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You may know about the difference between resident Indians and Non-Resident Indians (NRI) and how they file their taxes in India. NRI refers to an individual of Indian origin who resides abroad. The Income Tax Act 1961 incorporates distinct tax regulations for Indian residents and NRIs. The Act outlines specific criteria to determine residency status for tax purposes, distinguishing between residents and NRIs.
However, there is yet another category known as Resident but Not Ordinarily Resident or RNOR. This blog will explain the NRI statuses, taxation implications, and the concept of Residents but Not Ordinarily Residents (RNORs).
Who is a Resident but Not Ordinarily Resident (RNOR)?
To be classified as a Resident but Not Ordinarily Resident (RNOR) in a given year, you must meet one of the following two criteria:
If you have been a Non-Resident Indian (NRI) for at least 9 out of the 10 financial years preceding the current year or
If, during the 7 financial years preceding the current year, you have been in India for a total period of 729 days or less.
Your tax obligations may differ from those of ordinary residents, and you may be eligible for certain exemptions or benefits with the RNOR status.
Taxation of Income for NRIs and RNORs
Let us first understand the difference between NRI and RNOR taxation in India. If you are a Non-Resident Indian (NRI), only the income earned within India is subject to taxation. Income earned outside of India is not taxable in India.
In the case of a non-resident individual working abroad and providing services outside India, the salary credited to their NRE account with an Indian bank will not be considered part of their taxable income, even though it was credited to an Indian bank account.
However, in the case of Resident But Not Ordinarily Resident (RNOR) individuals who have recently returned to India, one can maintain their RNOR status for up to 3 financial years after their return.
This can be highly beneficial for you because your taxation will be similar to an NRI's. Hence, any income earned outside of India, even after your return, will not be taxed in India. Just like an NRI:
Income earned within India is taxable.
Income earned outside of India is not taxable in India.
You can retain this status for a period of 3 years. However, once you attain the status of a Resident, all your income, both within and outside India, will be taxable in India, except for any concessions available under the Double Taxation Avoidance Agreement (DTAA) between India and the country where your overseas income originated.
RNOR Income Tax Rules
Particulars of Income |
RNOR Taxability |
Any income earned, whether in India or abroad, that is received or considered to be received in India. |
Taxable |
Any income that accrues, arises, or is considered to accrue or arise in India during the previous year, regardless of whether it is received in India or elsewhere. |
Taxable |
Income from a business controlled by India, which accrues or arises outside India and is received outside India |
Taxable |
Any other income from a source outside India which accrues or arises outside India and is received outside India during the previous year |
Non-taxable |
Income that accrues or arises outside India or is received outside India in the years preceding the current year and is remitted to India during the previous year. |
Non-taxable |
RNOR Tax Benefits
If you have an RNOR status and earn income from the following sources, you need not pay RNOR income tax in India. These are the following income heads:
Rent from abroad: This is the income earned from renting out property in a foreign country. For instance, the rental income you earn from renting a house/apartment overseas.
Dividend or interest received from investing in deposits and securities: The earnings generated through investments or from dividends or interest payments as investment returns.
Withdrawals from offshore retirement accounts: If you are saving for retirement in an offshore account, and when you decide to access those funds, the withdrawals made from these accounts will be tax-free.
Capital gains from abroad: Capital gains refer to the profits earned from selling assets such as stocks, real estate, or other investments. This applies if you sell assets located in foreign countries and make a profit.
NRE deposit and interest on FCNR deposits, if converted into RFC: NRE deposits are denominated in Indian rupees, while FCNR deposits are held in foreign currencies. If you convert your FCNR deposits into RFC accounts, you can still earn tax-free interest on those deposits.
If you have an RNOR status and want to purchase a life insurance policy for your family’s security, you can simply opt for NRI insurance plans. These policies are designed to offer life cover protection to Non-Resident Indians and those with an RNOR status and their families. With NRI insurance, you can purchase the policy in India and manage the premium payments from another country, which ensures uninterrupted life insurance coverage for your family back in India.
A Tata AIA life insurance policy has several benefits that enable you to purchase any NRI policy of your choice and make the premium payments per your preference. Moreover, depending on your residential status, you can also enjoy the tax benefits of these life insurance policies and the policy benefits.
Conclusion
If you have returned to India after an extended period of living abroad, you may qualify as a Resident but not Ordinarily Resident (RNOR). Subsequently, the income tax rules for your residency will also differ to a certain extent, as highlighted above. It is also important to note that those with RNOR status can purchase a life insurance policy in India and flexibly pay the premiums for a life insurance coverage they choose, just like any other resident.
