Moment guide · FY 2026-27

I am dealing with a foreign pension or 401(k) after returning to India

How is a US 401(k) or foreign pension taxed in India?

A foreign 401(k) or IRA is not taxed in India during accumulation while you are an NRI or RNOR — the tax event is the withdrawal, taxed at slab in the year of receipt if you are a resident. Section 89A lets you spread pension income from notified countries (US, UK, Canada) over years, and the DTAA pension-article coverage of 401(k)/IRA distributions is debated, so claim relief with documentation and a Form 67 foreign tax credit.

The #1 trap

Assuming the 401(k) is tax-free in India because it is tax-deferred in the US — the deferral is a US concept; India taxes the withdrawal when you are a resident, and the DTAA's pension article coverage of 401(k)/IRA distributions is contested, so the treaty argument must be documented. Also, section 89A relief spreads the pension over years — it does not exempt it.

Naveen, US returnee with a 401(k) and a UK pension

Naveen worked in the US for 12 years, building a 401(k) worth $250,000, and holds a small UK pension. He returned to India in 2024 and became an ordinary resident in 2025. During his NRI and RNOR years the growth inside the 401(k) was not taxable in India, because the accumulation happens inside a foreign trust structure that India does not tax until a distribution. In FY 2025-26 he takes a lump-sum withdrawal of $60,000, converted at ₹86 per dollar, giving ₹51,60,000, which is taxable as income from other sources at his slab rate in the year of receipt. Because the US is a notified country under section 89A and Rule 21AAA, Naveen can spread the pension over the prescribed number of years to avoid the bunching effect of the ₹51,60,000 landing in one year. The US withheld 10% on the withdrawal, and Naveen claims the foreign tax credit by filing Form 67 before the ITR due date, converting the US tax at the SBI TT buying rate. The India-US DTAA pension article covers regular pensions, but its application to a 401(k) lump-sum distribution is debated, so Naveen keeps the plan documents, the withdrawal statements and the treaty analysis; where both the treaty and domestic law offer relief, the more beneficial applies. His UK pension from the state scheme is also from a notified country and gets 89A treatment. If he had withdrawn nothing in a year, no Indian tax would arise on the 401(k) in that year. A quick call with us dials in the final figure. Naveen also checks the section 89A mechanics: the relief spreads the pension over the number of years specified in Rule 21AAA for notified countries, and the claim is made in the return with the foreign pension statement. If he withdraws in multiple years, each withdrawal is assessed in its own year, and the 89A spread is recomputed for each. The 401(k) loan he took in the US is a withdrawal for Indian purposes if he is a resident, so he tracks loans as potential taxable distributions. If he becomes an NRI again later, the pension withdrawals during the NRI years are foreign-source income and fall outside the Indian net. A quick call with us dials in the final figure.