I am a non-resident alien (citizen of India), married, age 63. If I withdraw $3650 from my IRA account with a mutual fund, (1) will there be any withholding by mutual fund? (2) will there be any tax liability?

Because you are overseas (and assuming the mutual fund is aware of that fact), the mutual fund, by law, MUST withhold 20% of the distribution to ensure that you pay the tax on this distribution as income.

You can claim the excess withholding as a refund by filing a non-resident alien tax return (Form 1040NR or 1040NR-EZ) in January 2012.