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IRA Overview

Individual Retirement Accounts (IRAs) in the United States are retirement plans provided through financial institutions with tax advantages as specified by the IRS. Contributions to an IRA account, up to specified limits, are not taxed at the time of contribution. Instead, withdrawals from the IRA are taxed according to IRS rules. There is a 10% tax penalty for early withdrawals (before 59.5 years of age) in addition to the normal tax.

Types of IRAs

• Traditional IRA: Contributions are made with pre-tax dollars, and taxes are paid upon withdrawal, usually at a lower tax rate after retirement.

• Roth IRA: Contributions are made with post-tax dollars, and qualified withdrawals are tax-free.

• SEP IRA: Simplified Employee Pension Plan for self-employed individuals and small business owners.

• 401(k) Plans: Employer-sponsored retirement plans with tax-deferred contributions.

For detailed information, refer to:

• Publication 590-A: Contributions to Individual Retirement Arrangements (IRAs)

• Publication 590-B: Distributions from Individual Retirement Arrangements (IRAs)

Tax Implications for NRIs in India

In India, an Ordinary Resident is required to disclose foreign assets and income and is subject to tax on worldwide income. For OCI (Overseas Citizen of India) or returning NRIs who become Ordinary Residents, the following points are relevant:

1. Disclosure: The IRA balance must be reported as foreign assets when filing tax returns in India.

2. Taxability of IRA Withdrawals:

   • There is no clear directive on the taxability of IRA withdrawals in India.

   • An Advanced Ruling (AAR) suggests that IRA withdrawals are considered withdrawals from a capital asset balance. The amounts in the IRA account, earned while the OCI or NRI was a Non-Resident (NR) or Non-Resident Ordinary Resident (NROR), are not taxable at that time.

Advanced Ruling Details

Advance Ruling A. No. P-12 of 1996:

• It was determined that amounts in the IRA account represent salary income received in earlier years and deposited as compulsory savings. These funds are augmented by interest, capital gain, and other accretions.

• Withdrawals represent salary and other income accrued when the individual was a non-resident in India and are therefore not subject to Indian tax.

• Indian tax liability does not arise merely because funds are brought into India later or taxed by the US IRS upon distribution.

For more detailed information and practical examples, refer to the Income Tax website.