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Taxability of Traditional 401(k)/ Traditional IRA/ Roth 401(k)/ Roth IRA in India and USA

S.No. Particulars Traditional 401(k)/ IRA Roth 401(k)/ IRA

1. Investment in a Traditional 401(k) plan or Traditional IRA is eligible for

1. Investment in a Roth 401(k) plan or Roth IRA is NOT eligible for a
a deduction under US Tax laws.
deduction.
1 Basic Differentiation 2. There is no tax when the investment grows in value.
2. There is no tax when the investment grows in value.
3. Amounts received on maturity/ distribution are fully taxable as
3. Amounts received on maturity/ distribution are generally tax free
ordinary income
2 Taxability India USA DTAA Relief/ India USA DTAA Relief/

A US Citizen/ Green Card Holder returned to India (assuming ROR status in India)

Not Taxable May not be available

Taxable at Slab
a Dividend and/ or Interest on Securities Taxable at Slab Rates1 (Tax payable on due to timing difference Not Taxable NA
Rates1
withdrawal) in taxability
Appreciation in Capital Value of 401(k) (without actual sale of
b Not Taxable Not Taxable NA Not Taxable Not Taxable NA
securities)
c Lump-Sum Withdrawal
Ordinary Income + 10% Foreign Tax Credit
i. Before 59.5 years 10% penalty2
Taxable as Capital penalty available in India Taxable as Capital
Gains Foreign Tax Credit Gains
ii. After 59.5 years Ordinary income Not Taxable NA
available in India
Withdrawal as Monthly Pension (Substantially Equal Periodic
d
Payment)
Ordinary income + Foreign Tax Credit Not Taxable +
i. Before 59.5 years NA
No Penalty3 available in India No Penalty3
Taxable at Slab Rates Taxable at Slab Rates
Foreign Tax Credit
ii. After 59.5 years Ordinary income Not Taxable NA
available in India

B Non-US Person returned to India (assuming ROR status in India)

Not Taxable May not be available

Taxable at Slab
a Dividend and/ or Interest on Securities Taxable at Slab Rates1 (Tax payable on due to timing difference Not Taxable NA
Rates1
withdrawal) in taxability
Appreciation in Capital Value of 401(k) (without actual sale of
b Not Taxable Not Taxable NA Not Taxable Not Taxable NA
securities)
c Lump-Sum Withdrawal
Ordinary Income + 10% Foreign Tax Credit
i. Before 59.5 years
Taxable as Capital Taxable as Capital 10% penalty2
penalty available in India
Gains Gains
Foreign Tax Credit
ii. After 59.5 years Ordinary income Not Taxable NA
available in India
Withdrawal as Monthly Pension (Substantially Equal Periodic
d
Payment)
Ordinary income + Foreign Tax Credit Not Taxable +
i. Before 59.5 years NA
Taxable at Slab Rates No Penalty3 available in India
Taxable at Slab Rates No Penalty3
Foreign Tax Credit
ii. After 59.5 years Ordinary income Not Taxable NA
available in India

C US Person before returning to India (assuming RNOR/ NRI status in India)

Not Taxable
a Dividend and/ or Interest on Securities Not Taxable (Tax payable on NA Not Taxable Not Taxable NA
withdrawal)
Appreciation in Capital Value of 401(k) (without actual sale of
b Not Taxable Not Taxable NA Not Taxable Not Taxable NA
securities)
c Lump-Sum Withdrawal
Ordinary Income + 10%
i. Before 59.5 years NA 10% penalty2
penalty
Not Taxable Not Taxable
ii. After 59.5 years Ordinary income NA Not Taxable NA
Withdrawal as Monthly Pension (Substantially Equal Periodic
d
Payment)
Ordinary income + Not Taxable +
i. Before 59.5 years NA NA
Not Taxable No Penalty3 Not Taxable No Penalty3
ii. After 59.5 years Ordinary income NA Not Taxable NA
Notes:

1. Taxability of Dividend and/ or Interest received in the 401(k) or Roth IRA account (without actual maturity of the 401(k) or Roth IRA) is a complex issue in India with no judicial precedents in this regard. Accordingly, it
may be possible to take a view that Dividend and/ or Interest received in the 401(k) or Roth IRA shall be taxable only on maturity.

2. 10% Penalty on Roth IRA withdrawal is not applicable if:

i. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and
ii. The payment or distribution is:
a. Made on or after the date you reach age 59½,
b. Made because you are disabled,
c. Made to a beneficiary or to your estate after your death, or
d. One that meets the requirements listed under First home under Exceptions (up to a $10,000 lifetime limit).

3. To avoid the 10% penalty, the distribution must be part of a series of substantially equal periodic payments over an individual's life expectancy. If the distributions are from a qualified plan other than an IRA (e.g.
401(k)), the employee must first separate from service in order to utilize this exception.
4. Determining the payments: There are three methods for calculating the annuity payments:
i. required minimum distribution method;
ii. fixed amortization method; and
iii. fixed annuitization method.
A one time change in method is permitted so long as it is a change to the required minimum distribution method.