Why a US 401(k) or IRA becomes an India problem when you return
While you were a non-resident, India did not tax your US retirement account. It was foreign income earned abroad. That changes when you move back and become an Indian tax resident, because India then taxes its residents on worldwide income.
The difficulty is not whether India can tax the account, but when. The US taxes a 401(k) or a traditional IRA only on withdrawal. The money grows untaxed for years. India can treat the dividends, interest and gains arising inside the account as your income each year, on an accrual basis, even though you have not taken a rupee out.
The result is a timing mismatch. India taxes the growth as it accrues; the US taxes the same money later, on withdrawal. Because the foreign tax credit only works when both countries tax in the same year, you can pay Indian tax now with no US tax yet to credit against, then US tax later, with the Indian tax already spent. That timing gap, not a true double charge on principal, is the real pain point for returning NRIs.
What Section 89A actually does
Section 89A is India's answer to that mismatch. Inserted by the Finance Act 2021 and effective from assessment year 2022-23, it lets a 'specified person' realign the Indian timing to the foreign timing.
A 'specified person' is a resident of India who opened the retirement account while they were a non-resident of India and a resident of that other country, which fits a returning NRI who built up a 401(k) or IRA while living and working in the US.
The mechanism, read with Rule 21AAA: instead of taxing the account's income as it accrues, India includes that income in your total income of the previous year in which it is taxed in the notified country. The year you withdraw. So India waits and taxes the same event, in the same year, as the US.
| Without Section 89A | With the Section 89A election | |
|---|---|---|
| When India taxes the account | Each year, as income accrues inside it | The year you withdraw, matching the US |
| When the US taxes it | On withdrawal | On withdrawal |
| Foreign tax credit | Hard to match, different years | Lines up, same year, creditable |
The election is made by e-filing Form 10-EE before you furnish your return. It is a one-way decision: once exercised it applies to all subsequent years and cannot be withdrawn. If you later become a non-resident again, the option is treated as never having been exercised.
Where the RNOR window fits in
Before reaching for Section 89A, the first India-side question is your residential status, because a returning NRI often gets a grace period.
When you come back, you usually qualify for a stretch as Resident but Not Ordinarily Resident (RNOR) under Section 6 before you become a full resident (Resident and Ordinarily Resident). The RNOR test turns on your recent history, broadly, having been a non-resident for nine of the preceding ten years, or in India for 729 days or less in the preceding seven years. For many returnees, RNOR status lasts two to three years.
What matters here: during RNOR years, foreign income not received in India and not from a business controlled in India is generally outside the Indian net. So income arising in your 401(k) or IRA during the RNOR window is typically not taxed by India at all. Section 89A recognises this, income not taxable in India during accrual because you were a non-resident or RNOR is carved out of what the relief has to align.
So the right India-side sequence is: first map how long your RNOR window runs, because the choices around withdrawing or electing under 89A look very different inside it versus after. The window is a planning opportunity, not an afterthought.
A worked example: Anand moves back to Bengaluru
Anand worked in California for twelve years, building up a 401(k) and a traditional IRA, then moved back to Bengaluru. For his first couple of years home he is RNOR; after that he becomes an ordinary Indian resident.
During the RNOR window, the income growing inside his 401(k) is foreign income not received in India, so India does not tax it. That window is where much of his planning happens.
Once he is an ordinary resident, the mismatch bites: India could tax the account's accruing income each year, while the US taxes it only on withdrawal. His CA assesses whether the Section 89A election helps. Because Anand opened both accounts while a US resident and non-resident of India, he is a 'specified person' and qualifies. They e-file Form 10-EE before his return, so India will now tax each withdrawal in the same year the US does, not year-by-year on accrual.
When Anand later draws from the 401(k), the US withholds tax on the distribution. India taxes the same withdrawal that year, and his CA claims a foreign tax credit (Form 67, under the India-US treaty) for the US tax, which now lines up, because both countries tax the same year's event. The election, the residency mapping, the Indian computation and the credit are all India-side, and that is what we deliver.