US-India Cross-Border Retirement Treaty US Tax Rules
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US-India Cross-Border Retirement Treaty US Tax Rules
The United States and India have a tax treaty in place — and that tax treaty provides a detailed summary about how foreign retirement is taxed for US Persons, Indian Nationals, and other residents — depending on the type of retirement plan at issue. In general, when it comes to cross-border retirement tax rules, if there is a tax treaty in place — it will significantly impact the outcome of how certain residents and citizens/nationals are taxed on the resulting income — including how contributions and growth are taxed as well. In discussing retirement and pension income taxation, they are typically three (3) buckets of retirement that taxpayers may have — depending on what sector they worked in (Public vs Private) and what type of investments they have. The three larger categories of retirement income include:
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Private Pension;
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Public Pension; and
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Social Security
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Let’s explore the basics of How US Treaty Taxes India Cross-Border Retirement & Pension
Article 20 (1) Private Pension
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Any pension, other than a pension referred to in Article 19 (Remuneration and Pensions in Respect of Government Service), or any annuity derived by a resident of a Contracting State from sources within the other Contracting State may be taxed only in the first-mentioned Contracting State.
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Private Pension Article 20(1) is Taxed by Country of Residence
In general, private pensions are taxed in the country of residence. Therefore, if a US person who is also an Indian Citizen, National or former Resident receives income from a foreign pension plan in India, the United States has the opportunity to tax that income — because the United States is the country of residence. But, it should also be noted that India would also have an opportunity to tax the income as well — because private pension Paragraph (1) is not excluded from the saving clause.
Private Pension Not Excluded by Saving Clause
While the saving clause excludes the remainder of Article 20 in the tax treaty between the United States and India from the Savings Clause, which deals with private pensions — Paragraph (1) involving annuities, which is the most common type of foreign pension, is not excluded from the saving clause — and therefore general tax rules in either Country would apply.
Article 20 (2) Social Security
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Notwithstanding paragraph 1, and subject to the provisions of Article 19 (Remuneration and Pensions in Respect of Government Service), social security benefits and other public pensions paid by a Contracting State to a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State.
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Social Security Article 20 (2) is Taxed at Source
Since Social Security is paid by the government, it would make sense that only the Government that serves as the source of the Social Security would have the opportunity to tax that income.
Exempt From Saving Clause
Social Security is exempt from the saving clause — which means that the information provided in the tax treaty regarding Social Security would be the “final word” on how Social Security is taxed by either country party to the agreement.
Article 19 Government Pension
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Any pension paid by, or out of funds created by, a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that state or subdivision or authority shall be taxable only in that State. (b) However, such pension shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that State
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Government Pension at Source Unless Resident or Citizen of Other Country
As with most tax treaties, the information involving government pensions in the US/India Tax Treaty is a bit complicated and contains certain exceptions/exclusions — which is often found in other tax treaties as well. In general, public pensions are taxed by source and therefore the general proposition is that a pension that is being paid as a result of government service in one country shall have the only opportunity to tax the income.
But, the treaty goes on to explain that it is actually the other country of residence that has the exclusive right to tax the pension if the person receiving the pension is a resident or national of the other country (exceptions, exclusions, and limitations apply).
Saving Clause Limited Exemption
The Saving Clause further clarifies that while Article 19 is excluded from the saving clause — it is only for people who are neither citizens nor have any other immigration status in the country.
EPF is Pension; PPF is Not
In India, an EPF is an Employee Provident Fund is a type of Retirement plan, whereas a Public Provident Fund — which is oftentimes used to supplement retirement — is not technically a retirement plan.
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