A community memberwho spent 25 years in the US recently asked us: "I'm moving back to India next year. I have a 401(k), Social Security, and some rental income. How will my pension be taxed?"
This question has no simple answer. Your tax liability depends on where the pension originates, your residential status, and whether India has a tax treaty with that country. Let us break it down.
Your Residential Status Changes Everything
When you return to India, your tax status doesn't flip overnight. You transition through stages:
Year 1-2: RNOR (Resident but Not Ordinarily Resident) During this period, only Indian-sourced income is taxable. Foreign pension withdrawals, overseas rental income, and foreign bank interest remain tax-free in India.
Year 3 onwards: ROR (Resident and Ordinarily Resident) Now your global income becomes taxable in India-including foreign pensions.
The RNOR window typically lasts 2-3 years if you were an NRI for 9 out of the preceding 10 years. Use our Residential Status Calculator to check your exact timeline.
👉 Tip: Time your return to maximize RNOR benefits. Returning in April (start of financial year) often gives you a longer tax-free window.
Also Read - Residential Status Under Section 6 Of Income Tax Act
How Indian Pensions Are Taxed
If you receive pension from an Indian employer-government or private-the rules are straightforward:
Monthly pension (Uncommuted): Fully taxable as "Salary" at your applicable slab rate. Your pension disbursing authority will deduct TDS.
Tax Regime | Up to ₹4L | ₹4L-8L | ₹8L-12L | ₹12L-16L | Above ₹16L |
|---|---|---|---|---|---|
New Regime (FY 2025-26) | Nil | 5% | 10% | 15% | 20-30% |
Lump sum pension (Commuted):
- Government employees: 100% tax-free
- Private sector (with gratuity): 1/3rd exempt
- Private sector (without gratuity): 1/2 exempt
NPS withdrawals: At retirement, 60% lump sum is completely tax-free. The remaining 40% must purchase an annuity-annuity income is taxable at your slab rate.
Also Read -Old Tax Regime Vs New Tax Regime - What Should NRIs Choose
Foreign Pension Taxation: Country Matters
This is where it gets complex. Your foreign pension's tax treatment depends on the DTAA (Double Taxation Avoidance Agreement) between India and your country of residence.
US 401(k) and IRA:
Under India-US DTAA Article 20, private pensions are taxable only in the country of residence. Once you're an Indian resident, 401(k) withdrawals are taxable in India.
But there's relief: Section 89A (introduced in Budget 2021) allows you to defer Indian taxation on foreign retirement accounts until withdrawal. File Form 10-EE with your ITR to claim this benefit.
US Social Security: Taxable only in the US, exempt in India under DTAA. You'll still receive it, but won't pay Indian tax on it.
UK Pensions: Similar to US-private pensions taxable in country of residence. State pension follows specific DTAA rules.
Australian Superannuation: Withdrawals may be taxable in India once you're a resident. The India-Australia DTAA provides relief through foreign tax credit.
👉 Tip: Withdraw from foreign retirement accounts during your RNOR years when possible. You'll avoid Indian tax entirely on those withdrawals.
DTAA: Avoiding Double Taxation
India has DTAAs with over 90 countries. These treaties prevent you from paying tax twice on the same income.
How it works:
- You pay tax in the source country (where pension originates)
- You claim Foreign Tax Credit (FTC) in India
- India taxes only the difference (if Indian rate is higher)
Documents needed to claim DTAA benefits:
- Tax Residency Certificate (TRC) from your former country
- Form 10F filed with Indian tax authorities
- Proof of taxes paid abroad
For US pensions specifically, submit Form W8-BEN to your 401(k) administrator to certify you're a non-resident alien and potentially reduce US withholding.
Also Read - How to Claim DTAA Benefits in India: Complete Step-by-Step Guide
Practical Scenarios
Scenario 1: Government pensioner returning from UAE
Rajesh, 62, receives ₹50,000/month pension from his former PSU job. UAE has no income tax.
Tax treatment: His pension is fully taxable in India at applicable slab rates. Since UAE doesn't tax income, there's no DTAA benefit to claim. However, his NRE FD interest during RNOR years remains tax-free.
Scenario 2: IT professional returning from US with 401(k)
Priya, 60, has $500,000 in her 401(k). She's returning to India permanently.
Smart strategy: During her 2-3 year RNOR period, she can withdraw from 401(k). US will withhold 30% tax, but India won't tax it (foreign income during RNOR). She claims FTC when filing US returns.
After becoming ROR, she files Form 10-EE to defer Indian taxation until actual withdrawal, avoiding accrual-based taxation.
Scenario 3: NPS subscriber who was NRI
Vikram contributed to NPS while working abroad. At 60, he returns to India.
Tax treatment: 60% lump sum withdrawal is tax-free. The 40% annuity income will be taxed at his slab rate. His NPS contributions during NRI years were from NRE/NRO accounts, which is fully compliant.
Tax-Saving Strategies for Retiring NRIs
1. Maximize RNOR window
Liquidate foreign assets, withdraw from 401(k)/IRA, and bring funds to India during RNOR years. This income escapes Indian tax completely.
2. Keep some corpus in GIFT City
GIFT City USD FDs offer tax-free interest even after you become a resident. Park retirement funds here for tax-efficient, dollar-denominated returns.
3. Use Section 89A for 401(k)
Don't let India tax your 401(k) on accrual basis. File Form 10-EE to align Indian taxation with US taxation-pay tax only when you withdraw.
4. Claim all deductions
Under the old tax regime, you can claim Section 80C deductions (₹1.5 lakh), health insurance premiums (80D), and NPS contributions (80CCD).
5. File ITR even if income is below threshold
Filing returns creates a paper trail, helps claim TDS refunds, and is essential for DTAA benefit claims.
Common Mistakes to Avoid
Not updating residential status: Banks and pension authorities need to know when you become resident. Failing to update can cause TDS mismatches.
Ignoring foreign asset reporting: Once you're ROR, you must disclose all foreign assets (regardless of value) in Schedule FA of your ITR. Non-disclosure of foreign movable assets valued over ₹20 lakh attracts penalty under Black Money Act (up to ₹10 lakh).
Missing Form 10-EE deadline: To defer 401(k) taxation under Section 89A, file Form 10-EE before your ITR due date.
Not claiming FTC: If you've paid tax abroad on pension income, claim Foreign Tax Credit in India. Many retirees leave this money on the table.
Planning your return to India? Join our WhatsApp community where thousands of NRIs discuss retirement planning strategies.
Want tax-efficient retirement income? Download the Belong app to explore GIFT City investments with tax-free returns.
Also Read -Step-by-Step Guide to Converting Resident Account to NRI Account
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