
The Income-tax Act, 2025 allows eligible taxpayers to file Form 40 and defer taxation on specified foreign retirement accounts until money is actually withdrawn. According to tax experts, this provision is designed to prevent tax timing mismatches between India and foreign countries. The relief currently applies to retirement accounts maintained in notified countries including the United States, United Kingdom, Canada and Australia. As reported by Business Standard, the primary objective is not to exempt foreign pension income from tax, but to synchronise the timing of taxation in India with the timing of taxation in foreign jurisdictions.
The challenge arises because different countries tax retirement accounts at different stages. India taxes retirement accounts on accrual, while countries like the US generally tax only when withdrawals are made. According to Nishant Shanker, chartered accountant and international tax expert at Navraj Global Advisors, a professional returning to India with a ₹1 crore 401(k account could face taxation on ₹7-8 lakh annual gains once they become Resident and Ordinarily Resident (ROR). Hardik Mehta from Bombay Chartered Accountants' Society explained that without Form 40, this person pays Indian tax on money they have not seen. The timing mismatch can eventually result in double taxation due to foreign tax credit availability constraints.
The provision is particularly useful for returning NRIs with substantial overseas pension balances who intend to leave the money invested for many years. Tax experts identify the ideal beneficiary as someone who has become ROR, falls in the 20 per cent or 30 per cent tax bracket, and continues to hold a growing overseas pension corpus. However, benefits may be limited for taxpayers planning to withdraw money shortly after returning, individuals with small pension balances, and those still classified as Resident but Not Ordinarily Resident (RNOR). As noted by experts, the benefit is also restricted to retirement accounts in notified countries and those holding relatively small pension balances may not benefit significantly.
Experts warn that many returning NRIs wrongly assume foreign retirement accounts are exempt from disclosure requirements. Common mistakes include failing to report such accounts in Schedule FA of the income tax return and missing Form 40 filing deadlines. Mihir Tanna from SK Patodia & Associate LLP emphasized that skipping Schedule FA exposes taxpayers to the Black Money Act penalties. Taxpayers must maintain pension account statements, contribution records, foreign tax certificates, withdrawal records, and overseas tax treatment documents. Niyati Shah from 1 Finance recommends that taxpayers first determine their residential status accurately and ensure proper reporting of foreign assets and overseas income before filing Form 40.
Tax experts recommend that returning NRIs first determine their residential status accurately because eligibility depends on ROR classification. A senior executive returning after nearly two decades in the US with substantial 401(k) and IRA balances could avoid years of tax timing mismatches by filing Form 40 on time and making proper disclosures. According to Niyati Shah from 1 Finance, planning is far more effective and less expensive than correcting compliance gaps later. The strategic approach involves maintaining proper documentation, ensuring timely filing of Form 40, and completing all procedural requirements for foreign tax credit claims to maximize the benefits of this tax deferral mechanism.