Finance Act, 2021 introduced Section 89A providing relief from taxation in income from retirement benefit accounts maintained in a notified country by non-resident, effective from AY 2022-23. The Government recently introduced Rule 21AAA and Form No. 10-EE to operationalise Section 89A and also notified USA, Canada and UK for this purpose.

Mr. S. Ramanujam (Chartered Accountant) analyses Section 89A and highlights that Rule 21AAA provides that foreign tax paid on income from retirement benefit accounts shall be ignored for computing foreign tax credit available as per Rule 128. He finds its contrary to the provisions of DTAA which grants TDS credit on doubly taxed income. He is of the view that since the option once exercised cannot be revoked in subsequent year, it is useful for persons who have no intention of going back and becoming a non-resident again. He states that since currently only 3 countries have been notified under Section 89A, “what is relevant to see is whether under DTAA these balances are taxable even when the assessee becomes a resident in India with the amounts locked up (tightly) in funds allowing only a partial or staggered or full withdrawal after completion of certain minimum age.”

The author also highlights some open-ended issues which need clarification such as differential accounting year followed in an overseas country, disclosure of assets upon return to India, prorating of withholding taxes in case of joint returns, etc. He also analyses the Rule 21AAA in the light of Delhi HC ruling in Yoshio Kubo and opines, “One possible way to reconcile is that till vesting, there is no accrual and once the specified age is attained, triggering the right to withdraw, accrual commences and thereafter the subsequent receipt can occur.”

“Retirement Benefit Account – Effect of New Rules”

INTRODUCTION :

For many questions that arise under the Income tax Act, there are no (correct) answers ,as just like the other branches of law , the answers here too evolve over a long period of time (One can look at the recent spate of judgments that were pronounced by Supreme Court -on the interpretation involving some provisions of Hindu law -whether a female member can have a claim over ancestral property etc. Taking a specific category of assessee – the NRIs, (for instance)-- they constantly seek clarity on taxation aspect in respect of their foreign income earned when they become permanent tax resident in India. With work -from -home concept followed by many companies, the physical presence test of determining the residential status for taxation purposes is the only hurdle and for all practical purposes, the NRI s have no problem in working from their home country As far as NRIs are concerned, till now they were subject to a different tax regime which allowed not much room for diverse interpretation, without the need for escalating their tax issues into a series of appeals up to the Apex Court in the countries where they were staying, unlike in India.

Coming back to the topic on hand, one of the principal question that confronted the author was with regard to the disclosure of retirement accounts kept in foreign countries by persons returning to Indiafor permanent residence here and though these are sums available to the assessee only after a specified period of time or after reaching a particular age, whether any non-disclosure by a resident NRI with regard to details of foreign assetswill result in any penalty under Indian tax laws. Due to lack of clarity of the subject the author used to wite seeking clarifications and also sent representations through ICAI -taxation Committee to the Government In some ways, a small solution has been given by the Government in the form of a new sec 89A effective from AY 2022-23. As a follow up measure , the Government also introduced new Rules – known as – Income tax – 6th( Amendment Rules ),2022 , effective from 4 th April 2022 by introducing Rule 21AAA and Form 10EE. A short analysis of the section and these rules are attempted in this article . New section 89A : Relief from taxation in income from retirement benefit account maintained in a notified Country :

Where a specified person has income accrued in specific account , such income shall be taxed in such manner and in such year as may be prescribed .

As per Explanation to Section 89A, 

1. 'Specified person' means a person resident in India who opened a specified account in a notified country while being non-resident in India and resident in that country 

2. 'Specified account' means an account maintained in a notified country by the specified person in respect of his retirement benefits and the income from such account is not taxable on accrual basis but is taxed by such country at the time of withdrawal or redemption.

3. 'Notified country' is the country to be notified by the Central Government for the purpose of Section 89A.

Note :

The government vide a notification 25/2022 dated 4-4-2022 notified 3 Countries – viz USA , Canada & UK for the purpose of this section .

The explanatory memorandum for introducing the amendment is extracted below :

“ Representations have been received that there is a mismatch in the year of taxability of withdrawal from retirement funds by residents who opened such accounts when they were non-residents in India and residents in foreign Countries. At present the withdrawal from such funds will be taxed on receipt basis in such foreign Countries while on accrual basis in India. In order to address this mismatch and remove this genuine hardship ,it is proposed to insert anew section 89A to the Act to provide that the income of a specified person from specified account shall be taxed in the manner and in the year as prescribed by the Central Government“

Summary of rule 21AAA :

(i) Any income accrued in the specified account in respect of a specified person during any previous year relevant to AY 2022-23 , such income shall be taxable at the option of the assessee in the year in which the specified account is taxed at the time of withdrawal or redemption in the notified country(source country)

(ii) If the option is exercised , the Income shall not be included in the previous year in which such income is taxable ( on accrual basis)under rule (i)

(a) If the said income is already taxed in any earlier year on accrual basis and the appropriate taxes have been paid; or

It may be added that the other existing legal provisions are not modified by the new provisions. .Hence the overseas income is not taxable in India (i)when the specified person was a non-resident or RNOR during that previous year( of accrual of income) ; or(ii) on account of application of DTAA , if any;

It is further provided that the foreign taxes paid on such income , if any shall be ignored for foreign Tax credit under rule 128 . (This is contrary to the provisions of DTAA which grants TDS credit on doubly taxed income )

(iii) The option to be exercised by the assessee in respect of all specified Retirement benefit accounts maintained by him .

(iv) if the assessee becomes again a non-resident in any previous year, the option so exercised shall be deemed to have never been exercised and the income which has accrued during the period of option and shall be taxable in the previous year and tax need to be paid before filing the Return of Income

(v) the option to be exercised by filing form 10EE on or before the due date of filing the Return of Income

(vi) The option so exercised shall apply to all subsequent assessment years and can’t be withdrawn for any subsequent assessment year

Some key aspects of Form 10EE : ( documents to be attached )

(i) Balance in the account as on last date of the financial year prior to the previous year in form 10EE is filed

(ii) Documentary evidence if it is already taxed or taxable in the other Country along with the relevant statutory provisions or any other document

(iii) If it is already taxed in Indian accrual basis , a reconciliation statement with the Income tax computation has to be enclosed.

The Upshot of all the above is :

• Since for a resident in India , the world income is taxable , any income accrued even in a retirement account held abroad is taxable on accrual basis ;

• The option is useful if the persons say are very old and have no intention of going back and becoming again a non-resident ;

• Since only 3 countries are notified till now , what is relevant to see is whether under DTAA these balances are taxable even when the assessee becomes a resident in India with the amounts locked up (tightly ) in funds allowing only a partial or staggered or full withdrawal after completion of certain minimum age

There are many more interesting questions that also need clarification . some of these are listed below :

For US Citizens who relocated to India—either for work or for permanent residence (after retirement)

Issues:

(a) 401K—there are different plans in US; Each employer offers the plan to employees and these sums generally are taxable at the time of their withdrawal. There is also rollover option to regular IRA plans.; How to offer the yearly income for tax in India? in most cases one cannot access the amount till they reach a particular age—say 59 and half years ; Many times , even details are not readily available for the amounts lying in each account.

(b) How to offer income as they follow calendar year in the US and in India we follow financial year —can prorating it on time basis be the correct approach?

(c) How to prorate the withholding taxes in the case of joint return filed in US( say husband and wife ) till they return to India? Can we follow US IRS approach ?

(d) How to show the foreign assets and corresponding income in the hands of the individuals once they return to India, especially when both were working professionals in the foreign country?

Singapore :

A permanent resident in Singapore when employed there contributes to Central Provident Fund Account there which will be given back to him only when he surrenders his PR status or relocates back to Singapore. An NRI has relocated to India and he has accumulated PF contributions there. He gets interest at roughly 4% p.a. on the PF balances year after year which also cannot be claimed till he surrenders PR or relocates. The question is whether interest earned in PF there year after year needs to be offered to Indian Income tax if the individual becomes a resident in India? 

In this context it is worthwhile to recall the judgment rendered by the Delhi HC in the following case decided along with a host of other cases ). Some excerpts from this judgment aware extracted . 

Yoshio Kubo vs Commissioner of Income Tax on 31 July, 2013(Delhi HC )] = [TS-361-HC-2013(DEL)-O]

“35 . In the case of Yoshio Kubo, one of the appeals in the present batch, the assessee employee was a Japanese national, and an official of M/s Sony Corporation of Japan. He was deputed to work in/s Sony India Ltd. The welfare pension scheme in that case contained the following elements:

(a) The contribution was covered by the welfare pension law enacted by the Government of Japan;

(b) Establishments and concerns with at least five employees had to register with the pension fund authorities and both the employer and the employee were required to contribute to the pension insurance scheme;

(c) The monthly contribution of both the employer and the employees were to be deposited with the National Bank of Japan;

(d) The benefit from the scheme took the form of annuity payment until death and the individual employees were eligible to receive the first tier of benefits from the welfare pension plan only on attaining the age of 65 and not prior to it.;

(e) The contribution of the employer was not refundable.

The Tribunal held, after noticing the nature of the scheme that before attaining the age of 65 or before death, neither the assessee nor his survivors were entitled to get any benefit from the scheme and at the most the employee only had a contingent right which cannot attract Section 17(2)(v) of the Act. The Tribunal also noticed the salient features of the welfare insurance scheme and held that any benefit actually obtained or received by the assessee under the scheme during the relevant previous year will have to be assessed as per provisions of Section 17(2)(v) of the Act. In all other respects, the decision otherwise was that the assessee did not get any vested right in such contributions when they were actually made. This reasoning was adopted by the Tribunal in several other cases, some of which are before this court in the present batch of appeals….

38. In the present case, the assessee does not acquire any vested right over the payment at the time of contribution. With regard to the insurance plans, the CIT(A) had held that the contributions are made to benefit the employer and to protect him from loss of employment, sickness, death, accident, etc. of the employee and that the policies themselves are contingent in nature, the benefit under which would depend on whether the contingency takes place or not.

39. This court is of the opinion that the revenue's contentions are insubstantial and meritless. Thespesia does not- in any appeal, get a vested right at the time of contribution to the fund by the employer. The amount standing to the credit of the pension fund account, social security or medical or health insurance would continue to remain invested till the assessee becomes entitled to receive it. In the case of medical benefit, the revenue could not support its contentions by ITA 441/2003

and connected cases citing any provision in any policy or scheme which is the subject matter of these appeals, which entitle the vesting right to receive the amount under the scheme or plan did not occur. “

Comments on the above case law vs the new IT rule 21AAA and Form 10EE

If one looks at the rationale of the Delhi HC judgment , it is clear that so long as there is no vested right that accrues in the hands of the employees there cannot be any taxation on yearly basis before the plan is terminated or redemption that is withdrawal, occurs. On the other hand, the Rule 21AAA proceeds on the theory that once the income accrues anywhere in the world, tax liability is triggered unless otherwise it falls in the exempted category. Is there any contradiction between the two views? The answer seems to be yes. One possible way to reconcile is that till vesting, there is no accrual and once the specified age is attained, triggering the right to withdraw, accrual commences (and thereafter the subsequent receipt can occur).It is somewhat similar to the accumulated balance in a provident fund account in India, which is withdrawable normally only as a terminal benefit. If an employee chooses to postpone the withdrawal even after he ceases to be an employee, the accrual will nevertheless happen. 

How to interpret these provisions ?