The Income-tax Act, 2025 introduced Section 158 (earlier Section 89A) to address taxation mismatches for Indian residents holding foreign retirement accounts. According to reports from ET Wealth Online, this provision helps resolve the issue where some countries tax funds on an annual accrual basis while others only tax upon withdrawal. Under Indian tax rules, the same income could become taxable as it accrues, even if the funds remain locked in the account and have not been accessed by the account holder.
To avail the tax deferral benefit, taxpayers must submit Form 40 before filing their income-tax return for the relevant assessment year. As reported by ET Wealth Online, Form 40 has replaced the earlier Form 10-EE under the Income-tax Rules, 2026. The form must generally be filed electronically and allows individuals to opt to defer taxation in India on income accrued in the foreign retirement account until the funds are actually withdrawn or redeemed.
The tax deferral benefit is available for specified foreign retirement benefit accounts maintained in notified countries including the United States, United Kingdom, and Canada. According to Chartered Accountant Suresh Surana from ET Wealth Online, the tax deferral benefit is not limited to US 401(k) accounts but extends to specified foreign retirement benefit accounts in countries notified by the Indian government, subject to prescribed conditions. The option is generally irrevocable and continues to apply to the specified foreign retirement account in subsequent years, unless the taxpayer becomes a Non-Resident in any year.
It is crucial to note that Form 40 does not make the income tax-free - it only allows eligible taxpayers to postpone paying tax on it until a later stage, subject to certain conditions. As reported by ET Wealth Online, if the taxpayer becomes a Non-Resident in any year, the option ceases to have effect and is treated as if it had never been exercised. The income accrued in the relevant retirement account may then become taxable under the provisions of the Indian Income-tax Act.
