Aarti Raote and Pallavi Dhamecha
Most employers across the globe provide pension benefits to their employees. This may be on account of obligations imposed by statutory requirements or a voluntary employee welfare initiative.
Pension plans can be private or government-subscribed plans with contributions by the employer and employee or only employer-funded plans. While most plans extend the annuity benefit to employees after their retirement, some schemes may permit a lump sum payout option. Though the type of plans and their benefits may vary, one thing is certain: taxation on receipt of pension. However, the tax treatment for overseas pensions may differ depending on the residential status of the recipient and the place of accrual and receipt of pension.Basic taxation rules
In India, the taxability of any income depends on the residential status of the individual, which is determined by the person’s physical stay in India during the year as well as past periods. A person who qualifies to be a resident and ordinarily resident (ROR) is taxed on his worldwide income while one who qualifies to be a resident but not-ordinarily resident (RBNOR) and non-resident (NR), is taxed on income accrued or deemed to accrue in India or income received or deemed to be received in India.
Taxability of pension under different scenarios(a) Pension received for services rendered abroad
Overseas pension received in India by pensioners who served outside India is regarded as income accrued outside the country. Moreover, such pension would not be liable to tax in India on a receipt basis if it is drawn and received abroad in the first instance and thereafter remitted to India.
In the case of NR or RBNOR, pension received overseas for services rendered abroad will not be taxable in India unless the first receipt of such income is in India. However, in case of ROR individuals, such pension would be taxable in India irrespective of the place of accrual or receipt. Where pension becomes taxable in India, a person can claim relief under the tax treaty between India and the other country as follows:
1. Claim foreign tax credit (in case taxes are paid in another country) in the India tax return. To claim relief, additional compliance like filing Form 67 would need to be done. Where India does not have a tax treaty with the source state, India can still provide a unilateral tax relief: credit for taxes paid overseas. It may be noted that individuals NR in India cannot claim credit for taxes paid overseas.
2. Claim exemption from India tax if the tax treaty provides right of taxation to the country of source.
As per tax treaties, an individual receiving pension in respect of government service shall be taxable only in the country paying the pension.(b) Pension received for services rendered in India
If part of the individual’s service was rendered in India, the pension received by him from an overseas pension plan in his overseas bank account would be subject to tax in India to the extent such pension relates to services rendered in India. However, as mentioned above, one can claim tax exemption based on specific tax treaty provisions, if the tax treaty provides right to tax only to a resident country.
Where both contributions as well as the pension is taxed in India, there is possibility of dual taxation.
As pension is an old age financial security, it is advisable to be aware of future tax implications to avoid unpleasant surprises later and to plan better.Aarti Raote is a Partner at Deloitte Haskins & Sells Pallavi Dhamecha is Senior Manager with Deloitte Haskins & Sells