Indians holding overseas pension accounts will have to change the way they file income tax returns. New income tax return (ITR) documents for assessment year 2026–27 discontinue simpler forms for reporting foreign pension assets.
ITR-1, ITR-4 no longer valid for foreign pension holders
For taxpayers with accounts such as US 401(k), UK SIPP or Canadian RRSP, filing ITR-1 (Sahaj) or ITR-4 (Sugam) is no longer permitted.
“For assessment year 2026–27, anyone holding an overseas retirement account… can no longer file using ITR-1 or ITR-4. ITR-2 or ITR-3 are now the only options,” said Parag Jain, a chartered accountant and tax head at 1 Finance.
Professionals, who continued filing ITR-1 after returning to India, could be caught off guard. “This year, that return will be treated as defective before it is even processed,” Jain said.
Chandni Anandan, tax expert at ClearTax, said that while taxpayers can continue to claim relief under Section 89A, “the relevant fields to claim this relief have been removed from ITR-1 and ITR-4, making ITR-2 or ITR-3 mandatory for resident taxpayers seeking such relief.”
Mihir Tanna, associate director of direct tax at SK Patodia & Associates LLP, said that taxpayers with foreign assets or income were never eligible for ITR-1 or ITR-4 in principle. The removal of disclosure fields in these forms now aligns them with eligibility rules.
Disclosure burden rises
Taxpayers must now disclose foreign retirement accounts in:
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Schedule FA (Foreign Assets): account details, country, peak balance -
Schedule FSI (Foreign Source Income): income such as interest, dividends, or pension
“Specific details of foreign pension accounts… must be reported under Schedule FA and Schedule FSI,” said Hardik Mehta, chartered accountant and managing committee member at the Bombay Chartered Accountants’ Society.
Jain emphasised that overseas retirement accounts are no longer a grey area. “Foreign pension accounts must now be reported… with complete disclosure,” he said.
Common mistakes
Experts flagged recurring errors that could lead to scrutiny or penalties:
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Filing ITR-1 or ITR-4 despite holding foreign assets results in a defective return. -
Not reporting dormant or non-income-generating accounts is a common mistake. -
Filing Form 10-EE does not remove the need to disclose assets. Both obligations exist simultaneously. -
Foreign assets must be reported on a calendar year basis, not the Indian financial year. -
Missing Form 10-EE or Form 67 deadlines can lead to immediate taxation or the denial of foreign tax credit. -
Not claiming Section 89A relief can lead to double taxation. -
Inadequate documentation of foreign taxes paid can affect foreign tax credit claims.
Failure to disclose foreign assets can attract penalties of up to Rs 10 lakh under the Black Money Act, according to Jain.
Section 89A: Avoiding tax timing mismatch
A central issue for taxpayers is the mismatch between Indian and foreign tax rules.
“India taxes income on an accrual basis… while countries like the US tax it at withdrawal,” Jain explained. Section 89A addresses this by allowing taxpayers to defer Indian tax until withdrawal.
Mehta said the provision enables a “receipt-based taxation approach”, aligning Indian taxation with the foreign country.
This benefit applies only to specified countries such as the US, UK, Canada and Australia, and requires filing Form 10-EE before the ITR deadline.
Jain cited a case of a returnee earning income in a US 401(k): Without Section 89A, annual accruals are taxed in India even if funds are locked; with the provision, taxation is deferred until withdrawal, reducing the risk of double taxation.
Taxation on withdrawal and DTAA relief
Once a taxpayer is classified as “resident and ordinarily resident (ROR),” foreign pension withdrawals are added to total income and taxed at slab rates.
“Foreign pension withdrawals are fully taxable in the hands of ROR,” Mehta said.
Double taxation avoidance agreements (DTAA) play a critical role:
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Under India-US rules, Social Security is taxed only in the US, but 401(k) withdrawals are taxable in India -
UK pensions are typically taxed in the country of residence -
Where both countries tax the income, relief is provided via the foreign tax credit
“Taxpayers can claim credit for taxes paid in the foreign country… by filing Form 67 before the ITR deadline,” Tanna said.
Planning opportunity: RNOR window
Experts highlighted a narrow planning window for returning Indians.
“When you first return to India… foreign income is not taxable during RNOR status,” Jain said. Withdrawals during this period may escape Indian tax entirely, leaving only foreign tax liability.
However, once full residency applies, Section 89A becomes the primary safeguard against double taxation.
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