An Indian citizen returning from the US may face different tax treatment for a 401(k)-to-IRA rollover depending on their residential status. According to tax experts, the tax implications will be governed by the Income-tax Act, 2025, which came into effect on 1 April 2026. Depending on the period of stay in India, the taxpayer may qualify as a Non-Resident (NR) and Resident but Not Ordinarily Resident (RNOR) initially, with different tax implications for each status.
For an NR, only income received or deemed to be received in India, or income that accrues or arises (or is deemed to accrue or arise) in India is taxable, whereas foreign income is not taxable in India. For an RNOR, foreign-source income is taxable when it is derived from a business controlled from India or a profession set up in India. Accordingly, the appreciation in your IRA, being foreign-source income, would not be taxable in India while qualifying as an NR/RNOR.
Once the taxpayer becomes a Resident and Ordinarily Resident (ROR), their global income, including income accruing in their IRA, would become taxable in India on an accrual basis. However, as the USA taxes such income only upon withdrawal, the Income-tax Act, 2025 permits eligible taxpayers to defer taxation in India until the year in which such income is taxed in the USA. To avail of this benefit, taxpayers are required to furnish Form 40 on or before filing their Indian income-tax return for the corresponding year.
Upon withdrawal, the amount would also become taxable in India, but taxpayers can claim a foreign tax credit in India for the taxes paid in the USA by furnishing Form 44 while filing their Indian income-tax return. During the period in which the taxpayer qualifies as an ROR, they would also be required to disclose their IRA in Schedule FA of their income-tax return. It is important to note that if the taxpayer subsequently becomes a non-resident after availing the income deferral benefit, the entire deferred income would be taxable in the year of the change in their residential status.
