What Happens to Your 401K When You Move Back to India for Good

If you move back to India, your 401(k) retirement plan stays in the US and continues to grow. You can leave it, roll it into an IRA, or withdraw it, but each option carries different tax consequences in both countries. The India-US DTAA prevents you from paying tax twice, and structuring withdrawals as periodic payments under DTAA Article 20 can significantly reduce what you owe.

Key Takeaways

• According to the IRS (IR-2025-111, November 2025), the 2026 employee contribution limit for a 401(k) retirement plan is $24,500, up from $23,500 in 2025.
• Non-residents face a flat 30% US withholding tax on lump-sum 401(k) withdrawals, plus a 10% penalty if you are under 59½.
• Periodic payments under DTAA Article 20 can reduce US withholding to 0%, but only if you file Form W-8BEN with your plan administrator first.
• India's Section 89A (Finance Act 2021) defers Indian tax on 401(k) growth to the year of withdrawal. File Form 10-EE with your ITR to claim it.
• The RNOR window, typically 2 to 3 years after returning, is the most tax-efficient period to plan major withdrawals.
• Form 67 lets you claim a Foreign Tax Credit in India for taxes already withheld in the US.

What Is a 401(k) Retirement Plan?

A 401(k) retirement plan is an employer-sponsored savings account that lets you contribute pre-tax salary, which grows tax-deferred until withdrawal. Many employers match contributions, adding effectively free money to your account.

According to the IRS announcement IR-2025-111, the employee contribution limit for 2026 is $24,500. Those aged 50 to 59 can add an extra $8,000 as a catch-up contribution, and those aged 60 to 63 qualify for a super catch-up of $11,250 under SECURE 2.0. The combined employee-employer limit for 2026 is $72,000.

The two main variants relevant to NRIs are the Traditional 401(k), where contributions are pre-tax and withdrawals are taxed as income, and the Roth 401(k), where contributions are after-tax but India may still tax qualified withdrawals since Indian tax was never paid on that income.

What Are Your Options After Moving to India?

Option 1: Leave It in the US

Your account does not close when you move. It stays with your plan administrator and continues to grow. This works well if you are approaching 59½ or want to preserve US-market exposure. One material risk: non-US citizens face a 40% US estate tax with only a $60,000 exemption on US-sited assets. Read more about managing your full financial transition in FinAtoZ's NRI financial checklist.

Option 2: Roll Over to a Traditional IRA

A rollover into a Traditional IRA preserves tax-deferred status and gives you broader investment choices. Funds must be transferred directly or deposited within 60 days. Missing this window triggers income tax and potentially the 10% early withdrawal penalty. Some US brokers do not allow IRA accounts linked to international addresses, so confirm your broker's policy before starting.

Option 3: Withdraw With a Strategy

A lump-sum 401(k) withdrawal from India faces 30% US withholding tax plus the 10% penalty if you are under 59½. Consider Rahul's case: he withdrew $50,000 at age 44 in the 22% federal bracket, paying $11,000 in income tax and $5,000 as a penalty, a 32% immediate loss.

The smarter path is to set up periodic monthly payments before you leave. These qualify as pension income under DTAA Article 20, taxed only in India. This requires filing Form W-8BEN with your plan administrator before distributions begin.

How Is 401(k) India Taxation Calculated?

Your Indian residency status determines how much tax you owe on distributions.

RNOR (Resident but Not Ordinarily Resident): This status applies for 2 to 3 years after returning, provided you were a US-based NRI for 9 or more of the previous 10 years. During this window, foreign-sourced income including 401(k) withdrawals is generally not taxable in India. Combined with DTAA Article 20 periodic payments, this creates a period of near-zero combined tax on your distributions.

ROR (Resident and Ordinarily Resident): Once you become ROR, your global income is fully taxable in India at your applicable slab rate.

Section 89A Relief: Section 89A, introduced in Finance Act 2021, defers annual Indian tax on 401(k) growth to the year of actual withdrawal, matching US tax-deferred treatment. File Form 10-EE (under Rule 21AAA) with your Indian ITR before the due date to elect this. Once chosen, this option cannot be withdrawn. It applies to accounts held in the US, UK, and Canada. For broader guidance on managing income after you return, see FinAtoZ's retirement planning guide for senior citizens.

How to Withdraw 401(k) from India: Step-by-Step

Step 1: File Form W-8BEN. Submit this to your US plan administrator to certify your non-resident alien status and activate DTAA protections. Without it, the IRS defaults to 30% withholding.

Step 2: Set up periodic payments. Monthly payments of even $1,000 to $2,000 qualify as periodic distributions under DTAA Article 20, eliminating US withholding entirely by shifting taxing rights to India.

Step 3: Elect Section 89A. File Form 10-EE with your first Indian ITR to defer 401(k) India taxation to the year of actual withdrawal.

Step 4: Use an NRO account for repatriation. Route funds through an NRO (Non-Resident Ordinary) account, not NRE. Most 401(k) withdrawals do not qualify for direct NRE deposits. Larger transfers require Form 15CA/CB for FEMA and RBI compliance.

Step 5: Claim your Foreign Tax Credit. File Form 67 before submitting your Indian ITR to claim credit for any US taxes withheld. This prevents the same income being taxed twice.

Step 6: Report in Schedule FA. Under FATCA and CRS, India and the US automatically share financial data. Failing to disclose your 401(k) in your ITR can result in a penalty of up to Rs. 10 lakh.

How the India US Tax Treaty 401(k) Provisions Work

The India US tax treaty 401(k) splits treatment across two articles:

Article 20 (Pensions) covers periodic distributions. Structured correctly, these are taxed only in your country of residence, India. This is why setting up monthly payments before departure is the single most important planning step.

Article 23 (Other Income) covers lump-sum withdrawals. Both the US and India retain taxing rights on these. This is the most commonly missed distinction: a single full withdrawal forfeits Article 20 protection entirely. The Income Tax India DTAA portal has the full treaty text for reference.

Any US tax paid despite a DTAA claim can be credited against your Indian liability using Form 67, so you pay the higher of the two rates rather than the sum of both.

About FinAtoZ

FinAtoZ (RightFocus Investments Pvt. Ltd.) is a SEBI-registered Investment Adviser (INA200006628) based in Bengaluru, operating since September 2016 and registered with AMFI (ARN: 114771). The firm specialises in cross-border financial planning for NRIs and returning residents, covering US retirement accounts, Indian investment portfolios, and tax residency transitions. Book an introductory call with a Certified Financial Planner to discuss your specific situation.

This article is for informational purposes only and does not constitute tax or investment advice. Consult a qualified cross-border tax advisor and SEBI-registered investment adviser for guidance specific to your situation.

Frequently Asked Questions

How do I withdraw my 401(k) from India without paying 30% US tax?

File Form W-8BEN with your plan administrator and set up periodic monthly payments. This activates DTAA Article 20, shifting taxing rights to India and eliminating US withholding. Lump-sum withdrawals do not qualify.

What is 401(k) India taxation for someone with RNOR status?

During the RNOR window, typically 2 to 3 years after returning, foreign-sourced income including 401(k) distributions is generally not taxable in India. Combined with DTAA Article 20 periodic payments, effective tax on distributions can be near zero during this period.

Does the India US tax treaty 401(k) provision prevent double taxation completely?

It significantly reduces it but does not eliminate it automatically. Article 20 periodic payments are taxed only in India. Lump sums under Article 23 are taxable in both countries, though Form 67 ensures credit for US taxes paid is applied against your Indian liability.