Addressing Cross-Border Taxation of Foreign Retirement Benefits : Clause 158 of Income Tax Bill, 2025 Vs. Section 89A of Income Tax Act, 1961

Clause 158 Relief from taxation in income from retirement benefit account maintained in a notified country.

Income Tax Bill, 2025

Introduction

Clause 158 of the Income Tax Bill, 2025, and Section 89A of the Income Tax Act, 1961, both address a nuanced but increasingly relevant issue in Indian taxation: the timing and manner of taxing income accrued in retirement benefit accounts maintained in foreign jurisdictions by individuals who have returned to India after a period of residence abroad. The evolution of these provisions reflects the growing mobility of Indian professionals and the government's attempt to harmonize domestic tax treatment with international practices, thereby preventing double taxation and providing relief in genuine hardship cases. The significance of these provisions is heightened by the proliferation of cross-border employment and the increased incidence of Indian residents holding retirement accounts in countries following a "taxation on withdrawal" regime, notably the United States, United Kingdom of Great Britain and Northern Ireland and Canada. The legal framework aims to address the mismatch arising when such income is taxed in the foreign country upon withdrawal, while Indian tax law, without a specific provision, would tax it on accrual, potentially leading to double taxation or timing mismatches. This commentary undertakes a detailed analysis of Clause 158, explores its objectives and mechanics, and provides a comparative assessment with the existing Section 89A. The discussion further explores practical implications, interpretative challenges, and potential areas for legislative or judicial refinement.

Objective and Purpose

Legislative Intent

Both Clause 158 and Section 89A are designed to address the peculiar tax issues faced by "returning Indians" who have accumulated retirement savings in foreign countries. The central policy objective is to prevent double taxation or undue hardship arising from differences in the timing of taxability between India and the foreign jurisdiction. The legislative intent is clear: provide relief to individuals who, while being non-residents, contributed to retirement benefit accounts in countries where taxation is deferred until withdrawal, and who, upon returning to India and becoming residents, would otherwise face tax on an accrual basis under Indian law, potentially much before actual receipt or foreign tax liability arises.

Historical Background and Policy Considerations

Originally section 89A was inserted by the Finance Act, 1982. Section 89A was reintroduced by the Finance Act, 2021, effective from assessment year 2022-23, in response to representations from non-resident Indians (NRIs) and returning Indians. The provision sought to align the Indian tax regime with international practice and remove the hardship of double taxation. Clause 158 of the Income Tax Bill, 2025, appears to continue this policy, possibly with refinements or clarifications intended to ensure clarity, consistency, and effective administration.

The policy considerations include:

- Preventing double taxation and timing mismatches.

- Facilitating ease of compliance for returning Indians.

- Ensuring that relief is targeted and does not create opportunities for tax avoidance.

- Aligning with international best practices and treaties.

Detailed Analysis of Clause 158 of the Income Tax Bill, 2025

Key Provisions and Interpretation

1. Scope of Relief

Clause 158(1) provides that "the income accrued in a specified account, maintained in a notified country by a specified person, shall be taxed in a tax year, as prescribed."

This establishes the basic framework:

- The relief is available only in respect of income accrued in a "specified account."

- The account must be maintained in a "notified country."

- The beneficiary must be a "specified person."

- Taxation will occur in a prescribed manner and year, as determined by subordinate legislation (rules).

2. Definitions

Clause 158(2) defines the critical terms:

(a) Notified Country

- A "notified country" is one notified by the Central Government.

- This allows the government to specify countries with compatible regulatory and tax frameworks, and to exclude countries that may pose compliance or enforcement challenges.

(b) Specified Account

- The account must be maintained in a notified country by the specified person for his retirement benefits.

- It must be taxed by that country at the time of withdrawal or redemption, and not on an accrual basis.

- This is crucial: the relief is targeted at accounts where the foreign country taxes only upon withdrawal, not annually on accrual.

(c) Specified Person

- A "specified person" is a resident in India who opened the specified account in a notified country while being a non-resident in India and a resident in that country.

- This ensures the relief is only available to those who genuinely acquired the retirement account while abroad, not to those who open such accounts after becoming residents in India.

3. Taxation in Prescribed Year and Manner

Clause 158(1) leaves the actual timing and manner of taxation to be "prescribed." This is a significant feature, as it delegates the operational details to subordinate legislation, allowing flexibility to adapt to changes in international practice and administrative exigencies. The likely intent is to tax the income in the year in which it becomes taxable in the foreign country (i.e., upon withdrawal), thereby aligning the Indian tax event with the foreign tax event and preventing double taxation or cash flow mismatches.

4. Administrative and Compliance Aspects

The clause envisages a rule-making power to prescribe the detailed procedure:

- How and when to report such income.

- Documentary evidence required to establish eligibility.

- Mechanism for tracking withdrawals and ensuring proper reporting. This is critical to prevent abuse and ensure that relief is granted only in genuine cases.

5. Ambiguities and Potential Issues

Several interpretative and practical challenges may arise:

- Determining the exact nature of "accrued income" in the context of foreign retirement accounts, which may follow different accounting and tax conventions.

- Ensuring that the "specified account" is not used as a vehicle for tax deferral or avoidance.

- Coordination with Double Taxation Avoidance Agreements (DTAAs) and ensuring that relief under Clause 158 does not conflict with treaty provisions or give rise to unintended benefits.

- The open-ended nature of "as prescribed" creates uncertainty until rules are notified.

Practical Implications

Impact on Individuals

For returning Indians, Clause 158 provides much-needed relief:

- It prevents taxation of notional or unrealized income, thereby avoiding cash flow issues.

- It aligns the Indian tax event with the foreign tax event, making it easier to claim foreign tax credits and comply with both jurisdictions.

Impact on Businesses and Employers

Multinational companies employing Indian professionals may find it easier to attract talent, as the risk of double taxation on retirement benefits is mitigated.

Regulatory and Administrative Impact

The provision imposes a compliance burden on both taxpayers and the tax authorities:

- Taxpayers must maintain detailed records and comply with reporting requirements.

- The tax authorities must verify eligibility, monitor withdrawals, and prevent abuse.

- The notification of countries and accounts requires ongoing review and updating.

Comparative Analysis: Clause 158 of the Income Tax Bill, 2025, Vs. Section 89A of the Income Tax Act, 1961

1. Structural and Substantive Parity

A comparison of Clause 158 and Section 89A reveals near-identical language and intent. Both provisions:

- Apply to income accrued in a specified account maintained in a notified country by a specified person.

- Define "notified country," "specified account," and "specified person" in substantially similar terms.

- Provide for taxation "in such manner and in such year as may be prescribed." This structural parity suggests that Clause 158 is intended to carry forward the relief provided by Section 89A, possibly with minor refinements or clarifications.

2. Key Points of Convergence

- Eligibility Criteria: Both provisions restrict relief to residents who opened the account while non-resident and resident in the foreign country.

- Nature of Account: Both require the account to be taxed in the foreign country only on withdrawal, not on accrual.

- Notification Mechanism: Both empower the Central Government to notify eligible countries.

- Delegation to Rules: Both leave the operational details to be prescribed by rules.

3. Differences and Refinements

While the core provisions are virtually identical, the following points merit attention:

- Legislative Context: Clause 158 is part of the new Income Tax Bill, 2025, which may involve a comprehensive overhaul or consolidation of the tax code. Section 89A is an amendment to the existing Income Tax Act, 1961.

- Language and Structure: Clause 158 uses slightly modernized language and may be accompanied by new or revised rules under the new tax code.

- Rule-making Power: Clause 158's reference to "as prescribed" may allow for greater flexibility or more detailed rules compared to the existing framework u/s 89A.

- Potential for Expansion: The new Bill may envisage expansion to cover additional types of accounts or countries, depending on subsequent notifications.

4. Interaction with DTAAs and Other Provisions

Both provisions must be interpreted in harmony with India's network of DTAAs. Relief under Clause 158 or Section 89A should not defeat the intent of treaty provisions, nor should it result in double non-taxation. The government's power to notify countries allows it to manage this interaction and prevent abuse.

5. Potential Gaps and Areas for Clarification

- Scope of "Retirement Benefits": Neither provision defines "retirement benefits" in detail, potentially leading to disputes over eligibility of certain accounts (e.g., employer pension vs. individual retirement accounts).

- Taxation of Growth vs. Principal: Clarification may be needed on whether relief applies to both principal and accretions, or only to the income component.

- Partial Withdrawals: Treatment of partial withdrawals or phased annuity payments could give rise to complexities in timing and quantum of taxation.

Conclusion

Clause 158 of the Income Tax Bill, 2025, and Section 89A of the Income Tax Act, 1961, represent a considered legislative response to the challenges posed by cross-border retirement savings. By deferring Indian taxation to coincide with the foreign tax event, these provisions provide significant relief to returning Indians, prevent double taxation, and align Indian law with international norms. The provisions are carefully circumscribed to prevent abuse, with eligibility limited to accounts opened while non-resident and taxed on withdrawal in the foreign country. The reliance on government notification and rule-making ensures flexibility and administrative control. While Clause 158 largely mirrors Section 89A, its placement in the new Income Tax Bill may facilitate further refinement, expansion, or harmonization with the broader tax code. Key areas for further clarification include the precise scope of eligible accounts, treatment of partial withdrawals, and coordination with DTAAs. The practical impact is substantial: individuals benefit from relief, businesses can attract global talent, and tax authorities can administer the regime with clarity. Ongoing vigilance is required to prevent abuse and ensure that relief is targeted and effective.

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Full Text:

Clause 158 Relief from taxation in income from retirement benefit account maintained in a notified country.

 

Dated: 22-4-2025