1. Background of Rule 74
The Draft Income-tax Rules, 2026 introduce Rule 74 to address taxation of retirement benefit accounts maintained in foreign jurisdictions.
Many individuals working abroad accumulate savings in foreign pension or retirement plans (such as 401(k)-type plans, superannuation funds, or employer retirement schemes).
Under earlier provisions, income accruing annually in such accounts could become taxable in India even though the funds are not withdrawn, resulting in timing mismatch and potential double taxation.
Rule 74 introduces a deferral mechanism to align taxation in India with the taxation in the foreign country where the retirement account is maintained.
2. Key Concept – Deferral of Taxation
A specified person can choose to defer taxation in India for income accrued in a foreign retirement account.
Instead of taxing the income every year in India, the taxpayer may offer it to tax only when the income is actually taxed upon withdrawal or redemption in the notified country.
In simple terms
| Scenario | Tax Treatment |
|---|---|
| Income accrues yearly in foreign retirement account | No taxation in India if option exercised |
| Withdrawal / redemption happens abroad | Income becomes taxable in India in that year |
This ensures synchronisation of tax timing between India and the foreign jurisdiction.
3. Who Can Use This Rule?
The option is available only to a “Specified Person”.
Definitions are aligned with Section 158(2) of the Income-tax Act, 2025.
Key elements include:
Specified Person – Generally a resident individual holding such foreign retirement accounts.
Specified Account – A retirement benefit account maintained abroad.
Notified Country – Countries specifically notified by the Government.
4. Conditions for Exercising the Option
To avail the deferral benefit, the taxpayer must comply with the following:
1️⃣ Option must be exercised for ALL retirement accounts
Partial selection is not permitted.
2️⃣ Form to be filed
The option must be filed in Form No. 40.
3️⃣ Time limit
The form must be submitted before the due date of return filing under Section 263(1)(c).
4️⃣ Once exercised – cannot be withdrawn
The option becomes permanent for all future years.
5. Safeguard Against Double Taxation
When income is eventually taxed in India at the time of withdrawal:
The following income will NOT be taxed again:
✔ Income already taxed in earlier years in India
✔ Income that was not taxable earlier due to residential status (NR / RNOR)
✔ Income exempt due to DTAA provisions
However:
⚠ Foreign tax paid earlier on that income will not be eligible for foreign tax credit under Rule 76.
6. Important Rule if the Person Becomes Non-Resident
If the individual becomes a non-resident in a later year:
The earlier option is treated as never exercised.
All previously deferred income becomes taxable in the year immediately preceding the year of becoming non-resident.
Tax must be paid before the return filing due date.
This provision prevents permanent tax deferral through change in residential status.
7. Practical Impact
Rule 74 is particularly relevant for:
Individuals holding foreign retirement savings accounts
Persons planning cross-border retirement taxation
8. Professional Perspective
The rule introduces structured taxation of global retirement funds, but proper planning is required regarding:
Residential status
Foreign tax credit treatment
Timing of withdrawals
Disclosure and compliance requirements
9. How Professional Advisory Helps
Professional review can assist taxpayers in:
• Evaluating eligibility as a specified person
• Identifying qualifying retirement accounts
• Filing Form 40 correctly within due dates
• Managing foreign asset reporting and compliance
Proper advisory ensures global retirement savings remain tax-efficient and compliant with Indian tax laws.
