Rule 74 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rule 74 of the Income-tax Rules, 2026 lets a specified person elect, in Form No. 40, to be taxed on income accrued in a specified retirement account only when the notified country taxes it on withdrawal.
The mismatch rule 74 fixes
Many overseas retirement accounts accrue income year by year but are taxed abroad only on withdrawal or redemption. Without an election, an Indian resident holding one is taxed here on the annual accrual and abroad on the eventual withdrawal — in different years, so the foreign tax credit never lines up. Rule 74 lets the taxpayer align the two. The 1962 parallel is rule 21AAA.
Sub-rule (1): if a specified person has income accrued in a specified account or accounts during a tax year, that income shall, at his option, be included in his total income of the tax year in which income from the said account is taxed upon withdrawal or redemption in the notified country.
Sub-rule (6)(a) takes "notified country", "specified account" and "specified person" from section 158(2).
How the rule 74 option is exercised
| Requirement | Detail |
|---|---|
| Scope | In respect of all the specified accounts maintained by the specified person — it cannot be exercised account by account |
| Form | Form No. 40 |
| Due date | On or before the due date specified under section 263(1)(c) |
| Duration | Once exercised for a tax year, it applies to all subsequent tax years |
| Withdrawal | Cannot be withdrawn for the year of exercise or any subsequent year, subject to the non-residence provision |
Two features of rule 74 make the election a considered decision rather than a filing formality. It is all-or-nothing across accounts, so a taxpayer cannot defer on one plan and accrue on another. And it is irrevocable — sub-rule (5) bars withdrawal for the year of exercise and for every subsequent year. The only route out is the one in sub-rule (4), which is not a choice at all.
What is excluded when the income is finally taxed
Sub-rule (2): in the year the income becomes taxable under the option, the total income shall not include income which:
- has already been included in total income in any earlier tax year during which it accrued, and tax has been paid on it under the Act; or
- was not taxable in India in the year it accrued, because:
- the person was a non-resident, or not ordinarily resident as referred to in section 6(13), during that tax year; or
- of the application of a Double Taxation Avoidance Agreement.
And the consequence for credit: the foreign tax paid on such income, if any, shall be ignored for the purposes of computation of the foreign tax credit under rule 76.
The last limb of sub-rule (2) is the safeguard that makes rule 74 coherent. Income excluded from the withdrawal-year computation — because it was already taxed in India, or because it was never taxable here — carries no foreign tax credit under rule 76. Otherwise a taxpayer could exclude the income and still claim credit for the foreign tax on it.
What rule 74 does when the holder becomes non-resident
Sub-rule (4): where the specified person becomes a non-resident during any relevant tax year — the "relevant tax year" being defined in sub-rule (6)(b) as the tax year in which he becomes non-resident after the year the option was exercised — then:
- the option shall be deemed to have never been exercised with effect from the relevant tax year; and
- the income accrued in the specified accounts during the period beginning with the tax year for which the option was exercised and ending with the tax year immediately preceding the relevant tax year shall be taxable during that immediately preceding tax year, with tax paid on or before the due date of filing the return for the relevant tax year.
| Element | Effect |
|---|---|
| Which year is charged | The tax year immediately preceding the year of becoming non-resident |
| What is charged | All accrued income from the year of the option to that preceding year |
| When tax is payable | By the return due date for the relevant tax year — that is, the year of becoming non-resident |
So the charge and the payment date fall in different years, which is the practical trap: the tax relates to an earlier year's return but is paid on the later year's calendar.
Worked example
| Facts | Position under rule 74 |
|---|---|
| Resident holds two retirement accounts in a notified country | Option must cover both |
| Option exercised for tax year 2026-27 in Form No. 40 by the section 263(1)(c) due date | Accruals deferred to the year of foreign taxation on withdrawal |
| Taxpayer wishes to revert in 2028-29 | Not permitted — the option cannot be withdrawn |
| Part of the accrual arose while he was not ordinarily resident | Excluded from the withdrawal-year computation; foreign tax on it ignored for rule 76 credit |
| Becomes non-resident in tax year 2030-31 | Option deemed never exercised from 2030-31; accruals from 2026-27 to 2029-30 taxable in 2029-30 |
| Payment of that tax | By the return due date for 2030-31 |
Compliance checklist
- Confirm the account is a specified account in a notified country and the holder a specified person under section 158(2).
- Decide the election on a whole-portfolio basis — it covers all specified accounts.
- File Form No. 40 by the section 263(1)(c) due date.
- Treat the option as irrevocable and model the later years before exercising it.
- Keep a year-by-year record of accruals and of the residential status in each year.
- Identify amounts already taxed in India or not taxable when accrued, and exclude them.
- Exclude the corresponding foreign tax from the rule 76 credit.
- On a change to non-resident status, compute the catch-up charge in the preceding year and pay by the relevant year's return due date.
Common mistakes
- Electing for one account and not the others.
- Assuming the option can be reversed when circumstances change.
- Claiming foreign tax credit on excluded income.
- Charging the catch-up income in the year of becoming non-resident rather than the preceding year.
- Missing the Form No. 40 due date, which leaves the accruals taxable year by year.