Non-Resident Indians (NRIs) are individuals of Indian origin who reside outside of India for a certain period during a financial year. NRIs are subject to different tax rules and regulations compared to Resident Indians. However, we know a special category of NRIs as Resident but Not Ordinarily Resident (RNOR) who enjoy certain tax benefits. Let’s dive deeper into what RNOR status entails and the tax implications associated with it.
Who is Considered an RNOR?
According to the Indian Income Tax Act, an individual can qualify as an RNOR if he/she satisfies any of the following conditions:
- If an individual has been a Non-Resident in India for nine out of the ten preceding financial years.
- If an individual has stayed in India for a total period of 729 days or less during the preceding seven financial years.
If someone meets either of these conditions, tax authorities will consider him/her an RNOR for a particular financial year.
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Tax Implications for RNORs
RNORs enjoy certain tax benefits as they are subject to different tax rules compared to Resident Indians and Non-Resident Indians.
1. Taxation of Foreign Income:
In contrast to Resident Indians, tax authorities do not require RNORs to pay tax on their foreign income if it is not earned from a business or profession controlled or established in India. This means that income earned by an RNOR outside of India, such as salary, rent, interest, or capital gains, is not liable to tax in India unless it is related to a business or profession in India.
2. Exemption from NRE/NRO Account Interest:
RNORs are exempt from tax on interest earned on their Non-Resident External (NRE) and Non-Resident Ordinary (NRO) accounts for a period of two consecutive financial years after their return to India. However, after the expiry of the two-year period, the interest earned on NRE and NRO accounts becomes taxable.
3. Taxation of Capital Gains:
RNORs are eligible for concessional tax rates on capital gains. Long-term capital gains on the sale of specified assets, such as equity shares, equity-oriented mutual funds, and immovable property, Tax authorities tax them at a flat rate of 20% with indexation benefits. Tax authorities apply normal slab rates applicable to Resident Indians to tax short-term capital gains on the sale of specified assets.
4. Deduction and Exemptions:
RNORs are not eligible for certain deductions and exemptions available to Resident Indians, such as standard deduction, deductions under Chapter VI-A, and exemptions for House Rent Allowance (HRA), Leave Travel Allowance (LTA), etc.
5. Taxability of Indian Income:
Tax authorities tax RNORs on their Indian income in the same manner as they tax Resident Indians. This includes income earned from a business or profession in India, salary earned in India, rental income from properties in India, and other income generated within India.
Conclusion
RNOR status is a special category of tax residency for NRIs that provides certain tax benefits. It is important for NRIs to understand the criteria for qualifying as an RNOR and the tax implications associated with it. We recommend seeking professional tax advice to ensure compliance with the Indian Income Tax Act and to maximize tax benefits. It’s also essential to keep in mind that tax laws and regulations are subject to change, and it’s always advisable to stay updated with the latest rules and consult a tax expert for accurate and up-to-date information.