This guide covers when NRIs become RNORs, what taxes they must pay on Indian and foreign income, and how to take advantage of Double Taxation Avoidance Agreements (DTAA).
A Resident but Not Ordinarily Resident (RNOR) is an individual classified by their tax status as per the Income Tax Act of 1961:
The RNOR status is an intermediate classification applicable to NRIs returning to India. RNOR status applies if either of these conditions is met:
There are some additional cases around income being above ₹15 lakh once you are staying in India that depend on the number of days spent in India in the previous year.
If neither of these conditions is met, RNOR status is not applicable, and the individual will be classified as either an NRI or a Resident Indian.
RNOR status is calculated on a financial year (FY), from 1st Apr to 31st Mar, basis. The FY when you come back to India starts the clock.
Let us say the return date is 1st Jan 2025 after spending 10 or more years abroad.
| FY | Location | Status | In India | Comment |
|---|---|---|---|---|
| Before 2024-25 | Abroad | NRI | 0 days | NRI for 10+ years in the past |
| 2024-25 | Returns to India | RNOR | 90 days | NRI for 10+ years in the past |
| 2025-26 | India | RNOR | 365 days | NRI for 9+ years in the past |
| 2026-27 | India | RNOR | 365 days | Less than 729 days in India in last 7y |
| 2027-28 | India | Resident Indian | 366 days | Crosses 729 days in India in last 7y |
An RNOR becomes a Resident Indian when they are now staying in India and when both of these conditions become false:
If an RNOR leaves India in some time, the NRI calculation will again start as per the standard rules described in detail in this article: Who is an NRI and who is not? Understanding FEMA and NRE/NRO bank accounts
RNOR status holders do not have to pay tax on income or capital gains not based in India. This includes:
However, income from a business domiciled in India will be taxed in India. In general, RNOR status holders will have to pay tax on income or capital gains based in India. This includes salary, rental income, and capital gains from Indian assets like bank accounts, FDs, property, shares and mutual funds.
We will now deal with a few specific cases below:
NRIs do not have to pay tax on NRE accounts in India. The interest income from these accounts is taxable in the foreign country. However, once RNOR status kicks in, these NRE accounts remain non-taxable in India as long as RNOR status is maintained.
Once Resident Indian status is gained, these accounts have to be closed and the amounts have to be transferred to Resident Indian bank accounts.
NRO accounts are always taxed in India whether the holder is an NRI or RNOR. NRO accounts should be converted to Resident Indian accounts once NRI or RNOR statuses lapse.
RNOR status holders can open Resident Foreign Currency (RFC) accounts which can be maintained in foreign currency (usually USD, GBP and EUR) either as savings accounts or fixed deposits (FDs) and allow easy transfer of foreign currency from foreign accounts to India.
RNORs do not have to pay tax on RFC accounts until they become Resident Indians.
Both NRI and RNOR status holders do not have to pay tax in India on FCNR deposits. Once these accounts mature, and if the status at that point is Resident Indian, then the money is deposited to Resident Indian bank accounts and the interest is taxable.
We will now cover the usual cases of taxable income and capital gains from foreign assets. None of these are taxable in India.
Foreign real estate is always taxable in the country where the house is located. There are no taxes on this sale in India.
Capital gains and income (via dividends) are taxable in the country where stocks, mutual funds and ETFs are held. These are not taxable in India.
Withdrawal from tax-advantaged accounts like 401k, IRA, Roth IRA, HAS and 529 Plans (in the case of US-based NRIs) or ISAs for UK-return RNOR holders are taxable in the foreign country only.
These are not taxable in India.
Interest income is taxable in the foreign country where the bank account is held. Since this income does not originate in India, there are no taxes in India.
There is one special case due to businesses operated in a foreign country by an RNOR or Resident Indian which we will cover as an example of using the DTAA benefit below.
Double Taxation Avoidance Agreement (DTAA) helps RNOR status holders avoid paying tax on the same income in two different countries if DTAA exists between the countries. There can be cases like income from a US-based business operated by an RNOR (or Resident Indian) is taxable:
In such cases, any tax already paid in the US will be subtracted from the tax due in India under DTAA. In such cases, RNOR holders should carefully understand which incomes can be both dual taxable and if DTAA applies to them.
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Published: 20 November 2024
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This post titled Understanding RNOR Tax Status in India: Key Rules and Tax Obligations Explained first appeared on 02 Oct 2024 at https://arthgyaan.com
