who later settle down in India faced double taxation on their overseas retirement funds, because withdrawal was taxed on a receipt basis abroad and on an accrual basis in India.

What Section 89A does. It provides that the income of a specified person from a specified account shall be taxed in the manner and in the year prescribed by the Central Government.

The two definitions, and both have to be met.

The notified countries. The countries notified so far are the United States of America, Canada and the United Kingdom. For Indian residents, income from specified retirement accounts in these countries is taxed at the time of withdrawal of funds from those accounts, and not on accrual.

Read the specified-account test closely. It is not enough that the account is a retirement account abroad. The foreign country must itself not tax the income on accrual, and must tax it on withdrawal or redemption. An account in a notified country that is taxed there on accrual does not answer the definition, because there is no mismatch to relieve.

And read the specified-person test closely too. The account must have been opened while the person was non-resident in India and resident in that country. Someone who opens an account in a notified country while already resident in India is outside the section.

Where it sits in the chapter. Section 10.4 deals with the taxation of non-residents generally. Relief there comes mainly through a Double Taxation Avoidance Agreement, for which the non-resident needs a Tax Residency Certificate and Form 10F, or, for Indian citizens and persons of Indian origin, through Chapter XII-A. Section 89A is different in kind: it is not a rate relief but a timing relief, and it applies to someone who is now a resident.

Illustrative figures.

Mr Menon worked in the United States for 14 years and opened a US retirement account there while he was a non-resident in India and a tax resident of the USA. The account is not taxed in the USA on accrual; the USA taxes it when he withdraws. He returns to India in 2022 and becomes resident in India.

In a year, the account earns Rs 8,00,000 of income but he withdraws nothing.

Suppose he is in the 30% slab. The relief moves roughly Rs 2,40,000 of tax out of that year and into the year he actually draws the money, which is the same year the USA will tax it. Both taxes now fall in one year, so foreign tax credit can be claimed against the same income instead of being stranded in an earlier year.

Now change one fact at a time, and the section stops applying.

In every one of those cases the income goes back to being taxed in India as it accrues.

Chapter 10 (Taxation of Debt Products), section 10.4, on the taxation of non-residents, closes with the Finance Act 2021 amendment and Section 89A. Chapter 20's case studies return to it: one caselet gives a couple with a deferred-tax retirement account in the USA and asks whether India taxes the income on accrual or on withdrawal, with the correct answer turning on whether the account is notified under Section 89A. Expect that exact question shape, and a recall question on the three notified countries.

• Three countries only: the USA, Canada and the UK. An account in any other country gets no relief under this section.
• Section 89A shifts the YEAR, not the rate. It is a timing relief. The income is still taxed in India, at slab rates, when it is withdrawn.
• The account must have been opened while the person was non-resident in India and resident in that country. Opening it after moving back to India does not qualify.
• The foreign country must tax it on withdrawal, not on accrual. That mismatch is the whole basis of the definition.
• It applies to someone who is NOW resident in India. It is filed under the taxation of non-residents in the workbook, which misleads candidates into treating it as relief for a non-resident.
• It is not a DTAA benefit. A DTAA gives a lower rate and needs a Tax Residency Certificate and Form 10F. Section 89A needs neither.
• Retirement benefits is part of the definition. An ordinary savings or investment account abroad is not a specified account however long it has been held.