The 401(k) and IRAs When You Leave

The 401(k) and any traditional IRAs are usually the largest pot a household brings home, and the advice online about them contradicts itself: some say India taxes the whole withdrawal, some say only the growth, some say nothing at all during RNOR years. This chapter lays the US rule and the Indian rule side by side, shows where the contradiction comes from in the text of the Indian rule, and says plainly where practitioners differ. The US half is written out in full in the chapter "Leaving the US With a 401(k) and IRAs" in the visa shelf's third book; here it is only recapped.

The US half in four lines

• Leaving the country does not force you to take the money. A plan can stay where it is, or move by direct rollover to an IRA before you go.
• A traditional payout to a nonresident has 30% withheld by default, unless a lower treatment is claimed beforehand: a treaty rate, or graduated-rate withholding on the part earned from US work after 1986, on Form W-8BEN or Form 8233 (IRS Publication 519).
• Before age 59½ an additional 10% tax applies to the payout, wherever you live.
• The withholding is a deposit. IRS Publication 519 taxes the part that comes from contributions for your US work at graduated rates on Form 1040-NR, so the final US tax on a modest withdrawal can be below the amount withheld. The 401(k) withdrawal when leaving the US calculator shows the cash at payout and an estimate of the likely final US tax after Form 1040-NR.

A US citizen or green card holder stays taxed by the US on a payout whatever the Indian rules do, and can claim the Form 1116 foreign tax credit for any Indian tax on it, within the credit's limits.

The Indian half: it depends on the year you take the money

Which Indian tax year the money comes out in decides most of the answer.

In a non-resident or RNOR year. Section 5 taxes a non-resident on income received in India or arising in India. For an RNOR it also taxes foreign income only if it comes from a business controlled in India or a profession set up in India. A 401(k) payout is neither, so a payout that arises and is received outside India falls outside the Indian tax net in those years. Whether the later act of remitting the money to India changes that is not answered by the text, which taxes income "received in India" in every status; this is the point to settle with your CA before you move a large sum.

In a ROR year. A resident and ordinarily resident is taxed on worldwide income. For a foreign retirement account there is a specific relief, and the contradictions come from it.

The relief for foreign retirement accounts

Section 158 of the Income-tax Act, 2025 takes the place of section 89A of the 1961 Act. The Department's page for section 158 does not name its predecessor, but the two sections have the same effect and the same three definitions. It says the income accrued to a "specified person" in a "specified account" is taxed in such manner and in such tax year as may be prescribed. The Act defines the terms: a specified account is one kept in a notified country for retirement benefits, whose income that country taxes at the time of withdrawal or redemption and not as it accrues. A specified person is a resident of India who opened the account while a non-resident of India and resident in that country. The notified countries are Canada, the United Kingdom and the United States (Notification 25/2022 of 4 April 2022, read only as reproduced by a tax publisher), and section 536(2)(j) of the 2025 Act continues notifications made under the repealed Act so far as they are consistent with it.

The manner is set in the rules. Under the 1961 Act it was Rule 21AAA; under the Income-tax Rules, 2026 it is Rule 74, which the Department publishes. Both texts were read, and they say the same thing:

• the person may choose, by form, to include the income accrued in the account in the Indian tax year in which the foreign country taxes it, at withdrawal, instead of as it accrues;
• the withdrawal-year income excludes income that had already been taxed in India, and income that was not taxable in India in the year it accrued because the person was then non-resident or not ordinarily resident, or because of a tax treaty, and the foreign tax on the excluded income is ignored when the Indian foreign tax credit is worked out;
• the choice applies to all specified accounts and cannot be withdrawn once made;
• if the person becomes a non-resident again, the choice is treated as never made and the accrued income becomes taxable in the year before;
• the choice is made in Form No. 40 (it was Form 10-EE) by the due date for the return under section 263(1)(c), which for most individuals is 31 July after the tax year; and
• a choice already made under the 1961 Act is deemed made under the 2025 Act (section 536(2)(f)).

Where the two readings come from

Put the rule's wording next to the two popular readings.

• "The whole withdrawal is taxed in India." This follows from treating a payout received in a ROR year as ordinary income of a resident, without the choice. Without a valid choice, section 158 does not apply, and a resident is taxed on income as it accrues, which is the problem the section exists to relieve.
• "Only the growth is taxed." This follows from the rule's wording: what is brought into the withdrawal year is "income", not the contributions, and income that accrued while you were non-resident or RNOR is carved out. On that reading, with a valid choice, the Indian tax at withdrawal is on growth that accrued in ROR years only.

Neither is a quotation from a court or the Department about a 401(k). The text supports the second reading for a person who made the choice on time and whose account qualifies as a specified account. For a person who did not make it, or whose account does not qualify, the first reading is closer. Part of the disagreement between experts can come from different assumptions about these facts, so the useful question to put to a CA is which of the two situations you are in.

The treaty adds a third layer

The India-US treaty says that a private pension or annuity a resident of one country receives from sources in the other "may be taxed only" in the country of residence (Article 20(1)). It defines a pension as a periodic payment made in consideration of past services (Article 20(3)). A lump-sum withdrawal may fall outside that definition, in which case Article 23 on other income applies, and Article 23(3) lets the US tax income arising in the US as well. The treaty's saving clause (Article 1(3)) lets the US keep taxing its own citizens as if the treaty did not exist, and Article 25 requires each country to give relief for the other's tax. Whether a given 401(k) payment is a "pension" under Article 20 is another point practitioners read differently.

What the timing does to the growth

The rule matters most because of how growth builds. Take a balance left alone and see how much of its eventual growth falls inside a two-year RNOR window.

In the 2 years of the window the balance gains $37,080. By year 12 it has gained $303,659 in total. If the choice under section 158 is in place, the growth of the window falls outside the Indian tax at a later withdrawal, and only the growth after it is in play. If you instead take the money out inside the window, no Indian tax arises on it under the sections read, provided it is received outside India, but the US withholding and, under 59½, the 10% additional tax still do. The numbers show why neither rule alone settles the choice.

Options laid out

1. Leave it in the plan or an IRA and withdraw later, accepting Indian tax on the ROR-year growth if the choice applies.
2. Withdraw in the window, accepting the US withholding and the final tax on Form 1040-NR but no Indian tax on income received outside India.
3. Withdraw in stages across the window, which the graduated rates of Form 1040-NR can reward, since each year starts again at the low brackets.

None of these is right for everyone. Each also needs the US side to hold: the plan's willingness to keep your account with a foreign address, a W-8BEN with the treaty claim before payment, and a Form 1040-NR to file.