Receiving overseas pension in India: Check if you are liable for tax

Posted by Madhura on July 15th, 2019

A pension is a periodic compensation given to a person for the services provided by him/her. Such income is taxed when received by the employees under the salary head. In this article, we will discuss the applicability of income tax on pensions received from the overseas.

The public sector employees have definite pension plans attached to their basic salary, whereas a very few private sector employers are providing pension plans to their employees. This may be on account of a voluntary initiative for the welfare of employees or a statutory obligation imposed by the regulatory requirements.

There are two types of pension plans in India, Private and Government subscribed pension plans. In the case of government-endorsed pension plans, the contribution is made by both the parties: The employer and the employee. While most plans give payout to the policyholders in the form of monthly, quarterly, half-yearly or annually pensions,  some schemes permit a lump sum payout option. Though, the type of pension plans and their benefits may vary, one thing is sure: the taxation on a pension received. However, in the case of overseas pensions, the income tax norms may differ depending upon the residential status of the pension holder and the place of receipt of the pension.

In India, the taxability of income depends on the following two factors:

1. Source of income
2. Residential status

Any income, the origin of which is resided within India, is taxable under The Income Tax Act. Any person who is a qualified resident and ordinarily resident (ROR) is taxed on his worldwide income. Whereas, an individual who is a qualified resident but is not-ordinarily resident (RBNOR) and non-resident (NR), is taxed on the income earned in India or income received in India.

Let’s consider the taxability of pension received under a different scenario.

1. Pension received for the services provided outside India

The overseas pension which is received in India for services rendered outside India is formally regarded as income accrued outside the country. Additionally, such pension is not taxable if primarily it is received abroad and then transferred to India. Moreover, in the case of NR and RBNOR, the pension received overseas for the services provided outside India is not taxable in India unless the income was primarily received in India. However, in the case of people belonging to ROR, the pension is taxable in India irrespective of the place of release of such income.

When the pension becomes taxable in India, an individual can claim tax relief under the tax treaty between India and the other country.

A person can claim the foreign tax credit in India if the taxes are paid in a foreign country. To claim the tax relief, one need to submit the form 67. If India does not have a tax treaty with the source country, it can still provide unilateral tax relief. However, the NR individuals cannot claim a credit for the income tax paid abroad. As per the treaties, a person receiving a pension in respect of government service is taxable only in the country where services are rendered, and the pension is received. 

2. Pension received for the services provided in India

If a part of the service was performed in India, the pension received by an individual from the foreign pension plans in his foreign bank account is taxable in India for the specific amount for which the services were rendered in India. However, a person can claim tax exemption on the basis of tax treaty provisions, if applicable.

What is the tax saving investment option with attractive returns?

Tax saving mutual funds:

For the first-time investor, the investment in tax saving mutual funds qualifies for the tax exemption up to rupees 1.5 lakh under Section 80C of The Income Tax Act. Tax saving mutual funds come with a lock-in period of three years. However, it is advisable to invest in tax saving mutual funds for at least seven years to earn better returns.

Your money is generally invested in equity. It is quite a risky proposition. However, an extra risk may be rewarded with the additional returns. An investor with a high-risk appetite and medium investment horizon can consider investing in tax saving mutual funds to serve the dual purpose of saving tax and earning better returns. Besides, there are other investment options including national pension scheme under section 80 C. However, they are meant for conservative investors, and they offer standard returns. Additionally, you don’t need to sell the mutual fund units after the lock-in period. You can hold them to earn even better profits if they are performing well.

The tax saving mutual funds are also known as ELSS. The investment made under this scheme is tax deductible under Section 80 C in the current financial year. It is advisable to start tax planning exercise at the beginning of the new fiscal year. Thus, if you are thinking to invest in ELSS scheme, start investing right away. Save yourself from the last-minute running around to save tax before the financial year ends.

ELSS has a compulsory lock-in period of three years which is the shortest lock-in period. The other investment options like Public Provident Fund (PPF), National Saving Scheme (NSS) which are tax exempted under Section 80 C, have a comparatively longer lock-in period. The tax saving mutual funds invest in the equity which means, it is an ideal option to create a corpus over a long period.

The investment experts advise taxpayers to have long-term financial goals to generate a regular flow of income after retirement. Planning for your future financial needs would help you to stay focused on your investment objective.

A pension is a financial security in old age. It is uber important to be aware and keep a close watch on tax implications to avoid the nuisance and unpleasant surprises later. This knowledge helps you to plan better for your future financial security and decisions related to the pension plans.