Many NRIs especially in the Gulf are planning to shift to India. After staying abroad for several years, some have already come back for good.
There are many tax benefits that one enjoys as an NRI. Will settling in India be a cause of worry for the returning NRIs by adding to their tax burden?
Not, if they get the RNOR status.
What is an RNOR?
RNOR is an acronym for Resident but Not Ordinarily Resident. It is a transitional residential status given to returning NRIs before they become a resident of India. RNORs are treated on par with NRIs for Indian income tax purposes.
Before we understand RNOR, let’s understand the definition of a Resident and a Non-Resident Indian (NRI).
A person is a resident of India (Resident and Ordinarily Resident or ROR)
- If he or she has been in India for 182 days or more in that financial year or
- He/she has been in India for 60 days or more in a financial year and for 365 days or more in the preceding four years
If you fulfil any of the above conditions, you become a ROR.
However, if you have stayed abroad for a long time, you can qualify for the transitional RNOR status.
It is accorded to those fulfilling any of the following conditions:
If you were an NRI for nine out of the previous 10 years preceding that year
If you have stayed in India for 729 days or lesser in the previous seven years preceding that year.
RNOR is an automatic status and one doesn’t have to apply for it. It effectively gives NRIs a two to three-year period to shift assets from abroad without attracting huge taxes and settling in India. You can avail benefits of being a RNOR for a maximum of three yrs after your return to India.
How does it work?
Take the case of Mr. Nair, who worked as a petroleum engineer in Saudi Arabia for 10 years. He shifted to India on July 31, 2017. Since he stayed in India for 244 days (which is more than 182 days) in the financial year 2017-18, he could become a resident of India for tax purposes. However, since he stayed abroad for nine out of 10 previous years (2016-17 and earlier), he got the RNOR status for 2017-18.
By the end of March 2019, he stayed in India for 609 days (which is less than 729 days) and hence continued to be a RNOR. However, by March 2020, he was in India for 975 days (more than 729 days) and thus became an Indian resident for the financial year 2019-20.
Some tax experts believe that the new criteria for NRIs introduced recently will make them a RNOR (and not ROR), if their stay in India is for 120 days or more (but less than 182 days). In Budget 2020, the Government had modified the criteria for NRI to include those individuals who visited India for lesser than 120 days (from earlier 182 days), if their Indian annual income was more than Rs 15 lakh.
What are the tax benefits of being an RNOR?
An RNOR in India will continue to enjoy tax benefits like an NRI. They will be taxed only on income earned in India, unlike Indian residents who have to pay tax on global income.
The following are among the global income that is non-taxable:
- Interest earned on FCNR (Foreign Currency Non-Resident) deposits
- Capital gains from the sale of foreign assets including that of property
- Rent income
- Interest or dividends from foreign deposits and securities
- Any withdrawals from foreign retirement funds
However, it needs to be noted that income received and accrued outside India from a business controlled or set up in India is taxable in India even if you are an RNOR.
What about the status of bank accounts?
RFC (Resident Foreign Currency) accounts can be opened by the RNORs. It is used to bring funds from abroad to India and hold it in any currency of one’s choice.
It can be opened as a term or a savings deposit account and your existing NRE/NRO/FCNR accounts can also be converted to an RFC account.
Interest earned on an RFC account is not taxable as long as you enjoy the RNOR status. Also, any term deposit opened while you were an RNOR will continue to be tax-free till its maturity.
However, once you cease to be an RNOR, you lose all tax benefits and will have to report the change of the residential status in various accounts.