Article
Jan 16, 2026
401(k) Withdrawal Tax for NRIs (2026)
Withdraw Now or Later? The RNOR Tax Window Explained (With Numbers)
If you worked in the US and accumulated savings in a 401(k), one of the most important financial decisions after moving back to India is when to withdraw it.
The timing of your withdrawal — especially around your RNOR window — can materially change how much tax you ultimately pay in the US and India.
This article explains:
How the US taxes 401(k) withdrawals for NRIs
How India taxes the same income based on residency
Why RNOR is a powerful (but time-bound) planning window
A numeric example comparing withdrawal timing
Key caveats and compliance requirements
1. US Taxation on 401(k) Withdrawals for NRIs
Default US Withholding
When a non-resident alien (NRA) withdraws from a traditional 401(k):
The US generally applies 30% federal tax withholding on the taxable portion of the distribution
This tax is withheld at source by the plan administrator
This withholding applies regardless of whether you live in India, Canada, or elsewhere outside the US.
Form W-8BEN (Clarified)
Before making a withdrawal, you must submit Form W-8BEN to your 401(k) plan administrator.
What W-8BEN does:
Certifies non-resident status for proper US withholding documentation
Ensures the withdrawal is processed under NRA rules, not US resident rules
What W-8BEN does not do:
It does not reduce the withholding rate for Indian residents
The India–US tax treaty does not provide a preferential rate for 401(k) distributions
As a result:
Indian residents typically still face 30% US withholding, even after submitting W-8BEN
This is expected and correct under current treaty interpretation.
Early Withdrawal Penalty
If you withdraw before age 59½:
An additional 10% US early withdrawal penalty generally applies
This penalty is not creditable in India
So an early withdrawal can result in:
~40% reduction upfront (30% tax + 10% penalty) in the US alone
2. Indian Tax Treatment Depends on Residency
India’s taxation depends entirely on your residential status in the year of withdrawal.
NRI or RNOR
If you are:
Non-Resident (NRI), or
Resident but Not Ordinarily Resident (RNOR)
Then:
Foreign retirement income received outside India is generally not taxable
In such cases, only US tax applies to the withdrawal
This makes the RNOR phase particularly valuable for planning.
Resident and Ordinarily Resident (ROR)
Once you become ROR:
India taxes your global income
401(k) withdrawals become taxable in India at slab rates
Foreign tax credit (FTC) is available for US tax paid, subject to limits
3. Section 89A – Managing Accrual Tax Risk
India introduced Section 89A to address taxation of foreign retirement accounts such as 401(k)s.
What Section 89A Does
Allows Indian taxation to be deferred until withdrawal
Aligns Indian tax timing with US tax timing
Helps avoid timing mismatches once you become ROR
Why It Matters
Without a Section 89A election:
There is a risk that India could seek to tax yearly accretions in the 401(k) account
This risk is precisely why Section 89A exists
What You Must Do
File Form 10EE
Do this in the first year you become ROR
The election is generally irrevocable
4. Numeric Example: Withdraw During RNOR vs After RNOR
Let’s compare two realistic scenarios.
Assumptions
401(k) balance: USD 100,000
Age: 45
USD–INR rate: ₹85
INR value: ₹85,00,000
US withholding: 30%
Early withdrawal penalty: 10%
Indian slab (ROR): ~30% + cess
Scenario A: Withdraw During RNOR
US Impact
US tax (30%): USD 30,000
Penalty (10%): USD 10,000
Total US deduction: USD 40,000
Net received
USD 60,000 ≈ ₹51,00,000
India Tax
Nil (foreign retirement income received outside India during RNOR)
Final amount
₹51 lakh
Scenario B: Withdraw After Becoming ROR
US Impact
Same US tax and penalty: USD 40,000
India Tax
Gross income reported: USD 100,000
Indian tax ≈ USD 31,200
FTC usable ≈ USD 30,000
Residual Indian tax ≈ USD 1,200
Net received
USD ~58,800 ≈ ₹50,00,000
Final amount
₹50 lakh (approx.)
Key Insight
Withdrawal Timing | Approx. INR Received |
During RNOR | ~₹51 lakh |
After ROR | ~₹50 lakh |
The difference arises because:
Early withdrawal penalties are never creditable
FTC has limits
Slab rate interaction causes leakage
5. Withdraw Now or Later? Strategic View
Withdraw During RNOR When:
You need the funds in India
You want to avoid Indian slab tax entirely
You are comfortable accepting US-side tax and penalties
Delay Withdrawal When:
You do not need immediate liquidity
You plan to withdraw after age 59
You want to avoid the 10% US penalty
You prefer phased withdrawals over time
After age 59½, the US penalty disappears (improving outcomes), but if you are ROR, large lump-sum withdrawals can still trigger significant Indian tax exposure due to slab rates and FTC limits.
Important Caveats
These strategies assume you qualify as RNOR and maintain proper residency documentation
US estate tax exposure exists for non-residents holding US-situs assets like 401(k)s
Roth conversions create complex Indian tax issues and are rarely advantageous for returning NRIs
Always verify Section 89A eligibility and Form 10EE requirements with a cross-border tax professional
6. Lump Sum vs Phased Withdrawals
Phased withdrawals often perform better because they:
Reduce marginal tax rates
Improve FTC utilisation
Avoid large income spikes
Smooth currency conversion risk
Lump-sum withdrawals are usually tax-inefficient unless carefully timed.
7. Compliance Checklist
US
Form W-8BEN (before withdrawal)
Form 1040-NR (year of withdrawal)
India
Schedule FA disclosure required annually while the 401(k) exists, even without withdrawal
Schedule FSI (when income is taxable)
Form 67 / Schedule TR (foreign tax credit)
Form 10EE (Section 89A election, when applicable)
Summary Table
Aspect | US | India |
Withdrawal tax | 30% withholding | Slab rates if ROR |
Early withdrawal | +10% penalty (<59½) | Not applicable |
Treaty benefit | No reduced rate | FTC available |
Accrual taxation | Deferred | Deferred with 89A |
Foreign asset reporting | N/A | Schedule FA annually |
Final Takeaways
W-8BEN documents non-resident status; it usually does not reduce US withholding
RNOR often represents the most significant tax planning window for US retirement assets
Early withdrawal penalties are permanent losses
Section 89A election is typically critical once you become ROR to manage accrual taxation risks
Timing and structuring matter more than the withdrawal itself