Indian residents holding retirement accounts in the United States, the United Kingdom, or Canada can now align the timing of taxation in India with the tax treatment in those countries by filing Form 40 before the due date for filing their income tax return.

The relief is available under Section 158 of the Income Tax Act, 2025, read with Rule 74 of the Income-tax Rules, 2026, and is designed to address a common problem faced by individuals who become Indian tax residents after working abroad. In many foreign jurisdictions, retirement accounts are taxed only when money is withdrawn, whereas under Indian tax principles, income accruing in such accounts could otherwise become taxable annually on an accrual basis.

To eliminate this mismatch, eligible taxpayers can exercise a tax deferral option by filing Form 40 along with their income tax return. The form replaces the earlier Form 10-EE under the new tax framework.

Once the option is validly exercised, income, gains, and accretions arising within the specified foreign retirement account are generally not taxed in India every year. Instead, taxation is deferred until the year in which the income becomes taxable in the foreign jurisdiction or is actually withdrawn from the retirement account. This ensures that the timing of taxation remains broadly aligned in both countries.

The benefit currently applies to specified retirement accounts maintained in notified jurisdictions, including the US, UK, and Canada, subject to prescribed conditions. Taxpayers claiming the relief will typically file either ITR-2 or ITR-3, depending on the nature of their income.

When funds are eventually withdrawn, or the retirement account matures, the amount becomes taxable in India in the year of withdrawal, provided the taxpayer had opted for the deferral mechanism. The tax treatment will depend on the nature of the receipt and the applicable provisions of the Income Tax Act.

Where tax has also been paid in the foreign country, the taxpayer may claim a Foreign Tax Credit (FTC) in India, subject to fulfilment of the prescribed conditions and filing of Form 44 under the Income Tax Rules, 2026, which corresponds to the erstwhile Form 67. This helps mitigate the risk of double taxation.

However, taxpayers should note that opting for tax deferral does not exempt them from foreign asset reporting requirements. Eligible foreign retirement accounts must continue to be disclosed in Schedule FA (Foreign Assets) of the income tax return under the appropriate category. Importantly, Schedule FA disclosures are based on the calendar year rather than the Indian financial year. Thus, while filing the return for FY 2025-26, taxpayers must report details relating to Calendar Year 2025.

Experts advise taxpayers maintaining overseas retirement accounts to preserve records of contributions, account statements, income accruals, withdrawals, and foreign taxes paid, as these documents may be required during assessment proceedings and while claiming foreign tax credits in India.