Many people who go to USA for employment end up settling for a longer duration and take up citizenship of USA. During their time in USA, they are required to contribute towards social security in the form of tax. When these people return, they are usually eligible to the periodic social security benefits after a certain age.
A possible tax conflict arises whereby these payments are taxable in USA and can also be liable to tax in India, if the residential status of the person as per Indian tax law is a “Resident and Ordinarily Resident”. Also read – How to calculate Residential Status for Tax Purposes in India
In that regard, I am trying to explore today the finer aspects of taxation of such payments in India and whether such assesses can make use of any beneficial provisions of the India-USA DTAA.
Overview of Social Security Benefits in USA
Your accumulation in social security and the benefit amount will depend on how long you work
You need a minimum of 40 credits (10 years of work) to qualify for SSB payout. If you stop working before this minimum duration, the credits remain in your account and you can add up when you return to work in USA. Else, effectively your social security tax amount is wasted. In 2017, you receive one credit for each $1,300 of earnings, up to the maximum of four credits per year. Note that there is a separate criterion for disability and survivor related payments.
Generally, you start receiving SS payments from age of 66 years and 2 months. However, you can opt for an earlier payout or a disability payout if you meet the conditions.
If you get “pension” from your employer in USA, it does not affect the SS payments. However, in some exceptional situations like receiving pension from federal civil service etc., your SS payments will reduce.
What happens to the SS payments after you return to India
There is a detailed guide available on this topic on the SSA website here
I’ve picked up some relevant points below, which may pertain to my Indian friends who’ve returned from USA:
- For a US citizen, he can continue to receive SS payments after return to India.
- If you are not a US citizen (for example, you have surrendered your US citizenship on return to India), citizens of selected countries are allowed to receive payments subject to following conditions (note, there are separate additional conditions for survivor payments):
- You are receiving benefits based on your own earnings, and you earned at least 40 credits under the U.S. Social Security system or lived at least 10 years in the United States; or
- You are receiving benefits as dependent or survivor of a worker who earned at least 40 credits under the U.S. Social Security system or lived in the United States for at least 10 years. You must also meet the conditions under the heading “Additional residency requirements for dependents and survivors” in this publication.
Note that India is included in this list.
- If you do not fulfill these conditions, your payment is stopped after being outside USA for full six calendar months. Once this happens, your payments can only start if you come back and continue to stay in USA for at least 1 full calendar month.
- Every year or once in two years, you need to update your information like address and life events like marriage/divorce etc. – in case of a failure to report, the payments can stop. For example, if you are working in India after return from USA and you’ve not reached the full retirement age of 67 years, you need to inform the SSA. There are a lot of situations as mentioned in the guide so I will request you to refer the same.
- Your work in India may affect the quantum of SS payments that you are scheduled to receive after reaching age 67. In another case, if you start receiving a pension in India, you need to inform SSA – in such case, your SS payment amount may get modified.
- You can receive the SS payment in a bank account in USA or in India.
- Periodically, SSA will send you a statement of benefits which contains a detailed records of your earnings and estimated payout you’ll receive when you reach retirement – for a sample statement, check this
USA tax implications on Social Security Benefits
Social security payout is taxable in the USA, irrespective of the fact that you’re a US citizen or an Indian citizen. Also, the SSA will withhold tax from the payments made to you. The relevant extracts of the IRS and SSA website are as follows:
“…..If you file a federal tax return as an “individual,” and your combined income* is between $25,000 and $34,000, you may have to pay taxes on up to 50 percent of your Social Security benefits. If your combined income* is more than $34,000, up to 85 percent of your Social Security benefits is subject to income tax.
• If you file a joint return, you may have to pay taxes on 50 percent of your benefits if you and your spouse have a combined income* between $32,000 and $44,000. If your combined income* is more than $44,000, up to 85 percent of your Social Security benefits is subject to income tax.
• If you’re married and file a separate return, you’ll probably pay taxes on your benefits.
At the end of each year, we’ll mail you a Social Security Benefit Statement (Form SSA-1099) showing the amount of benefits you received. Use this statement when you complete your federal income tax return to find out if you must pay taxes on your benefits.
Although you’re not required to have Social Security withhold federal taxes, you may find it easier than paying quarterly estimated tax payments.
….”
(Source: Help guide on SSA website)
Social Security Benefits
A nonresident alien must include 85% of any U.S. social security benefit (and the social security equivalent part of a tier 1 railroad retirement benefit) in U.S. source fixed or determinable annual or periodic income. Social security benefits include monthly retirement, survivor, and disability benefits. This income is exempt under some tax treaties. See Table 1 in Pub. 901 for a list of tax treaties that exempt U.S. so-cial security benefits from U.S. tax.
(Source: IRS Publication 519 U.S. Tax Guide for Aliens Link)
In such a case where withholding tax is deducted, you may file a US tax return to claim the refund.
Taxation of SS payments under Indian Income Tax Act (ITA)
Now that we’re clear that USA will tax these payments, we need to check what the Indian laws say.
Please bear in mind that till your residential status is a Non-Resident (NR) or a “Resident and NOT Ordinarily Resident” (RNOR) in India, India will not tax this income PROVIDED it is not received “directly” in an Indian bank account. This is because any income “received” in India is taxable in India irrespective of a person’s residential status. That is why I will advise to keep one bank account in USA live post your return, and collect the payment in that account. After collection, you can “remit” the same to India”
Now, we come to a situation where a person is a “Resident and Ordinarily Resident” (ROR) as per Indian tax law. In such case, worldwide income of that person will be taxable in India – this is irrespective of whether he is an Indian citizen or a US citizen, and whether income is received in India or outside India.
In such a case, my view is that income per-se is fully taxable in India as “Income from Other Sources” – In my view, it is incorrect to treat the income as ‘Income from Salaries” because though the contribution was deducted by employer, the income does not arise as a consequence of “employer-employee” relationship.
Taxation of SS payments under India USA DTAA
So now we have a situation where the income (SS payouts) is taxable in USA as well as India. And hence we need to refer to the DTAA between India and USA.
Just FYI, a DTAA overrides the domestic tax codes of both countries and assessee has the option to choose the provisions of DTAA over the domestic tax law, if those are more favourable.
In that regard, if you see the India USA DTAA, there is a very specific mention as regard to social security payments in Article 20(2) and this Article will apply to such payments. Below is the extract of the Article for reference:
ARTICLE 20: PRIVATE PENSIONS, ANNUITIES, ALIMONY AND CHILD SUPPORT
“….
2. 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 (USA) to a resident of the other Contracting State (INDIA) or a citizen of the United States shall be taxable only in the first-mentioned State (USA).
….”
(emphasis and content supplied to provide context)
The broad conclusions we can draw from this DTAA provision are as follows:
- USA has the right to tax this income.
- India DOES NOT have the right to tax this income
- For a resident Indian too, income is taxable in USA and not India.
- For a US citizen, irrespective of the fact that he may qualify as a tax resident of India under India’
Internal tax law or he is tie-breaking to India under the DTAA, income is taxable in USA and not India.
So, as we can clearly see here, the DTAA provisions are more beneficial and assessee should choose the DTAA over Income Tax Act in India and USA, w.r.t. taxation of this income in India.
Indian Black Money Law implications on SS payments
In 2015, India enacted Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act (known as Black Money Act). This law is effective July 1, 2015 and requires a person who is a resident and ordinarily resident (ROR) under the ITA to disclose foreign income and assets in his tax return in India. Also Read: Retuning NRI/OCI’s Guide to India’s Black Money Act
Also, corresponding changes have been made in Section 139 of ITA making any person having ROR status in India and holding foreign assets/beneficial interest to mandatorily file a return of income in India irrespective of the income in that financial year. A separate schedule named Schedule FSI and FA are given in the tax return where these income/asset disclosures need to be made.
Please understand that for an ROR (irrespective of being India or US citizen), the social security payments represent “foreign income”. So, even if your income for the financial year is below the qualifying exemption limit in India, you are still required to file a tax return in India if you receive any SS payout. This is especially relevant to ladies/ senior citizens who were working in USA to be eligible for SS, and are no longer working post return to India.
As regards disclosure, you can disclose SS income as follows:
- In Schedule EI for “Exempt Income”
- In Schedule FSI for “Foreign Sourced Income” – here, you can mention the amount received, mention “0” against amount taxable in India, and mention applicable DTAA article as 20(2).
- As regards Schedule FA, I do not think social security payout represents an “investment” hence no reporting is needed in that schedule. Also, there is a challenge as to how to quantify the amount of investment.
Also Read: How NRI should disclose their foreign income/ assets in Indian tax return
What if you have failed to file return/disclose your SS payments in filed tax return
If you have failed to make a disclosure of your SS payments in your tax return after becoming ROR, regardless of the fact that SS is exempt from tax in India by virtue of DTAA, penal implications can follow in terms of tax, penalty and prosecution under Black Money Act. I will advise you to not to dilly-dally and seek proper professional opinion. Some pointers here are as follows:
- If you’ve not filed a tax return for a year, you have time to file it within 3 months from the end of assessment year. File the return and disclose the foreign assets. For example, for FY 2023-24 you can file a belated/revised return till December 31, 2024.
- If you miss timeline for filing belated/revised return, then the only option is to file an updated return u/s 139(8A) of Income Tax Act for which the timeline is 24 months from end of assessment year. So, for FY 2023-24, you can file an updated return till March 31, 2027.
FEMA requirements on receiving SS payments outside India
As per FEMA regulations, a person returning to India and becoming a resident can maintain accounts and investments outside India created out of his earnings outside India. So, post your return to India and becoming a resident of India as per FEMA (also read: NRI Definition: FEMA Act VS Income Tax Act) you can keep the bank account in USA and there is no requirement under FEMA to close or shift the account.
However, as regards SS payments received in that account, FEMA (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2015, you cannot retain the money outside India and requires you to remit the amount to India within a reasonable time and– in such a case, if you wish to keep the money in $, you can open a Resident Foreign Currency (RFC) account in India and keep in that account. Money in RFC account can be freely repatriated outside India without any restrictions.
To know about tax treatment of RFC accounts, you can read my detailed post here: NRO, NRE, FCNR, RFC: Tax and FEMA Implications for Returning NRI
SS payments vis a vis retirement planning of a returning NRI
I also want to bring the angle of SS payments vis a vis a person’s financial planning for retirement.
First things first, SS payments by itself should not be relied on, to provide for retirement related expenses. This is especially important considering that inflation in India is going to be, on an average, between 6-10% unlike USA where it is may be 1-2%.
The SSA website also amply clarifies this in these many words:
“…
In deciding when to retire, remember that financial experts say you’ll need 70 to 80 percent of your preretirement income to have a comfortable retirement. Since Social Security replaces only about 40 percent of preretirement income for the average worker, having pensions, savings, and investments are very important
…”
Hence, please factor in SS payments also when you prepare your financial plan, but also keep in mind that you need to invest in high growth avenues like equity, to negate the risk of you outliving your retirement. Also read – Financial planning considerations for returning NRI families
One more thing – if you’re planning to retire in India, then the amount that you expect to receive will suffer from exchange risk – you will need the money in INR and 20 years down the line when you start receiving pensions, you do not know what the USD/INR rate will be – if the trend from past 30-40 years of INR steadily depreciating against USD continues, all good for you. However, if it reverses, your final income will be impacted to the extent of the appreciation. I’ve discussed more on currency risk here: How NRIs can manage currency risk in their investment portfolio
However, there’s nothing you can do about it. What you can do is to save and build an aggressive INR portfolio during your remaining work life and tilt your retirement accumulation heavily towards INR.
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