Many Indians who return home after spending years abroad continue to hold retirement savings in overseas pension accounts such as a US 401(k), a UK workplace pension or a Canadian retirement plan. Such investments are often intended for retirement years, but they can create an unexpected tax problem once the account holder returns to India.
To address this issue, the Income-tax Act, 2025 allows eligible taxpayers to file Form 40 and defer taxation on specified foreign retirement accounts until the money is actually withdrawn. Tax experts say the provision is aimed at preventing a mismatch between how India and foreign countries tax retirement savings.
Why can foreign pension accounts create a tax problem?
The challenge arises because different countries tax retirement accounts at different stages.
“India and many foreign jurisdictions tax retirement accounts at different points in time,” said Nishant Shanker, chartered accountant and international tax expert at Navraj Global Advisors. He explained that income and gains generated within a foreign retirement account may become taxable in India as they accrue, whereas countries such as the US generally tax retirement accounts only when withdrawals are made.
Consider this example: A professional who worked in the US for a decade may return to India with a 401(k) account holding Rs 1 crore. Once he becomes a Resident and Ordinarily Resident (ROR), annual gains of Rs 7-8 lakh within that account could become taxable in India even though no money has been withdrawn.
“The US taxes on withdrawal; India, by default, taxes on accrual,” said Hardik Mehta, chartered accountant and managing committee member of the Bombay Chartered Accountants’ Society (BCAS). “Without Form 40, this person pays Indian tax on money he has not seen.”
Mihir Tanna, associate director of direct tax at SK Patodia & Associate LLP, said the timing mismatch can eventually result in double taxation because foreign tax credit is generally available only when tax is paid in both countries in the same year. If India taxes the income today and the foreign country taxes it years later on withdrawal, claiming relief can become difficult.
What does Form 40 do?
Form 40 is essentially a tax-deferral mechanism.
By filing the form, eligible taxpayers can choose to postpone taxation in India on income earned within specified foreign retirement accounts until the money is withdrawn or redeemed.
“The primary objective is not to exempt foreign pension income from tax, but to synchronise the timing of taxation in India with the timing of taxation in the foreign jurisdiction,” Shanker said.
Who stands to benefit the most?
The provision is particularly useful for returning NRIs who have accumulated substantial retirement savings abroad and intend to leave the money invested for many years.
Shanker said a professional returning from the US after 15 years with a sizeable 401(k) balance, or an executive returning from the UK with a large workplace pension, could benefit significantly because annual investment growth within the account can be substantial.
Mehta said the ideal beneficiary is someone who has become an ROR, falls in the 20 per cent or 30 per cent tax bracket and continues to hold a growing overseas pension corpus. Deferring annual taxation on notional gains can generate meaningful cash-flow savings over time.
However, the benefit may be limited in some cases:
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Taxpayers who plan to withdraw the money shortly after returning to India. -
Individuals with relatively small pension balances.
Those who are still classified as Resident but Not Ordinarily Resident (RNOR), since foreign income may not yet be taxable in India.
Individuals holding retirement accounts in countries that are not notified under the rules.
Common mistakes can prove costly
Experts warn that many returning NRIs wrongly assume that foreign retirement accounts are exempt from disclosure requirements.
One common mistake is failing to report such accounts in Schedule FA of the income tax return. Another is missing the deadline for filing Form 40 or claiming foreign tax credit incorrectly.
“Skipping Schedule FA exposes taxpayers to the Black Money Act,” Mehta said, adding that penalties can be severe even when Form 40 has been filed correctly.
Niyati Shah, chartered accountant and vertical head of personal tax at 1 Finance, said taxpayers also frequently fail to comply with procedural requirements for foreign tax credit claims or incorrectly assume that dormant pension accounts need not be disclosed.
What should taxpayers do before filing?
Taxpayers should maintain pension account statements, contribution records, foreign tax certificates, withdrawal records and documents explaining the tax treatment of the account overseas.
They should also ensure proper reporting of foreign assets and overseas income in their income tax returns and complete Form 40 before filing the return.
A senior executive returning to India after nearly two decades in the US with substantial balances in a 401(k) and Individual Retirement Account (IRA) could avoid years of tax timing mismatches by filing Form 40 on time and making proper disclosures, Shanker noted.
“Before returning to India, planning is far more effective and far less expensive than correcting compliance gaps later,” Shah said.
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