Pension benefits is an essential part of ones pay package which is generally provided by the employers over the world. It can be as an obligation imposed by statutory requirements or as a voluntary employee welfare initiative. Pensions can be by private firms or government aided where the contributions can be either by the employer and employee or only employer-funded plans. Often, pension plans extend the annuity benefit to employees after their retirement, but some may offer a lump sum pay out option. Although the type of plans or their benefits might differ, remember that pension too falls under the taxation laws. The taxes for overseas pensions depends on the residential status of the recipient and the place of accrual and receipt of pension.
Basic rules for taxation
The residential status of the individual determines his tax ability on any income. This is determined by the person’s physical presence in India during the current year and the past periods. A person who is 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.
Tax ability of pension under different scenarios
- Pension received for services provided abroad – Overseas pension received in India by pensioners who have served outside India is regarded as income accrued outside the country. In case of NR or RBNOR, pension received overseas for services rendered abroad will not be taxed in India unless the first receipt of such income is in India. But in case of ROR individuals, it would be taxable regardless 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. They can claim foreign tax credit (if taxes are paid in another country) when they file for tax returns in India. To claim relief, additional compliance like filing Form 67 would need to be done. With countries where India does not have a tax treaty, they can still get a unilateral tax relief: credit for taxes paid overseas. However, individuals NR cannot claim credit for taxes paid overseas in India. They can also claim exemption from India tax if the tax treaty provides right of taxation to the country of source.
- Pension received for services provided in India – If part of the individual’s service was offered in India, the pension received by him from an overseas pension plan in his overseas bank account would be subject to taxation in India. However, one can claim tax exemption based on specific tax treaty provisions, if the tax treaty provides right to tax only to a resident country.
As pension is a financial security for the future retirement purpose, it is of utmost importance to be aware of future tax implications to avoid unpleasant surprises later.