Tag: Indian Income and HMRC

Indian Provident fund and UK taxation

Method to calculated tax on foreign pension lump sum with example. This blog post focuses on lumpsum received from India.

Summary

Withdrawal from Indian Provident fund by a UK tax resident will be taxable in the UK.

In India, payment from provident fund is usually (see note below in case of tax deduction in India)1 exempt income under section 10(11/12) of Indian Income Tax Act2.

But in case an individual who is a UK resident who takes a lumpsum from it, he will need to pay UK income tax on it3.

Main point to remember is value of Provident fund till 6 April 2017 may not be taxable. EIM 75550

Basic Method of calculating foreign pension income (ITEPA 2003 section 574A(3) as inserted by FA 2017 Sch 3 para 8-10) :

Foreign Lumpsum receivedsay £100
Less: Accumulated value before 6 April 2017say £40
Balance£60
Less: 25% of lumpsum£15
Taxable foreign pension£45

Source
Explanatory notes FA 2017; read Pages 46 to 49.

EIM 75550 has two good examples. Please use Internet Archive to see previous version of EIM75550.

Example 1 deals with personal pension plan tax computation, something similar to SIPPs in the UK.

In case of Public Provident Fund (PPF), as it does not satisfy the criteria of being a pension PTM021000 , it can be treated as a fixed deposit. As PPF can be foreclosed and money can be accessed after paying penalty, interest on PPF will be taxable in UK on yearly accrual basis – see Example 2 SAIM2440.

Example 2 deals with Employer Provident fund, calculation method is similar but eligibility for 100% deduction for accumulated value before 6th April 2017, depends on length of foreign service.

Conclusion

For many of us who may be forced to withdraw funds from their Indian provident fund, it is better to know that it is taxed at the highest marginal rate in the UK. Unless they withdraw it before coming to the UK.

Notes

  1. There are four types of provident funds in India – Statutory provident fund, Recognised provident fund, Unrecognised provident fund and Public provident fund each with their own detailed rules of taxation.

Source: Taxmann’s direct taxes law & practice by Dr Vinod K. Singhania para 56.

2. Source: ICAI Taxation of Non- Residents – Revised (2021)

3. Source: FA 2017 Sch 3 Part 3.

Bonus

  1. As per India UK DTAA Article 19 (2)- Any pension paid by Government of India to any individual shall be taxable only in India. Government of India means Union, State or Municipal – see Article 3 (1) (k). This is mainly useful for ex Indian defence force personnel now living in UK. Source: UK India DTAA Agreement – Synthesized text
  2. Pension annual allowance is restricted when taxpayer accesses their pension flexibly. Sec 227G FA 2004 defines when the restriction is triggered, it does not include lumpsum from foreign pension.

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