Is 401k a good option for H1B Visa holder. If I plan to move  back to India in 2-3 years?

I don't think it's worse of an option in terms of tax than moving your savings account back to India. The clear advantage of the 401k (besides the obvious tax exemption past a certain age, but you don't seem interested in that) is that your employer might match your contribution. If you're with a good company, it will probably match anywhere between 50% and 100% of your contribution. So, free money. And in that case the answer to your question is yes.

Depends on when you want the money back. 401(k)s and IRAs are tax free going in, but will be treated as income when you withdraw it before retirement. There is also an early withdrawal penalty. So you need to weigh all three options:  1. no 401(k) 2. 401(k) with early withdrawal, and 3. 401(k) that gets rolled over into a Roth IRA that you basically keep till you are 60 If you choose option 3, you need to think about the Indian tax angle as well.

401K is always better if you get company matching as everyone mentioned. But treat this as savings and not liquid money because its not easy to withdraw it as and when you want that easily. So if you are getting more than you require, go ahead and contribute to your company's 401K plan. Also mind that this money doesnt evolve as a normal savings account. Its invested in stocks and bonds which might go down when you are looking to head back to india. hence you need to make sure you move back at the right time. One of my friend wanted to move back around 2008 and due to market down, his 401K money vanished and he had to wait for the market to be stable again before withdrawing and had to extend his stay.

Lets work with an example. Most companies offer some kind matching scheme when you contribute to 401K. For e.g. Your salary is 100K; Your company X matches 50% of your contributions upto 5% of your salary; Your income tax rate is 30%. If you invest in 401K You contribute 5K(pre-tax) and you company will match 50% so 2.5K That makes it 7.5 K So if you withdraw after a year, you will pay 10% penalty + 30% income tax; this leaves you with 60% x 7.5K = 4.5K If you don't invest in 401K You pay 30% tax on the 5K and are left with 3.5K at the year end. In other words, even if you want to withdraw over a short time line, you should contribute enough to take advantage of the amount that your company will match.   Withdrawal can be a headache but if you are willing to wait a bit, you can withdraw in a year that you had no US income and hence most of your withdrawal can be within standard deduction and you only pay the 10% penalty.

401k is an excellent option for ANYONE, even for persons on H1B visa determined to return to India after few years.By investing in 401k, you will save tax and get free money by way of matching contribution from your employer. If you decide to move back, you can plan to redeem in such a way that you would pay only 10% penalty and no tax in USA. As your status would be Not Ordinary Resident for Indian tax purpose, your US income would not be taxed in India.In short, as long as you are in a tax bracket higher than 10%, 401k is a good option, even if company is not matching anything.I worked for KPMG USA for about 4.5 years and was investing in 401k. While I have returned to India in 2010, I still maintain 401k as international diversification of my investments. I invest in US and global markets through 401k. I plan to send my daughter for her masters in USA after 10–15 years and I plan to pay for her education expense from 401k. So, even if exchange rate is Rs. 150/$, I will have natural hedge for her expenses because of my 401k investments.