Section 89A: when to file it, who qualifies, and how it defers tax on foreign retirement accounts for returning NRIs
Section 89A (Finance Act 2021) lets a returning NRI who has become a resident defer Indian tax on foreign retirement account income — 401k, IRA, RRSP, UK pension — to the year of withdrawal. Who qualifies, Form 10-EE, Rule 21AAA, and the RNOR interplay.
Harun Raaj
Chartered Accountant · Harun Raaj & Associates
Section 89A of the Income-tax Act, 1961 (inserted by the Finance Act 2021) lets a returning NRI who has become a resident defer Indian tax on the income from a foreign retirement account — a US 401k/IRA, a Canadian RRSP, or a UK pension — to the year the money is actually withdrawn. The election is available only to full Residents (not RNORs), is made by filing Form 10-EE under Rule 21AAA, and applies to accounts held in the notified countries of the USA, Canada, and the UK. Without it, India can tax the account's contributions and growth on an accrual basis even while the funds are locked inside the plan — creating a mismatch with the source country, which taxes only on distribution. For FY 2025-26, returning NRIs whose RNOR window has just closed are exactly the cohort that needs s.89A — and most have never heard of Form 10-EE.
Staleness alert: Generic "NRI tax return" content still describes foreign retirement accounts as either "not taxable in India" (true only during RNOR) or "taxed on withdrawal" (true only with s.89A). For the first full-resident year onward, the default position is accrual taxation unless you file Form 10-EE. Missing this election is a quiet, expensive error.
What s.89A actually does
Section 89A is a deferral election, not an exemption. It shifts the tax point:
The statutory mechanism: a "specified person" with income from a "specified foreign retirement account" may elect that the income is included in total income not in the year it accrues but in the previous year in which it is taxable in the source country — i.e., the year of distribution.
Who qualifies
The checklist is precise:
- Resident individual — full resident status is required. During RNOR years (typically 2–3 years after return under s.6(6)), foreign income is generally not taxable in India, so s.89A is neither needed nor used.
- Citizen of India or a person of Indian origin.
- Income from a "specified foreign retirement account" in a notified country — the CBDT has notified the USA (401(k), IRAs, Roth IRAs, etc.), Canada (RRSP, etc.), and the UK (registered pension schemes) as specified countries/accounts.
- Form 10-EE filed electronically under Rule 21AAA, with the prescribed details of the account and the year of election.
Who does NOT qualify: RNORs, non-residents, and residents with income from retirement accounts in countries other than the notified three. A Roth IRA deserves special care — qualified Roth distributions are tax-free in the US, and the India-side treatment under s.89A of a tax-free distribution is a fact-specific point to confirm with a CA.
The RNOR window and when s.89A starts
The timeline for a returning NRI is the key to understanding s.89A:
In practice, the election starts in the first year the RNOR status lapses. Filing Form 10-EE in that first full-resident year defers the account's income to the years you actually withdraw. Miss the filing and the default accrual treatment can apply to years already locked in the plan.
Worked example: Suresh returns from the US
Persona: Suresh, Indian citizen, returned from the US in 2023, 401(k) balance $500,000 (≈ ₹4,15,00,000 at ₹83/USD).
Facts:
- RNOR window (return in 2023) runs through the 2025-26 tax year
- FY 2026-27 is his first full-resident year
- Annual 401(k) accretion (employer match + investment growth) ≈ $30,000 (≈ ₹25,00,000)
- He plans to start withdrawing $50,000 (≈ ₹41,50,000) per year from FY 2027-28
Step 1 — File Form 10-EE in FY 2026-27 (first full-resident year).
Suresh elects s.89A electronically under Rule 21AAA, identifying the 401(k) and the year of election.
Step 2 — The deferral, in numbers.
Without s.89A, the ₹25,00,000 annual accretion could be taxed in India on accrual — at a 30% slab, about ₹7,50,000 plus 4% cess (₹7,80,000) per year — on money he cannot withdraw without penalty. With s.89A, that tax is deferred until distribution.
Step 3 — Withdrawal years.
From FY 2027-28, each $50,000 (₹41,50,000) distribution is taxable in India in that same year. The US withholding on the distribution (up to 15% on the taxable portion under the India-US DTAA) is creditable in India as foreign tax credit (Form 67 / Schedule FSI), so the same money is not taxed twice. The earlier accrual tax never arises because s.89A deferred it.
The benefit is cash-flow and matching: no tax on locked-in money during accumulation, one clean tax at distribution, and a working FTC. Reproduce the deferral timeline in our RNOR Transition Planner.
What changed FY 2025-26
Section 89A itself did not change for FY 2025-26. What is changing is enforcement and awareness: the income tax portal now surfaces foreign retirement account disclosures more prominently, and Schedule FSI / Form 67 filings from returning NRIs have grown. For the 2025-26 cohort whose RNOR window is closing, this is the year the election becomes decision-critical.
Frequently asked questions
1. What is Section 89A?
A deferral election (Finance Act 2021) allowing a returning NRI who is now a resident to defer Indian tax on foreign retirement account income to the year of withdrawal, by filing Form 10-EE under Rule 21AAA.2. Who can file Form 10-EE?
A resident individual who is a citizen of India or a person of Indian origin, with income from a foreign retirement account in a notified country. RNORs and non-residents cannot.3. Which countries and accounts are covered?
The USA (401(k), IRA, Roth IRA), Canada (RRSP), and the UK (registered pension schemes) as notified. Confirm the specific account qualifies with a CA before filing.4. When do I need to file it?
In the first full-resident year — the year after your RNOR window lapses. Filing in that year defers the account's income to the years you withdraw.5. Does s.89A exempt the money from tax?
No. It defers the tax to the year of withdrawal. The distribution is taxed in India in that year; it is not exempt.6. Does it prevent double taxation?
Yes, by aligning years. Because India taxes the same year the US taxes the distribution, the US withholding is creditable in India as foreign tax credit (Form 67 / Schedule FSI) under the DTAA — avoiding double tax on the same distribution.7. I'm still an RNOR — do I need s.89A?
Not yet. During RNOR, foreign income is generally not taxable in India, so there is nothing to defer. File the election when you become a full resident.---
Last verified: 2026-08-05 (FY 2025-26 / AY 2026-27)
Sources: s.89A, Income-tax Act, 1961 (inserted by Finance Act 2021, effective AY 2023-24); Rule 21AAA and Form 10-EE (Income-tax Rules 1962); CBDT notifications specifying the USA, Canada, and the UK (and specified retirement accounts); s.6(6) (RNOR status); DTAA pension articles and foreign tax credit under s.90 read with Rule 128 / Form 67 / Schedule FSI. The treatment of a specific foreign account (e.g., Roth IRA distributions) is fact-specific and should be confirmed with a CA. For a return-to-India timeline, see the RNOR Transition Planner or book a consultation at harunraaj.com.
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