If you are an Indian resident this year and previously worked as a salaried employee in the United States, Canada, United Kingdom or any other country notified by the Income Tax Department, and you have a pension account like 401k in the US or something similar for other countries, then the Indian Income Tax Act, 2025 offers you some relief.
Section 158 of the Indian Income-tax Act, 2025 provides relief from taxes on income from retirement benefit accounts held in a notified country like the UK, USA, or Canada, among others. Section 158 (earlier Section 89A) was created to fix the mismatch issues arising from timing of taxation of income accruing in foreign retirement accounts, such as the U.S. 401(k) and other specified overseas pension schemes.
Chartered Accountant Suresh Surana said to ET Wealth Online that this provision in the Indian tax law allows individuals with either a resident or ordinarily resident status in India to defer the taxation of income accrued in specified foreign retirement accounts from the year it is earned to the year it is withdrawn or redeemed. This deferment of India tax liability is subject to the condition that the foreign pension account is maintained in a notified country and other the prescribed conditions are satisfied.
Vikas Sharma, Lead-Personal Tax, AKM Global, a tax and consulting firm, says that to avail of the tax deferral benefit in India, individuals have to electronically furnish Form 40 (which replaces the earlier Form 10-EE) on or before the deadline for filing the income tax return. On exercising this option, the basis of taxation shifts from the accrual to the withdrawal (receipt) basis.
How can individuals claim tax deferral benefits in India by filing Form 40?
Individuals seeking tax deferral relief for foreign retirement benefit accounts are required to exercise the option by filing Form 40
Submitting Form 40 allows the taxpayer to defer taxation in India until they actually withdraw or redeem the amount in a foreign country. Typically, this form has to be filed electronically before furnishing the income-tax return for the relevant assessment year.
Under the Income-tax Rules, 2026 (IT Rules 2026), Form 10-EE has been replaced by Form 40, as prescribed under the new rules, to claim the corresponding relief for those foreign retirement benefit accounts.
For which pension account is this benefit available?
Surana says that the benefit is not restricted only to US 401(k) accounts as the relief applies to specified foreign retirement benefit accounts maintained in the notified countries, subject to fulfilment of certain conditions. At present, the notified countries include:
● United States of America
● United Kingdom
● Canada
Once residential status changes to NRI from resident or ordinarily resident, the tax benefit is lost even if Form 40 was previously filed
Sharma says that according to Rule 74 of the Income tax Rules, 2026 (corresponding to the erstwhile Rule 21AAA), once this option is exercised, it is generally irrevocable and will apply to all subsequent years for the specified account.
Sharma however, says that if the individual becomes a Non-Resident (NR) in any year, the filed Form 40 will have no effect as it will be deemed to have never been exercised.
According to Sharma, this takes effect from the relevant tax year, and the income accrued beginning with the tax year in respect of which the Form 40 India tax deferral option under the said sub-rule was exercised and the tax year immediately preceding the relevant tax year, becomes taxable in line with the provisions of the Indian Income Tax Act.
