IRA or Individual Retirement Accounts in the United States are a form of retirement plan for individuals provided through financial institutions, that have tax advantages, as specified by US IRS. The amount invested in the IRA account, upto specified limits, does not get taxed at the time of contribution to the IRA. Instead the withdrawals from the IRA are taxed per IRS rules. There is a tax penalty of 10% in addition to normal tax, for early withdrawal (before 59.5 years of age). The tax advantage is that the contribution is done with pre tax dollars, and tax on withdrawal is usually done at the individual to the extend needed at a time after retirement when income and tax rates are expected to be lower. There are various types of IRAs, Traditional IRA, Roth IRA, SEP IRA, 401 (K) plans etc. with different tax features. Detail are described in Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs) and Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).
In India, an Ordinary Resident is required to disclose foreign assets and income and subject to tax on worldwide income. Thus an OCI or returning NRI who becomes an Ordinary Resident will first need to report the IRA balance as foreign assets during filing tax returns in India. Next is the question of taxability in India of the IRA withdrawals. While there is no clear directive on the taxability in India of IRA withdrawals, there is an Advanced Ruling (opinion given on tax matters) that states that IRA withdrawal is a withdrawal from a capital asset balance and amount in the IRA account was earned while the OCI or NRI was NR or NROR, and hence not taxable at that time. Details of Advance Ruling on this matter is below.
Advance Ruling A. No. P-12 Of … vs Unknown on 27 March, 1996 Equivalent citations: 1997 228 ITR 61 AAR Bench: S Ranganathan, D Lal, R Meena. Quoted from the Advance Ruling: “The amounts lying in the IRA account with SIS (financial institution) in the US represent part of the salary income received by the applicant in earlier years and deposited in the IRA account as a form of compulsory savings augmented by interest, capital gain and other accretion thereto. The withdrawals mostly represent salary and other income which had accrued to the applicant at a point of time when he was a non-resident in India. He will, therefore, be liable to pay no Indian tax thereon. No such Indian tax liability can be attributed merely because, at a point of time later to their accrual, he chooses to bring those funds into India or merely because a part of those funds are treated as income and taxed by the US IRS at the point of distribution instead of at the original stage of accrual.”
