There’s a good chance that an NRI returning from UK has an accumulated pension in UK and there’s a need to understand tax and associated implications on that particular income in India to be compliant with the Indian laws.
In this post, I will be sharing insights on taxation of UK pensions in India as well as other issues/compliances that such expats should keep in mind on return to India.
Before we proceed:
Please bear in mind that the information in this post is not tax advice and I do not practice UK tax law. If you have returned to India and have a UK pension, please consult a qualified CA in India and CPA in UK with your specific tax situation and proceed accordingly.
Another big question on a UK returnee’s mind is what to do with the UK pension – should I keep it in UK or move it to an overseas jurisdiction, which is allowed under HMRC rules – I’ve discussed that issue separately in this post: What should I do with my UK pension on return to India?
Image Credit: www.iexpats.com
Taxation of UK pension in India
The broad scheme of taxation of “pension” from employer/former employer is as follows:
- The pension is chargeable to tax in India u/s 17 of Income Tax Act (ITA) under the head “Income from Salaries” – it is not chargeable under the head “Income from Other Sources” except in case of a family pension where rules are different.
- The income is chargeable at applicable slab rates and can be offset from the applicable qualifying exemption limit (in case of RNOR/ROR, INR 2.5 lacs/ INR 3 lacs/INR 5 lacs, as applicable, depending upon age)
- The commuted portion of the pension (taken as a lump sum distribution) is exempt @ 50% (if he does not receives gratuity) or 33% (if he receives gratuity) of the pension he is normally entitled to receive, u/s 10(10AA) (ii) of ITA. There is no exemption on uncommuted portion and it is completely taxable.
- There is no restriction that employer/foreign employer has to be an Indian resident – hence, even a pension accrued/received from a foreign employer (UK employer) will be taxable
- The pension is taxable on a “due” or “receipt” basis whichever is earlier – once the pension is taxed on a due/receipt basis, same amount is not taxable again.
Now, above were broad guidelines on taxation of pension in India.UK pension qualifies as “foreign income” under ITA. The taxability will thus depend on person’s residential status for that financial year in India as follows:
- Non Resident (NR) or Resident and NOT Ordinarily Resident (RNOR): Not taxable in India
- Resident and Ordinarily Resident (ROR): Worldwide income is taxable in India, subject to DTAA relief.
To calculate your residential status, you can refer this post: How NRI/PIOs can decode the Indian tax residency rules & save tax
It is pertinent to mention here that though NR/RNOR is not taxed on income accrued outside India, however income “received” in India is taxable in India OR w.r.t. services rendered in India is always taxable in India irrespective of a person’s residential status. Hence, I generally advise returning NRI clients who are initially in the RNOR period for some years, to keep a foreign bank account live even after your return to India so that when you get your pension, you collect it in the said account first and THEN remit it to India.
Taxation of UK pension under India UK DTAA
As I explained, I do not practice UK tax law hence am not an expert on this, but to the extent I’ve read about it, pensions are generally taxable in UK to UK residents. Also, for a person who moves abroad (i.e. out of the UK), pensions continue to be taxable in UK till some 5 years after his move.
If this is true, there is a scope of double taxation as the same pension will be taxed in UK as well in India (after person becomes ROR post 2-3 years of return). Also, if tax is applicable in UK on such pension, the pension provider in UK may also withhold applicable tax on such distribution.
In this context, it is important to mention that India and UK have a Double Tax Avoidance Agreement (DTAA). Article 20 of the DTAA on “Pensions and Annuities” most closely represents the nature of income in question. Text of Article 20 is as follows:
PENSIONS AND ANNUITIES
- Any pension, other than a pension referred to in Article 19(2) of this Convention, or annuity paid to a resident of a Contracting State (INDIA) shall be taxable only in that State (INDIA).
- The term “pension” means a periodic payment made in consideration of past employment or by way of compensation for injuries received in the course of performance of employment or any payments made under the social security legislation of either Contracting State (UK or INDIA).
3 years. The term “annuity” means a stated sum payable periodically at stated times during life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration in money or money’s worth.”
As we can see, once a person becomes a resident of India (ROR), India retains the sole right to tax that pension income in India. Hence, in such case, the person receiving the pension must check with a CPA in UK and the pension provider on how he can submit a tax residency certificate and claim zero tax withholding on pensions paid out from UK. In case a withholding is still made, there is no option other than claiming a credit of the same in the Indian tax return.
India tax implication if UK pension is transferred to a QROPS to a non-India jurisdiction
In many cases, NRI returning from UK transfer their pension pot from UK to other favourable overseas jurisdictions – In view of recent changes effective 09/03/2017 that applies 25% tax on such transfers and make it very unattractive, you as a reader may have done the transfer to a QROPS in Malta and may want to know the tax implications in India on payments from such a scheme.
First thing we’ve to understand here is that as an ROR, India will tax this income as foreign income no matter where the pension scheme is located. There are clearly defined rules on how to compute the income (as explained above) and certain exemptions in case of “commuted portion” of the pension (also known as pension commencement lump sum PCLS) will apply.
Having said that, it is important to check (especially before you make a transfer) on whether a DTAA exists between both countries, as a country having a favourable DTAA with India in matter of private pensions will help reduce the overall tax liability on such income.
In that regard, I am checking the applicable DTAA for certain popular and recognized jurisdictions as follows:
Isle of Man, Gibraltar, Hong Kong – No DTAA exists with India. For Isle of Man and Gibraltar, a Tax Information and Exchange Agreement (TIEA) exists, but that is different from a DTAA
Malta – Yes, a DTAA exists – the relevant Article applicable to this income is given below:
ARTICLE 19: PENSIONS
- Subject to the provisions of paragraph (2) of Article 20, pensions and other similar remuneration paid to a resident of a Contracting State in consideration of past employment shall be taxable only in that State.
- Notwithstanding the provisions of paragraph (1), pensions and other payments made under the social security legislation of a Contracting State shall be taxable only in that State.
New Zeland – Yes, a DTAA exists – the relevant Article applicable to this income is given below:
ARTICLE 18: PENSIONS AND ANNUITIES
- Subject to the provisions of paragraph (2) of Article 19, pensions and other similar remuneration paid in consideration of past employment to a resident of a Contracting State and any annuity paid to such a resident shall be taxable only in that State.
- The term “annuity” as used in this article means a stated sum payable periodically as stated times during life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration in money or money’s worth.
Your question might be this – what difference it makes in whether a country has a DTAA or not?
Answer is that if the DTAA exists AND the respective Article allows India the sole right to tax the income for an Indian resident (as applicable in case of Malta & New Zeland), you can submit a simple TRC to the pension provider and claim the pension without any tax withholding.
As compared to this, if DTAA does not exist, the pension provider will deduct tax and pay the balance to you. When you file tax return in India, Section 91 of ITA allows you to claim credit of tax on that income however there are two issues: a) the credit is available only to the extent and at the rate that India would have taxed that income – so, if you fall in 10% tax bracket in India and other country has deducted tax equivalent to 30% rate, you will get credit only upto 10% and not entire 30% and b) the money represented by tax withholding in overseas jurisdiction will keep locked up till you file a return and get a refund in India.
India Black Money Law Implications on UK pensions earned by Indian resident (ROR)
In 2015, India enacted Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act (known as Black Money Act). This law is effective July 1, 2015 and requires a person who is a resident and ordinarily resident (ROR) under the ITA to disclose foreign income and assets in his tax return in India.
Also Read: Black Money Act: An Analysis
Black Money Act is a draconian Act by any standard. Generally, it is a settled legal principle that penalty and prosecution can be imposed when mens rea i.e. a culpable state of mind is established. The most draconian element in Black Money Act is that the court will assume a culpable state of mind and onus is on the assessee to prove that non disclosure was inadvertent and not with a malicious motive to avoid tax. Also, there is no provision for compounding of offence like it exists in FEMA and ITA.
The payments from the pension scheme and the pension corpus as on March 31 of a financial year form part of the definition of “foreign income” and “foreign asset” respectively. Though an exemption is given from disclosure for foreign bank accounts up to INR 5 lacs, note that UK pension balance does not qualify as a bank account hence disclosure is required in the tax return filed in India of the amount standing to the credit of the pension account as well as the pension amount received during the financial year.
Also, corresponding changes have been made in Section 139 of ITA making any person having ROR status in India and holding foreign assets/beneficial interest to mandatorily file a return of income in India irrespective of the income in that financial year. A separate schedule named Schedule FSI and FA are given in the tax return where these income/asset disclosures need to be made.
So, if you are an ROR, and not earning an income above the qualifying limit, you are still required to file a tax return in India if you continue to hold a UK pension. This is especially relevant to ladies/ senior citizens who were working in UK and contributing to the pension scheme, but are no longer working in India and thus do not have a taxable income in India. It may be noted that these rules will still apply if the UK pension has been moved to a jurisdiction other than India. In short, the disclosure requirement for UK pension as per the Indian Black Money Law will be as follows:
- NR or RNOR: No disclosure required unless income is directly received in India or pertains to services rendered in India
- ROR: Yes, disclosure is required in all cases
What if you have failed to file returns/disclose your UK pension in filed tax return
If you have failed to make a disclosure of UK pensions in your tax return after becoming ROR, severe penal implications can follow in terms of tax, penalty and prosecution under Black Money Act. I will advise you to not to dilly-dally and seek proper professional opinion. Some pointers here are as follows:
- If you’ve not filed a tax return for a year, you have time to file it within 1 year from end of assessment year. File the return and disclose the foreign assets. [Note that w.e.f. April 1, 2017, these rules have got changed where you can file a belated return only by end of the relevant assessment year]
- If you’ve filed the tax return within due date, you can go ahead and revise it within 1 year from end of assessment year. [Note that w.e.f. April 1, 2017, these rules have got changed where you can revise even a belated return but only till the end of the relevant assessment year]
FEMA regulations on UK pensions for returning UK NRIs
As per FEMA regulations, a person returning to India and becoming a resident can maintain accounts and investments outside India created out of his earnings outside India. So, post your return to India and becoming a resident of India as per FEMA (also read: NRI Definition: FEMA Act VS Income Tax Act you can keep the account in UK and there is no requirement under FEMA to close or shift the account.
However, if you or account matures and you get a lump sum or a recurring pension, FEMA (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2015 require you to remit the amount to India within a reasonable time and you cannot retain outside India – in such a case, if you wish to keep money in £ or $, you can open a Resident Foreign Currency (RFC) account in India and keep in that account. Money in RFC account can be freely repatriated outside India without any restrictions. To know about tax treatment of RFC accounts, you can read my detailed post here: NRO, NRE, FCNR, RFC: Tax and FEMA Implications for Returning NRI
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