Returning NRI US Tax Guide: 401k, Exit Tax, RNOR, and What You Must Do Before You Leave

The year you permanently leave, you file a dual-status tax return — resident alien from January 1 through departure, nonresident alien from the day after through December 31.

File Form 1040 for the resident portion with a statement for the 1040-NR computation.

• Cannot claim standard deduction for full year
• Cannot file jointly (unless elect full-year resident under IRC §6013(g))
• Residency termination date is not always the last day physically present in the United States. For green card holders, U.S. tax residency generally continues until lawful permanent resident status is administratively or judicially determined to have been abandoned or revoked.

File Form 8854 if you expatriate or terminate long-term resident status. A long-term resident is generally a green card holder who was a lawful permanent resident in at least 8 of the 15 tax years ending with the year residency terminates.

Retain documentation supporting your residency termination date, foreign tax home, and abandonment of lawful permanent resident status, including immigration and travel records.

RNOR (Resident but Not Ordinarily Resident) status exempts foreign-source income from Indian tax for 2-3 years.

During RNOR, foreign income staying outside India is not taxable:

• 401(k)/IRA distributions may receive favorable Indian tax treatment during RNOR
• U.S. stock gains may not be taxable in India during RNOR if treated as foreign-source income
• Roth IRA withdrawals may receive favorable Indian tax treatment during RNOR, subject to individual circumstances.
• Roth withdrawals may avoid Indian taxation entirely

Eligibility (meet either):

Many NRIs who have lived abroad for an extended period qualify for RNOR status, but eligibility should be calculated based on actual residency history.

Evaluate RNOR eligibility before departure and consider the timing of significant financial events after obtaining professional tax advice.

Three options:

Leave in US: Grows tax-deferred. RMDs at 73. Withdrawals: 30% NRA withholding. India taxes unless RNOR.

Roll to Traditional IRA: No tax at rollover. More flexibility. Same withdrawal rules.

Withdraw full amount: Taxable as ordinary income. 10% penalty if under 59½. 30% NRA withholding. Almost always the worst option.

DTAA Article 20: The U.S.-India tax treaty may allow both countries to tax certain retirement distributions, with relief from double taxation generally available through foreign tax credit mechanisms.

Surrender green card → file Form I-407 (USCIS) + Form 8854 (IRS).

Covered Expatriate Test (held GC 8+ of 15 years):

Meet any one = covered expatriate.

If covered: Mark-to-market deemed sale on all worldwide assets. Gain above $886,000 exclusion taxed at capital gains rates. Deferred compensation (401(k)/IRA): 30% withholding on distributions instead.

Penalty for not filing Form 8854: $10,000.

RBI requires restructuring:

• While US resident: NRE interest was US-taxable (though India-exempt)
• After returning: NRE/RFC interest becomes India-taxable
• RFC accounts allow limited repatriation for ongoing US obligations

FBAR: Yes for departure year. Required if US person any part of year AND foreign accounts >$10,000.

After departure:

• H-1B/L-1 (not citizens/GC): FBAR ends after departure year
• US citizens: FBAR indefinitely
• Green card holders: file for year of abandonment

FATCA: Same — departure year only. After NRA status, no longer applies.

Common mistake: Missing departure year FBAR. If Indian accounts >$10,000, due April 15 (auto-extended Oct 15).

Missed prior years? IRS Streamlined Filing Compliance Procedures may allow compliance without standard penalties.

Documents:

• W-2 (partial year)
• 1099-B from brokerages
• 1099-INT/DIV from US accounts
• India bank statements (FBAR)
• Form 8854 (if green card)
• Property sale closing statement
• 401(k)/IRA statements
• Passport with departure stamp
• Lease/utility termination records
• Prior year return

Deadlines:

Still pay US taxes after moving?

Only on US-source income via Form 1040-NR.

What about my 401(k)?

Stays in US. Leave invested, withdraw gradually during RNOR. Lump-sum is worst option.

FBAR after leaving?

Departure year yes. After that, ends for non-citizens/non-GC holders.

What is RNOR?

2-3 year Indian tax status exempting foreign income. Qualify if NRI 9/10 preceding years or present in India ≤729 days in preceding 7 years.

Exit tax on green card?

Only if covered expatriate (held 8+ years, meet net worth/tax/compliance test).

Roth conversion before leaving?

Yes — pay known US rate, grow tax-free, withdraw during RNOR. Must convert before departure date.