If you are moving back to India after working in the US, your 401(k) and IRA are often the largest assets you leave behind. You do not have to cash them out, and doing so in a hurry can cost you a 10% penalty plus tax in both countries. This guide explains how the US and India tax these accounts once you live in India, what the India–US tax treaty actually says, and the main choices: keep, roll over, convert or withdraw. It is written for Indian citizens who were US tax residents (for example on an H-1B or a green card they give up); US citizens are taxed differently, as explained below. Rules are as of October 2026.
Can you keep your 401(k) or IRA after leaving the US?
Yes. Leaving the US does not force you to withdraw, and many returning NRIs leave the money invested for years. Two practical points:
- Old 401(k) plans: you can usually leave the money in a former employer's plan or roll it into an IRA. A rollover from a 401(k) to a traditional IRA is not taxable if done directly.
- Your US broker: some brokers restrict trading or new accounts for customers with a non-US address. Check your provider's policy before you move, and keep a working US phone number, email and two-factor access.
How the US taxes withdrawals once you live in India
Default withholding and Form W-8BEN
Once you are a nonresident alien for US tax, distributions are "generally subject to the 30% (or lower treaty) rate of withholding" (IRS Publication 519). To claim a treaty rate you give the plan administrator Form W-8BEN.
The IRS treats the part of a distribution that comes from your US work as effectively connected income "whether or not you are engaged in a U.S. trade or business", and the earnings part of a payment from a US trust is US-source income (Publication 515). In practice this means the US can tax a withdrawal unless the treaty says otherwise.
What the India–US treaty says
Article 20(1) of the India–US tax treaty says a pension or annuity paid to a resident of one country from sources in the other "may be taxed only in the first-mentioned Contracting state", which for you is India. But the treaty defines a pension as "a periodic payment made in consideration of past services". The US Treasury's Technical Explanation adds that "a single lump-sum payment does not qualify" and is treated as other income under Article 23, which the source country (the US) may also tax.
So the treaty distinguishes two cases:
| How you withdraw | Treaty treatment |
|---|---|
| Regular periodic payments (pension-style) | Article 20(1): taxable only in India, if it counts as a pension for past services |
| One lump sum | Not a "pension" under the treaty; the US can tax it, and India taxes it too, with credit for US tax |
Neither the treaty nor the Technical Explanation says clearly whether every 401(k) or IRA payment counts as "in consideration of past services", especially for IRA money that came from a rollover. This is a point to confirm with a cross-border tax adviser before relying on the treaty.
The 10% early-withdrawal tax still applies
If you are under 59½, IRS Publication 590-B says "you must pay a 10% additional tax" on early distributions. There is no IRS rule exempting nonresident aliens; the form used to report it (Form 5329) is filed with Form 1040-NR as well as 1040. One useful exception: if you leave your employer during or after the year you turn 55, distributions from that employer's 401(k) are exempt from the 10% tax. The same exception does not apply to IRAs.
Required minimum distributions
For traditional accounts, required minimum distributions currently start at age 73, and the age rises to 75 for people born in 1960 or later. Roth IRAs and Roth 401(k)s have no required withdrawals during the owner's lifetime.
US citizens and green-card holders who stay US tax residents
The treaty's "saving clause" lets the US tax its citizens and residents "as if the Convention had not come into effect", and Article 20(1) is not among the exceptions. If you are a US citizen, or keep a green card and remain a US tax resident, the US taxes your withdrawals as usual wherever you live, and you claim credit for tax paid between the two countries.
How India taxes your 401(k) and IRA
While you are RNOR
For the first years after you return you are usually "resident but not ordinarily resident" (RNOR). Income that accrues outside India is not taxed in India in those years unless it comes from a business controlled in, or a profession set up in, India. Growth and withdrawals from a US retirement account in your RNOR years are generally outside Indian tax. See RNOR status explained to work out how long your window lasts.
Once you are ordinarily resident (ROR)
As an ROR you are taxed in India on worldwide income. India built a relief for exactly this case, previously Section 89A of the Income-tax Act, 1961 and its Rule 21AAA:
- It covers a resident who opened a retirement account in a notified country (the US, the UK and Canada) while non-resident in India.
- If you opt in, income in the account is taxed in India "at the time of withdrawal or redemption" instead of each year as it accrues, which avoids paying Indian tax on growth you have not received.
- The option covers all your specified accounts, is filed on Form 10-EE by the return due date, and "cannot be subsequently withdrawn".
- If you later become non-resident again, the option is treated as never exercised and the deferred income becomes taxable.
- Income from your non-resident and RNOR years is left out.
The Income-tax Act, 2025 took effect on 1 April 2026 and carries this relief into Section 158. The matching rule and form numbers under the new rules may change, so check the current form when you file your first return as an ROR.
Credit for US tax
Where both countries tax the same withdrawal (for example a lump sum), you claim credit in India for US tax paid, using the foreign tax credit form with your Indian return. Our India–US tax treaty guide explains the credit mechanics.
Reporting
As an ROR you must list foreign assets, including a 401(k) or IRA, in Schedule FA of your Indian return, even if nothing was withdrawn. RNORs and NRIs do not fill Schedule FA. US persons also keep their US reporting.
Your options before and after you move
| Option | When it can make sense | Watch out for |
|---|---|---|
| Leave it invested | Default choice for most; growth continues, and India defers tax if you opt for the withdrawal basis once ROR | Broker restrictions on non-US addresses; your retirement money stays in dollars while your spending is in rupees |
| Roll a 401(k) into an IRA | Consolidating old plans; more fund choice | Lose the age-55 separation exception, which applies only to the employer's 401(k) |
| Convert to a Roth before leaving | A low-income year (for example a partial year in the US) | The converted amount is taxable in the US in the year of conversion |
| Take periodic withdrawals | After 59½, in retirement | Confirm treaty treatment with an adviser; India taxes them once you are ROR |
| Cash out in one lump sum | Rarely the best option | 10% penalty if under 59½, 30% default withholding, possible tax in both countries |
Social Security
There is no US–India Social Security (totalisation) agreement, so your Indian and US work years cannot be combined. You need 40 credits, roughly 10 years of US work, to qualify for a US retirement benefit. Indian citizens can keep receiving US benefits while living in India only if they meet the 40-credit (or 10-year residence) exception; otherwise payments to non-citizens stop after six consecutive calendar months outside the US. Dependants and survivors face a separate five-year US residence test.
Common mistakes
- Cashing out on the way out. Under 59½ that can mean the 10% additional tax, US withholding and Indian tax once you are ROR.
- Assuming the treaty protects every withdrawal. It protects periodic pension payments; a lump sum is treated differently.
- Missing the one-time Indian election. The withdrawal-basis option is filed with your return and cannot be reversed, so decide before your first ROR return is due.
- Forgetting Schedule FA. Once ROR, list the account every year even if you withdraw nothing.
Bottom line
For most people moving back, the sensible default is to keep the money invested, keep your US broker access working, avoid withdrawals before 59½, and use your RNOR years well. Once you become ROR, decide on India's withdrawal-basis option and keep Schedule FA up to date. Model how your US savings and Indian plans fit together with the 401(k) calculator and the Return to India planner, and see the full moving-back checklist.
This guide explains the rules in general terms. Cross-border retirement tax depends on your citizenship, visa history and dates, so confirm your plan with a qualified tax adviser in both countries.