Many Indians who return home after working overseas often continue to hold retirement savings in foreign pension accounts.
These may include a 401(k) in the United States, workplace pension schemes in the United Kingdom, retirement savings plans in Canada or similar employer-sponsored accounts in other countries.
To address this issue, the Income-tax Act, 2025 introduced Section 158 (earlier Section 89A). The provision was designed to resolve the mismatch in taxation that often arises for Indian residents holding foreign retirement accounts.
This mismatch occurs because some countries tax the fund on an annual accrual basis, while others only tax the funds upon withdrawal.
However, 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.
Section 158 helps address this issue by allowing eligible taxpayers to defer taxation in India until the amount is withdrawn or redeemed. The benefit is available only if the pension account is maintained in a notified country and other prescribed conditions are met.
How To Claim Tax Deferral On Foreign Pension Accounts
To avail of the tax deferral benefit for eligible foreign retirement accounts, taxpayers must submit Form 40.
By filing this form, individuals can opt to defer taxation in India on income accrued in the foreign retirement account until the funds are actually withdrawn or redeemed.
The form must generally be filed electronically before submitting the income-tax return for the relevant assessment year.
Under the Income-tax Rules, 2026, Form 40 has replaced the earlier Form 10-EE for claiming tax deferral relief on specified foreign retirement benefit accounts.
For which pension account is this benefit available?
Chartered Accountant Suresh Surana said to ET Wealth Online that the tax deferral benefit is not limited to US 401(k) accounts. It is available for specified foreign retirement benefit accounts maintained in countries notified by the Indian government, subject to prescribed conditions.
Currently, the notified countries are:
- United States
- United Kingdom
- Canada
Once Form 40 is filed, the option is generally irrevocable and continues to apply to the specified foreign retirement account in subsequent years. However, if the taxpayer becomes a Non-Resident (NR) in any year, the option ceases to have effect and is treated as if it had never been exercised. In such cases, the income accrued in the relevant retirement account may become taxable under the provisions of the Indian Income-tax Act.
It is also important 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.
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