The tax status in India we commonly hear is either Resident, or Non-Resident. There is another tax status defined in the Income Tax Act which is known as RNOR – Resident but Not Ordinarily Resident. This is a special transitional status accorded to a returning Non-Resident Indian (NRI), before attaining the Resident status.
As you are aware, you become an NRI for tax purposes, if you have spent more than 182 days abroad. On returning to India from overseas, you can obtain the RNOR status if you meet either of the two conditions specified below:
- If you have been a non-resident/NRI, in nine out of ten previous financial years.
- If you have spent less than 729 days in India, in the previous seven financial years.
Depending on the date of return, you can benefit from the RNOR status for up to three tax years in India.
How can NRIs benefit from RNOR tax status?
RNOR is a special “transitional” tax status given to returning NRIs, so that they can enjoy tax benefits applicable for NRIs, until they qualify as Residents for tax purpose. On returning to India permanently, NRIs automatically move into RNOR status and it need not be applied for.
Under RNOR, you need not pay tax on any income earned abroad. The income can be any of those listed below:
- Interest received on FCNR (Foreign Currency Non-Resident) deposits till maturity.
- Capital gains made from the sale of overseas assets including property.
- Interest and dividend received from overseas deposits and foreign securities.
- Withdrawals made from overseas retirement accounts.
The exemptions given for RNOR on foreign income, is to allow NRIs to transfer their foreign assets in India without a heavy tax burden. Once your tax status changes to Resident, foreign income will become taxable. However, if there is any DTAA (Double Taxation Avoidance Agreement) between India and your country of residence as an NRI, you might get tax relief if taxes have been already paid abroad.
How long can an NRI remain under RNOR status?
Depending on the date you return to India, you can be under the RNOR status up to three tax years. The Indian tax year or financial year starts from April of the current year to Marc of the succeeding year.
Illustration: Ms. Roopa returns to India from the UK on 12th Dec 2012. For the Financial Year (FY) 2012-13, she qualifies as an RNOR. This is because she satisfies one of the clauses of the RNOR status, that of being a non-resident for nine of out of the previous ten financial years.
For the FY 2013-14, she would still qualify as an RNOR even though she would have spent more than 182 days in India. This is because, she satisfies the other clause of qualifying for RNOR status, that is, having spent less than 729 days in India in the previous seven financial years. By the end of FY 2013-14, she would have spent only 474 days in India.
For the FY 2014-15, her tax status would change to Resident as she would not satisfy any of the clauses for RNOR status. She would have stayed in India for 839 days in the last seven financial years and would not be an NRI as well for nine out of the previous ten tax years.
Once your status changes to Resident, all your overseas income becomes taxable. Also, you have to intimate your bank about the changed residency status and convert the existing NRI specific accounts to resident rupee accounts.