How are US retirement funds taxed in India?

—Name withheld on request

Assuming you had limited physical presence in India in the past 10 years, you may qualify as a “Resident and Ordinarily Resident (ROR)” of India after 2 to 3 years of your return. An individual qualifying as ROR is taxable on his worldwide income in India and is required to report all foreign assets in the India ITR. 

The taxability of retirement funds will depend on the nature of the funds and the benefits available under the Double Taxation Avoidance Agreement (DTAA) between India and the US. 

 For example, accretions to the retirement funds (such as interest, dividends, etc) may be exempt from Income-tax if you qualify as a “Resident” of the US under the DTAA. However, Tax Residency Certificate will be required from the US tax authorities to prove the same. You may also be required to file Form 10F electronically attaching a copy of the Tax Residency Certificate with the Indian tax authorities. If you qualify as a “Resident” of India under the DTAA, the exemption from Income-tax may not be available. The capital gains from the retirement funds will be taxable in India. The income in form of pension may also be taxable in India. However, the foreign tax credit may be claimed in India or in the US to avoid double taxation under DTAA depending upon the residential status.

 There is a recently introduced beneficial provision which allows to defer the taxation of retirement funds to the year of withdrawal to mitigate the mismatch of taxation of income in India and the US and claim foreign tax credit of US taxes in India subject to specified conditions. You are recommended to take advice based on the type of retirement funds, type of income from retirement funds and taxability of identified retirement funds in the US. 

 Sonu Iyer is tax partner and people advisory services leader, EY India