Foreign Retirement Account Tax Relief for Returning NRIs: Section 158 (Income Tax Act 2025)
Section 158 of the Income-tax Act, 2025 gives relief to a resident of India who opened a retirement account in a "notified country" while living there as a non-resident. If that country taxes the account only when money is withdrawn, India can also tax the income on withdrawal instead of every year as it accrues. Rule 74 of the Income-tax Rules, 2026 says how: the person opts in through Form No. 40, for all such accounts, by the return due date under section 263(1)(c).
This guide covers who qualifies, how the option works, what happens to income already taxed, and what changes if you leave India again. Every point is taken from the Act (as amended by the Finance Act, 2026) and the Rules. Last reviewed against that text on 10 November 2026. It is information, not tax advice.
What does section 158 do?
Section 158(1) says the income accrued to a specified person in a specified account is taxed "in such manner and in such tax year, as may be prescribed". The prescribing is done by rule 74. Rule 74 is where the timing is set.
Who is a "specified person" and what is a "specified account"?
Section 158(2) defines three terms. All three must be satisfied.
| Term | Meaning under section 158(2) |
|---|---|
| Notified country | A country notified by the Central Government (clause (a)) |
| Specified account | An account in a notified country, kept by the specified person for retirement benefits, whose income is taxed by that country at withdrawal or redemption and not on an accrual basis (clause (b)) |
| Specified person | A person resident in India who opened a specified account in a notified country while being a non-resident in India and a resident of that country (clause (c)) |
The second test is the one people miss. If the foreign country taxes the account on accrual, it is not a specified account, whatever its name. Which countries are notified is a matter of notification and is not listed in the Act or the Rules, so check the current notification before relying on this.
How does the option under rule 74 work?
Rule 74(1) lets the specified person choose to include the accrued income in the total income of the tax year in which it is taxed on withdrawal or redemption in the notified country. The conditions are:
- The option covers all specified accounts the person holds (rule 74(3)(a)).
- It is made in Form No. 40, furnished on or before the due date under section 263(1)(c) (rule 74(3)(b)).
- Once exercised it applies to all later tax years and cannot be withdrawn for the year it was made or any later year (rule 74(5)), subject to the non-resident exception below.
If you do not opt in, rule 74 does not apply to you. How income is taxed then is outside what this article covers.
What if some income was already taxed in India, or was never taxable here?
Rule 74(2) keeps the withdrawal year from double counting. After the option is exercised, the total income for the withdrawal year does not include income that:
- was already included in total income in an earlier tax year in which it accrued, with tax paid under the Act; or
- was not taxable in India in the year it accrued because you were then a non-resident or a not ordinarily resident (section 6(13)), or because of a Double Taxation Avoidance Agreement.
Foreign tax paid on that excluded income is ignored when working out the foreign tax credit under rule 76.
Worked example 1: opting in while resident (all figures in rupees)
Assumptions: Ravi is a resident who opened a specified account in a notified country while a non-resident. He opts in through Form 40 for tax year 2026-27. Income accrues as shown and he withdraws the whole account in 2029-30, when the notified country taxes it. The figures are illustrative.
| Tax year | Income accrued in account | Added to Indian total income that year |
|---|---|---|
| 2026-27 | 1,00,000 | 0 |
| 2027-28 | 1,20,000 | 0 |
| 2028-29 | 1,50,000 | 0 |
| 2029-30 (withdrawal) | 0 | 1,00,000 + 1,20,000 + 1,50,000 = 3,70,000 |
Ravi's 2029-30 total income includes Rs 3,70,000 from the account. Tax on it is worked out under the normal provisions and rates for that year, and the foreign tax is dealt with under rule 76.
Worked example 2: part of the income already outside the Indian tax net
Assumptions: Meena returned to India during the period. Her account accrued income of Rs 2,00,000 in 2025-26 while she was a non-resident, Rs 1,50,000 in 2026-27 as a resident, and Rs 2,50,000 in 2027-28. In 2026-27 the Rs 1,50,000 was already included in her Indian total income and tax was paid. She opts in for 2027-28 and withdraws in 2028-29.
| Step | Amount (Rs) |
|---|---|
| Total income accrued in the account to withdrawal | 2,00,000 + 1,50,000 + 2,50,000 = 6,00,000 |
| Less: accrued while non-resident, not taxable in India (rule 74(2)(b)(i)) | 2,00,000 |
| Less: already included in 2026-27 with tax paid (rule 74(2)(a)) | 1,50,000 |
| Included in 2028-29 total income | 6,00,000 - 2,00,000 - 1,50,000 = 2,50,000 |
What happens if you become a non-resident again?
Rule 74(4) deals with this. If the specified person becomes a non-resident in a later tax year (the "relevant tax year"), the option is treated as never exercised from that tax year. The income accrued from the year of the option up to the tax year before the relevant tax year becomes taxable in that preceding tax year. The tax must be paid on or before the due date for filing the return for the relevant tax year.
Real-life example: Ravi leaves India again
Take Ravi's case again, with one change: he does not withdraw in 2029-30 and instead becomes a non-resident in that year. He opted in for 2026-27, and income accrued Rs 1,00,000, Rs 1,20,000 and Rs 1,50,000 in 2026-27, 2027-28 and 2028-29. The option is treated as never exercised from 2029-30, so the Rs 3,70,000 is taxable in 2028-29 (the tax year immediately preceding). He must pay the tax on or before the due date for filing his 2029-30 return.
Real-life example: Meena who has two accounts
Meena holds two retirement accounts in the same notified country, both opened while she lived there. She wants the deferral for one only. Rule 74(3)(a) does not allow that: the option applies to all her specified accounts. She either opts in for both or for neither.
Who must file the Form 40 and by when?
The Form 40 is furnished by the due date in section 263(1)(c), which is the return due date that applies to the person under the Table in that section. A resident, other than a not ordinarily resident, who holds any asset outside India or has signing authority in an account outside India must also file a return under section 263(1)(a)(ix), whatever the amount of income (section 263(1)(b)). A foreign retirement account is such an asset, so the return itself is not optional.
Quick reference
| Point | Rule |
|---|---|
| Who can opt | Specified person (section 158(2)(c)) |
| Form | Form No. 40 (rule 74(3)(b)) |
| Deadline | Due date under section 263(1)(c) |
| Scope | All specified accounts (rule 74(3)(a)) |
| Withdraw the option? | No, except through rule 74(4) on becoming non-resident |
| Foreign tax credit | Rule 76; tax on excluded income ignored (rule 74(2)) |
Common mistakes
- Assuming any foreign pension qualifies. The country must be notified and the account must be taxed there on withdrawal, not accrual.
- Missing Form 40. The option exists only if the form is furnished by the section 263(1)(c) due date.
- Opting in for one account only. It must cover every specified account.
- Counting income twice. Income already taxed in India, or earned while non-resident, is excluded in the withdrawal year under rule 74(2).
- Forgetting the exit rule. Becoming non-resident again pulls the accrued income into the preceding year, with tax due by the next return date.
- Skipping foreign asset reporting. Section 263(1)(a)(ix) can require a return even with low income.
Where this is in the Act
- Section 158: relief for a retirement benefit account in a notified country
- Section 6(13): not ordinarily resident
- Section 263(1)(a)(ix), (b) and (c): return filing and due dates
- Rule 74: taxation of income from a retirement benefit account, Form No. 40
- Rule 76: foreign tax credit
To see how residence is decided, read our guide to residential status in India.
For a CA firm, the hard part is tracking which returning-NRI clients hold foreign accounts, whether Form 40 was filed, and when each return is due. Finexo's practice management software keeps those deadlines and client notes in one place. It does not file forms or compute tax for you.
Frequently Asked Questions
What is section 158 of the Income-tax Act, 2025?
It gives relief to a resident who opened a retirement account in a notified country while a non-resident. The income can be taxed in India in the manner and year prescribed by rule 74, which is the year it is taxed on withdrawal abroad.
How do I opt for taxation on withdrawal?
Furnish Form No. 40 on or before the due date under section 263(1)(c), covering all your specified accounts (rule 74(3)). Once made, the option applies to all later tax years and cannot be withdrawn (rule 74(5)).
Is income taxed twice if some of it was taxed earlier?
No. Rule 74(2) excludes from the withdrawal year income already included in an earlier year with tax paid, and income that was not taxable in India when it accrued because you were non-resident, not ordinarily resident, or covered by a tax treaty.
What if I become a non-resident after opting in?
The option is treated as never exercised from that year. Income accrued since the option year becomes taxable in the preceding tax year, and the tax is due by the return due date for the year you became non-resident (rule 74(4)).
Is this an exemption or only a deferral?
Rule 74(1) lets you include the accrued income in the year it is taxed on withdrawal abroad, so the income is taxed in India later, not waived. Income already taxed or not taxable when it accrued is excluded from the withdrawal year (rule 74(2)).
Which countries are notified for this relief?
Section 158(2)(a) leaves this to a Central Government notification. The Act and Rules do not list them, so check the current notification for your country.