How India Taxes Your 401(k), IRA, and Foreign Pension After You Move Back: The RNOR Window, Section 89A, and the Drawdown Strategy Most Returners Miss

You are 58, you spent eighteen years in New Jersey, and you have a 401(k) worth the equivalent of Rs 2.4 crore that you have never touched. You are moving back to Pune next year. Your US colleague tells you to leave it invested and draw it down slowly in retirement. Your cousin in India tells you to cash it out before you land so the IRS cannot chase you. A WhatsApp forward tells you the whole thing becomes taxable in India the day you step off the plane. All three are wrong in different ways, and the gap between the right answer and the wrong ones is, on a corpus that size, several tens of lakhs of rupees.

The reason this is hard is that two tax systems and one treaty all have a claim on the same pot of money, and they fire at different moments. The United States wants its cut when you withdraw, plus a penalty if you are too young and a flat withholding on the way out. India ignores the account entirely until your residential status flips, then taxes the withdrawals as worldwide income. The India-US treaty decides who steps back, and for one kind of withdrawal the answer is genuinely contested. Get the sequence right and you can move a large retirement corpus across the world paying tax once, at a sensible rate, at a time you choose. Get it wrong and you pay twice, early, with a penalty stapled on.

The 30-second answer: Your 401(k), IRA, and foreign pension are outside the Indian tax net while you are Non-Resident, and stay sheltered through the RNOR phase that usually runs two to three financial years after you move back. Once you become Resident and Ordinarily Resident (ROR), India taxes your worldwide income and the withdrawals enter the charge at slab rates. A periodic 401(k) or IRA pension is generally taxable only in India under Article 20 of the India-US DTAA once you are resident; a lump sum arguably falls under the Other Income article and can be taxed in both countries with foreign tax credit resolving it. Section 89A with Form 10-EE lets you tax on a receipt basis instead of annual accrual, for the notified countries (US, UK, Canada). The US side is separate: a flat 30% withholding under IRC Section 1441, plus a 10% early-withdrawal penalty if you are under 59 and a half. The RNOR window is the time to draw down. The Roth position in India is debated.

This guide is part of our NRI tax-filing series. For the residency mechanics that drive everything here, start with NRI residency and RNOR rules, and for how foreign pensions in general are taxed see how pensions are taxed for NRIs. This piece goes deeper on the US retirement-account drawdown.

What follows is built around the one decision that matters most, which is when to take the money out. It explains the RNOR window and exactly why your foreign retirement accounts are invisible to India during it, how the picture changes the moment you turn ROR, the DTAA articles that decide whether the US or India taxes a withdrawal and where the lump-sum position is unsettled, Section 89A and the accrual-versus-receipt timing problem it solves, and the US-side machinery of the 30% withholding and the 10% early-withdrawal penalty that returners forget is still running. There is a full worked example drawing down a 401(k) inside RNOR versus after ROR with the rupee figures laid out, an Edge cases section covering the Roth debate, the Section 89A election trap, US Social Security, and lump sum versus periodic, and a closing read on what to actually do. One dating note before we start: AY 2026-27 covers income earned in FY 2025-26, still governed by the Income Tax Act 1961, so the section numbers below (6, 89A, 90) are the live ones for the return you file by July 2026; the Income Tax Act 2025 renumbers several of them from 1 April 2026, and I flag it where it matters.

The two-system problem, stated plainly

Before any planning, fix the structure in your head, because almost every mistake here comes from treating this as one tax question when it is three.

The US side never goes away. A 401(k), a traditional IRA, and most US employer pensions are tax-deferred. You put money in pre-tax, it grew untaxed, and the United States taxes it on the way out, whenever that is, wherever you live. Becoming an Indian resident does not release you from US tax on US-source retirement income; the US taxes it as the source country. So the US has a permanent claim that triggers on withdrawal.

The India side switches on with your residency. India taxes a non-resident only on Indian-source income. A US retirement account is foreign-source, so while you are non-resident it is simply outside the charge. When you move back you do not become fully taxable on worldwide income on day one; you pass through the RNOR transition first, during which foreign income is still sheltered. Only when you become ROR does India tax your worldwide income, and only then does the 401(k) withdrawal enter the Indian net.

The treaty referees the overlap. When both countries can tax the same withdrawal, the India-US Double Taxation Avoidance Agreement decides who has the primary or sole right, and the other side either steps back or gives a credit. For periodic pension payments the treaty is fairly clean; for lump sums it is not, and that is where honest uncertainty lives.

Hold those three apart and the rest is detail. The single most important consequence is this: there is a window, the RNOR years, when the US claim is live but the India claim is not, and that asymmetry is the entire planning opportunity.

The RNOR window: why your 401(k) is invisible to India for two or three years

When you move back to India for good, you do not flip straight from Non-Resident to fully taxable resident. There is a buffer status, Resident but Not Ordinarily Resident (RNOR), and for a long-settled NRI it usually lasts the first two to three financial years after return.

The test sits in Section 6 of the Income Tax Act. You are RNOR for a year, rather than ROR, if you satisfy either of two conditions: you were a Non-Resident in nine of the ten financial years preceding that year, or you were physically in India for 729 days or fewer in the seven financial years preceding it. A returning NRI who was genuinely abroad for most of the last decade typically meets the first condition comfortably for the first couple of years home, and the day-count condition often carries a third. The precise day-counting and the year-by-year mechanics are in NRI residency and RNOR rules; what matters here is the tax effect.

An RNOR is taxed like a non-resident on foreign income. India taxes an RNOR on Indian-source income and on income from a business controlled or a profession set up in India, but foreign income is outside the charge. A 401(k) distribution, an IRA withdrawal, a UK pension lump sum, a Canadian RRSP unwind, taken while you are RNOR, is foreign-source income received abroad and not taxable in India at all. You have physically returned, you are a resident in the ordinary sense, you are filing an Indian return, and yet this particular income stays out of it.

This is the window. For the two or three years you hold RNOR status, your US retirement money is in a rare position: it is reachable (you can withdraw it and bring the proceeds to India) and it is untaxed by India. The only tax in play on a withdrawal during RNOR is the US tax, which you were always going to pay. There is no Indian slab tax layered on top, because India is not yet looking at your worldwide income.

Most returners waste this. They leave the 401(k) untouched out of habit or on US-centric advice, sail through the RNOR years drawing nothing, and then become ROR, at which point every future withdrawal is exposed to Indian slab tax as well. The window closes quietly and they never knew it was open.

One caveat to register now and return to in the Edge cases: where the money lands can matter. If you arrange for a withdrawal to be paid directly into an Indian account, you create an argument that the income was received in India, which can pull it into the Indian net even during RNOR for certain income types. The clean practice is to take withdrawals into a US account and remit to India afterwards, because a remittance of already-earned foreign income is not itself taxable.

What changes the day you become ROR

Once the RNOR window closes and you are Resident and Ordinarily Resident, India taxes your worldwide income. Your 401(k) and IRA withdrawals now enter the Indian return at slab rates, added to your other Indian income, taxed at up to the 30% top slab (plus surcharge and cess at higher incomes). Nothing about the US side changes; what changes is that India now also wants its share, and the treaty has to sort out the overlap.

This is not a disaster if you planned for it, and it is not avoidable by pretending the account does not exist. An ROR who omits a 401(k) withdrawal from the Indian return is under-reporting worldwide income, and with US account information flowing to India under FATCA the omission is visible. The correct approach once ROR is to report the withdrawal, apply the right treaty article, and claim foreign tax credit for the US tax so you are not taxed twice on the same money. The credit mechanics live in foreign tax credit and Form 67.

So the lifecycle of a 401(k) for a returning NRI is three stages. Non-Resident: outside the Indian net. RNOR: still outside the Indian net, even though you live in India. ROR: inside the net, taxed at slab, with treaty relief and foreign tax credit. The planning is almost entirely about which withdrawals you can pull back into the first two stages.

The DTAA articles: where Article 20 is clean and Article 23 is not

When you are ROR and both countries can tax a withdrawal, the India-US DTAA decides the contest. Two patterns matter, and they diverge sharply depending on how you take the money.

Periodic payments fall under Article 20, and that is the clean case. Article 20 covers pensions and other similar remuneration paid in consideration of past employment, and says such pensions are taxable only in the country of residence of the recipient. So if you are an Indian resident taking regular, periodic payments from your 401(k) or IRA, structured as a genuine pension-like stream, the treaty position is that they are taxable only in India. The United States should then step back, and if you file a Form W-8BEN with your plan administrator citing the treaty, US withholding on those periodic payments can in principle drop toward zero, leaving you with the Indian liability alone. In practice plan administrators are cautious and often withhold at the default rate anyway, leaving you to recover the excess by filing a US non-resident return, but the legal position under Article 20 for periodic payments is reasonably settled.

Lump sums are the contested corner, and most likely fall under the Other Income article. A one-shot withdrawal of the whole balance does not look like a pension stream, and the widely-held view is that a lump-sum distribution does not qualify for Article 20 treatment. It instead falls under the Other Income article (Article 23), which does not give exclusive taxing rights to the country of residence. The consequence is that a lump sum can be taxed in both the United States and India, with foreign tax credit resolving the double charge rather than one country cleanly standing aside. This is not a fringe reading; it is the cautious mainstream position, and it is the single strongest argument against taking a 401(k) as one big lump sum once you are ROR. If both countries tax it, you do not escape either; you merely avoid paying the same rupee twice through the credit.

The honest read on the articles: structure withdrawals as periodic where you can, because Article 20 gives you a clean single-country result, and be wary of large lump sums once ROR, because the Other Income treatment exposes them to both sides. Treaty interpretation here is not uniform across advisers, and the term "pension" is not exhaustively defined in the treaty, so confirm the classification of your specific withdrawal pattern with a cross-border specialist rather than assuming Article 20 covers everything. The general treaty machinery, the Tax Residency Certificate and Form 10F, is in DTAA mechanics: TRC and Form 10F and the deep India-US treaty walkthrough is in the India-US DTAA deep dive.

Section 89A: the accrual-versus-receipt timing fix

Here is a problem that bites even after you have the articles straight, and that most general guides skip entirely. A 401(k), an IRA, an RRSP, a UK pension fund, grows tax-deferred in its home country and is taxed there only on withdrawal. But once you are an Indian ROR, India can try to tax the growth inside the fund year by year, on an accrual basis, even though you have withdrawn nothing and the United States has not taxed that growth yet. The result is a timing mismatch: India taxing accrual, the US taxing receipt, on the same account, in different years, which makes foreign tax credit nearly impossible to match up because the tax falls in different periods in each country.

Section 89A, introduced by the Finance Act 2021 and operated through Rule 21AAA and Form 10-EE, fixes exactly this. It lets a returning resident elect to be taxed on a receipt basis for a specified foreign retirement account, the same way the foreign country taxes it, so the income enters the Indian charge when you actually withdraw, not as it accrues inside the fund. The notified countries for Section 89A are the United States, United Kingdom, and Canada (Australia also appears in some readings of Rule 21AAA), which is precisely why this provision is paired with a 401(k), an IRA, a UK pension fund, and an RRSP or RRIF, and not with, say, a UAE account.

Three mechanical points that catch people. First, you must e-file Form 10-EE on or before the due date for furnishing your ITR for the relevant year; miss the deadline and the relief is lost for that year. Second, once you exercise the election it applies to all subsequent years and cannot be withdrawn, except in the year you cease to be a resident, so it is a one-way door you should walk through deliberately. Third, Section 89A solves timing, not quantum: it does not reduce how much India ultimately taxes, it aligns when India taxes so the withdrawal is taxed on receipt and the US foreign tax credit can actually match against it. The account-by-account planning is in retirement planning across two countries and the related timing-mismatch problem on the credit side is in the foreign tax credit timing mismatch.

The US side: the 30% withholding and the 10% penalty that keep running

Indian readers planning a return tend to focus entirely on the Indian tax and forget that the US machinery is still live and has two teeth.

The 30% NRA withholding. Once you are a non-resident alien of the United States, a distribution from your 401(k) or IRA to you is a US-source payment to a foreign person, and under IRC Section 1441 the payer must withhold US tax at a flat 30% unless a lower treaty rate applies and is properly documented. You reduce or reclaim this by filing a Form W-8BEN with the plan administrator to claim the treaty rate and, where the withholding still came off at 30%, by filing a US non-resident return (Form 1040-NR) to recover the excess against your actual US liability. Do not treat the 30% as your final US tax; it is a withholding, often more than you owe, and recoverable, but it does tie up cash and requires a US filing to get back.

The 10% early-withdrawal penalty. If you take a distribution before age 59 and a half, the United States adds a 10% additional tax on the taxable amount, on top of ordinary income tax, and this penalty applies to non-residents too. So a 45-year-old who cashes out a 401(k) early after moving to India faces the 10% penalty plus US income tax plus the 30% withholding mechanics, and potentially Indian slab tax as well if ROR. The penalty is the strongest argument against draining a 401(k) early purely to "get it out of the US"; the cure is worse than the disease. There are narrow exceptions to the 10% penalty (substantially equal periodic payments under Section 72(t), certain disability and medical cases), but for most returners the practical rule is simple: do not take taxable retirement-account withdrawals before 59 and a half unless you have a specific exception, because the 10% is pure leakage.

Put the US pieces together and a clean picture emerges. The ideal withdrawal is taken after 59 and a half (no penalty), as a periodic stream (Article 20 clean treatment, treaty-rate withholding), and timed into the RNOR window where India is not also taxing it. The worst withdrawal is a young, lump-sum cash-out that triggers the penalty, the 30% withholding, the Other Income article exposing it to both countries, and Indian slab tax if ROR.

Worked example: drawing down a 401(k) in RNOR versus after ROR

Numbers make this concrete. Take Anand, 61, who is moving back to Bengaluru after twenty-two years in the US. He is past 59 and a half, so the 10% early-withdrawal penalty does not apply to him, which removes one variable. He holds a 401(k) worth the equivalent of Rs 2,00,00,000 and wants to draw down Rs 25,00,000 (roughly USD 30,000) to fund a property purchase and living costs in his first year home. He returns in April 2026 and, having been non-resident for the previous twenty-plus years, he is RNOR for FY 2026-27 and FY 2027-28, becoming ROR from FY 2028-29. Assume for illustration his US effective tax on this withdrawal works out to about 22%, and that as an ROR in India this slice would sit largely in the 30% slab.

Scenario A: he draws the Rs 25,00,000 in FY 2026-27, while RNOR.

• US tax. The withdrawal is US-source income to a non-resident alien. The plan withholds at the default rate; he files Form 1040-NR and settles his actual US liability at roughly 22%, so US tax of about Rs 5,50,000, and recovers any over-withholding above that.
• India tax. He is RNOR. The 401(k) withdrawal is foreign income, entirely outside the Indian net. India tax: Rs 0.
• Total tax on the Rs 25,00,000: about Rs 5,50,000, all of it US, none of it Indian. He nets roughly Rs 19,50,000.

Scenario B: he waits and draws the same Rs 25,00,000 in FY 2028-29, after he is ROR.

• US tax. Same as before, roughly 22%, so about Rs 5,50,000 of US tax.
• India tax. He is now ROR, so the withdrawal enters his Indian return as worldwide income. If it is a periodic payment under Article 20, the cleaner reading is that it is taxable only in India, but the US still withholds and he claims credit; if treated as Other Income, both tax it with credit. Either way, India taxes it at slab. At a 30% marginal rate the Indian tax is about Rs 7,50,000. He then claims foreign tax credit under Section 90 and Form 67 for the US tax of Rs 5,50,000 already paid, so the net additional Indian tax is about Rs 2,00,000 (Rs 7,50,000 Indian liability less Rs 5,50,000 US credit).
• Total tax on the Rs 25,00,000: about Rs 7,50,000 (the higher of the two countries' rates, which here is India's 30%). He nets roughly Rs 17,50,000.

The gap is about Rs 2,00,000 on a single Rs 25,00,000 withdrawal, purely from timing it inside RNOR versus after ROR. The reason is structural: in RNOR he pays only the US rate (22%); once ROR he effectively pays the higher of the two rates (India's 30%), because foreign tax credit only neutralises the double charge, it does not refund the difference when the Indian rate is higher. Scale that to a larger drawdown across the two RNOR years, say Anand pulls Rs 1,00,00,000 over FY 2026-27 and FY 2027-28 while RNOR, and the saving against doing it after ROR is on the order of Rs 8,00,000, just from sequencing.

The lesson is not "drain the whole account in RNOR regardless." Drawing Rs 2 crore in two years could spike his US tax into higher brackets and is rarely sensible. The lesson is to bring forward into the RNOR window the withdrawals you were going to make anyway in the early retirement years, up to the point where the US bracket cost outweighs the Indian saving. That balance is the real planning exercise, and it is worth modelling with an adviser on your actual numbers.

Edge cases

The Roth IRA debate. A qualified Roth distribution is tax-free in the US because you contributed after-tax dollars. Whether India must respect that once you are ROR is genuinely unsettled. India has no Roth equivalent, the DTAA does not mention Roth accounts, and there is no CBDT ruling. The risk is that India treats a Roth withdrawal as ordinary foreign income at slab, taxing even the growth you never paid US tax on. The conservative reading is that your contributed principal should not be taxed again, but the accrued growth may be exposed. Do not assume a Roth is tax-free in India in your ROR years. If you have a Roth, drawing qualified distributions during RNOR sidesteps the whole question, because India is not taxing foreign income then; after ROR, get specific advice before relying on any position.

The Section 89A election is a one-way door. Form 10-EE, once filed, applies to all later years and cannot be withdrawn while you remain resident. It is the right move for most people with a US, UK, or Canadian retirement account because it aligns India's taxation to withdrawal and makes foreign tax credit work, but it is a deliberate, irreversible election. File it before the ITR due date for the first year you need it; a late form forfeits the relief for that year.

US Social Security is a different animal entirely. Under Article 20(2) of the India-US DTAA, US Social Security and other US public pensions paid to a resident of India are taxable only in the United States and exempt in India. This sits outside the treaty's saving clause, so it is the final word. A returning NRI drawing US Social Security pays no Indian tax on it; once ROR you still report it on the Indian return and claim the Article 20(2) exemption so the taxable amount is nil, rather than omitting it. This is the opposite of the 401(k), which India does tax once ROR, so do not lump the two together. The fuller treatment is in how pensions are taxed for NRIs.

Lump sum versus periodic, again. Beyond the Article 20 versus Article 23 point, a lump sum has a second cost: it lands the entire taxable amount in a single year, spiking you into the top slab in India and a high bracket in the US, where a periodic stream spreads the income across years at lower marginal rates. Even setting the treaty aside, periodic withdrawals are usually more tax-efficient simply through bracket management. Reserve lump sums for the RNOR window, where India is not taxing them anyway, or for small balances where the simplicity is worth the bracket cost.

UK and Canadian accounts follow the same shape. A UK occupational or personal pension and a Canadian RRSP or RRIF behave like the 401(k): foreign income outside the Indian net while NR or RNOR, taxable in India once ROR, with Section 89A available because the UK and Canada are notified countries. The UK state pension treatment after return is separately debated (see the pension guide). The Canada-specific cost-basis and departure issues are in Canada NRI returning cost basis, and the UK non-resident pension position in UK NRI ISA and pension as a non-resident.

RNOR misjudged. The entire shelter depends on actually being RNOR in the year you withdraw. Miscount your days, or assume a third RNOR year you do not in fact get, and a withdrawal you thought was sheltered enters the Indian net at slab. Confirm your status year by year against the tests in NRI residency and RNOR rules before timing a large drawdown to it.

Receiving the withdrawal in India. Routing a distribution straight into an Indian account while resident risks a received in India argument that can tax it earlier than the worldwide-income rule alone requires. Take withdrawals into a US account and remit to India afterwards; a remittance of already-earned foreign income is not itself taxable. The account-side mechanics for parking and converting these funds are in returning NRI account conversion and the RFC account explained.

The closing read

Strip away the article numbers and the form numbers and this is one decision: when do you take the money out. Your 401(k), IRA, and foreign pension are invisible to India while you are Non-Resident and stay invisible through the RNOR window, the two or three years after you move back. They become India's to tax only when you turn ROR, and from that point you effectively pay the higher of the US and Indian rates, because foreign tax credit cancels the double charge but does not refund the gap when India's slab is steeper than your US rate. So the single highest-value move for most returners with a large US retirement corpus is to bring forward into the RNOR years the withdrawals they were going to make in early retirement anyway, up to the point where pushing into higher US brackets costs more than the Indian saving.

The honest read on the rest. Wait until 59 and a half to take taxable withdrawals if you possibly can, because the 10% early-withdrawal penalty is pure leakage with no offsetting benefit. Prefer periodic payments over lump sums, both for the clean Article 20 treatment and for bracket management. File Form W-8BEN to claim the treaty rate against the 30% withholding, and be ready to file a US non-resident return to recover the excess. Elect Section 89A with Form 10-EE before your ITR due date so India taxes you on receipt, not accrual, and your foreign tax credit actually matches; remember it is a one-way door. And keep withdrawals in a US account, remitting to India afterwards, so you do not manufacture a received in India problem.

On the genuinely unsettled corner, be honest with yourself. The Roth position in India after you become ROR is contested, and so, to a lesser degree, is whether a particular withdrawal pattern qualifies as a periodic pension under Article 20 or falls into the Other Income article. On those, do not lean on a general rule, because the general rule is exactly where they break. For a Roth especially, the cleanest defence is to draw qualified distributions during the RNOR window, where the Indian question never arises, and to get country-specific advice before relying on any position once ROR. On a corpus of this size, the modelling fee is rounding error against the tax at stake.

Related guides

• NRI residency and RNOR rules
• How pensions are taxed for NRIs
• India-US DTAA deep dive
• DTAA relief for NRIs
• DTAA mechanics: TRC and Form 10F
• Foreign tax credit and Form 67
• The foreign tax credit timing mismatch
• Retirement planning across two countries
• Returning NRI account conversion
• The RFC account explained
• NRI ITR filing for AY 2026-27
• US NRI FBAR and FATCA reporting
• Canada NRI returning cost basis
• UK NRI ISA and pension as a non-resident
• All Taxation guides

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This guide is general information, not tax advice. The taxation of foreign retirement accounts for a returning NRI depends on your residential status year by year, your age, your US tax position, how and when you withdraw, the specific DTAA articles that apply, and how the income is paid and received. Several positions noted here are genuinely unsettled or fact-specific, including the Indian taxation of Roth distributions after you become ROR, and whether a given withdrawal pattern qualifies as a periodic pension under Article 20 or falls under the Other Income article. The Section 89A election through Form 10-EE is irreversible while you remain resident. Rates, sections, and provisions cited are for AY 2026-27 (FY 2025-26 income, governed by the Income Tax Act 1961); the Income Tax Act 2025 renumbers several of these sections from 1 April 2026, and US rules can change. Confirm your position with a qualified chartered accountant and a US cross-border tax adviser before withdrawing, filing, or relying on a treaty article.