How Does the RNOR Status Helps NRIs to Save Tax on Investments?

The RNOR status is mainly designed for returning NRIs, which acts as a transition phase between NRI and full Indian tax residency. This status generally lasts for around 2-3 financial years for many long-term NRIs. During this phase, many types of foreign income are not taxed in India if earned or received outside India. It can include foreign salary, rental income from overseas property, interest from foreign bank account, etc. However, it doesn't automatically exempt all foreign income from taxation. For example, the income sourced in India will be taxed in India regardless of whether you have the RNOR status.

The NRI gets significant time to plan repatriation, rebalance assets, exit foreign investment strategically, and avoid tax exposure after returning to India. In case a returning NRI doesn't have the RNOR status, they may be liable to pay tax in India on global investment income. In this blog, we will learn more about how the RNOR status helps NRIs to save tax on foreign investments.

What is RNOR Status?

Under the Income Tax Act, 1961, RNOR (Resident but not ordinarily resident) is a special residential category that is mainly designed for returning NRIs. In India, taxpayers are broadly classified into three categories:

• Non-Resident (NR)
• Resident and Ordinarily Resident (ROR)
• Resident but Not Ordinarily Resident (RNOR)

The RNOR status acts as a transition phase between NRI and full Indian tax residency. A person will generally qualify as an RNOR if:

• They become residents in India after returning from abroad, and
• They were an NRI in 9 out of the previous 10 financial years, or
• Their residence in India during the previous 7 financial years was 729 days or less.

After returning to India, the RNOR status generally lasts around 2-3 financial years for many long-term NRIs. India does not fully tax foreign income earned outside India during the RNOR status, hence it is a very important phase. Let's see some more reasons why the RNOR status is important for returning NRIs.

Why Does the RNOR Status Matter for Returning NRIs?

When an NRI returns to India permanently or for a longer duration, they may get a special tax status. It is called RNOR or the Resident, but not Ordinarily Resident. This transition status is essential because it offers temporary tax benefits after returning to India. Here are some reasons why the RNOR status matters for returning NRIs:

• The RNOR status acts like a transition phase between being an NRI and becoming a fully taxable Indian resident.
• During this period, many types of foreign income are generally not taxable in India, provided they are earned and received outside India. This can include foreign salary, rental income from overseas property, interest from foreign bank accounts, and income from foreign investment.
• This phase provides returning NRIs the time to reorganize their finances. They can do everything gradually. It includes closing foreign bank accounts, transferring investments, and updating banking and tax records without facing any immediate tax burden.
• The RNOR status is particularly beneficial as a normal Indian resident is liable to pay tax in India on their worldwide income. Conversely, the RNOR status offers a partial relief for a limited period.

For example, an NRI comes back to India, but he still earns income in the US. The RNOR status will help him to avoid immediate taxation on that foreign income in India. This status generally continues for up to 2-3 financial years, based on residency conditions. Now that we know the importance of RNOR status, let's know how it helps NRIs to save tax on foreign investments.

How Does the RNOR Status Help NRIs to Save Tax on Foreign Investments?

The key benefit of the RNOR status is that it safeguards overseas investments from immediate Indian taxation. This helps the returning NRIs to have sufficient time to:

• Review their global portfolio
• Rebalance the assets gradually
• Plan the repatriation effectively
• Exit foreign investments in a strategic way
• Prevent sudden tax exposure after returning to India.

Many returning NRIs would immediately become liable to pay tax in India on worldwide investment income if they don't have the RNOR status. Let's understand this with an example.

Example of a Returning NRI with US Investments

Rakesh is an NRI living in the United States. He holds the following assets:

• US ETFs
• Shares of Apple
• US rental property
• High-yield savings accounts

Now, Rakesh decides to return to India, and when he comes back, he qualifies as RNOR, hence:

• The interest he earns from US bank accounts remains tax-free in India.
• Capital gains acquired from selling US ETFs may remain tax-exempt outside Indian taxation.
• Rental income received from foreign property may also remain outside Indian taxation, provided if controlled and received abroad.

However, these foreign incomes usually become taxable in India after the RNOR status ends and the person becomes ROR. Hence, it is very important to plan your taxes wisely before the RNOR status ends. Now, the question arises: Do all foreign investments remain tax-free during RNOR? Let's check the common foreign investments that remain tax-exempt during the RNOR phase.

Which Foreign Investments Remain Tax-Free During RNOR?

During the RNOR period, generally, foreign income earned and received outside India remains exempt from Indian taxation. Let's see some of the key foreign investments covered during the RNOR period:

Common Foreign Investments Covered During the RNOR Phase

The table below lists the most common foreign investments covered during the RNOR period:

The exact tax treatment depends on the:

• Source of income
• Country involved
• DTAA provisions
• Nature of the investment, and
• Whether the income is received or controlled from India

The RNOR status doesn't automatically exempt all foreign income. It means the income connected to a business controlled from India or a profession established in India may still be taxed. Similarly, income sourced in India will remain taxable in India regardless of the RNOR status. The tax treatment for ROR and RNOR status may vary for NRIs. Let's know the difference between ROR and RNOR taxation in India for NRIs. 

What is the Difference Between RNOR vs ROR Taxation for NRIs?

It is important to learn the difference between RNOR vs ROR status to ensure effective investment planning. Once a returning NRI becomes a resident and an ordinarily resident, the tax impact changes significantly. The table below lists the type of income and its tax treatment for RNOR and ROR status:

The tax treatment changes drastically when there is a change in residential status. However, the transition to ROR status is essential; let's know why:

Why the Transition to ROR Status is Important?

Many NRIs mainly focus on the year they return to India. However, you must not ignore the long-term tax consequences. Once the ROR status begins, several obligations change, which are as follows:

• Double taxation issues may arise
• Reporting global income becomes mandatory
• Complying with the foreign tax credit becomes important
• Reporting requirements for foreign assets may increase
• Filing Schedule FA and Form 67 may become mandatory. 

These are some reasons why many returning NRIs choose to restructure investments during the RNOR period itself. Moving further, let's see some of the common mistakes that returning NRIs must avoid.

What are the Common Mistakes Returning NRIs Must Avoid?

Due to a misunderstanding of the RNOR income tax rules, many NRIs lose significant tax-saving opportunities. Here are some of the common mistakes that returning NRIs must avoid:

Neglecting Residential Status Planning

Many NRIs assume that their tax obligation changes only after obtaining Indian citizenship or surrendering foreign residency. However, this is wrong. In reality, under Section 6 of the Income Tax Act, Indian tax residency is mainly determined through the physical duration of stay in India. 

It is important to count the days accurately, as an incorrect day count can trigger the ROR status earlier than expected. 

Ignoring the RNOR Planning Window

The RNOR phase is given for a temporary period. Many returning NRIs keep waiting for too long before reviewing their foreign investments. Hence, they later end up facing full Indian taxation after transitioning to ROR. 

Failing to Keep Records of Foreign Investment

You must keep a proper record of documentation for source verification, DTAA relief, claim for foreign tax credit, compute capital gains, and cost basis. Ensure to maintain proper records of purchase dates, broker statements, dividend reports, foreign tax paid, and currency conversion details. 

Not Disclosing Foreign Assets

In India, the rules to report foreign assets are strict. Failing to report overseas accounts or investments in Schedule FA may trigger severe penalties under the Black Money Act. 

Assuming Foreign Income is Always Tax-Free

The benefits of the RNOR status apply only under specific conditions. Not all overseas income may become exempt automatically. So, you must not make incorrect assumptions, as it can lead to tax notices, penalties, or issues with the Income Tax Department. 

The Bottom Line

RNOR status is one of the most important tax benefits provided to returning NRIs. Eligible individuals may get significant tax relief on foreign investments, overseas income, and global assets for a certain period after returning to India. During this transitional phase, you can reorganize finances, plan investment exits, and manage cross-border taxation. However, the RNOR benefits are not permanent, and once a returning NRI becomes ROR, these benefits may change. NRIs planning to return to India must review DTAA implications, repatriation plans, foreign investment exposure, etc., at least 12-18 months prior before relocating.

So, if you are planning to move back to India, consider seeking help from a professional at Savetaxs. At Savetaxs, we have a team of experts who can help you navigate this transition phase easily by consulting with you on the taxation, repatriation, banking, and other obligations. Our experts can help you stay compliant and ensure you take the most benefit during the RNOR phase. 

If you are planning to stay for an extended duration or are a returning NRI, connect with Savetaxs. We serve our clients 24/7 across all time zones.