7 RNOR Status Misconceptions Returning NRIs Must Avoid

An NRI who had come back to India from the United States after 12 years. Being eligible for Resident but Not Ordinarily Resident (RNOR) status and having done a lot of research on this topic online, his knowledge was full of misconceptions that could have resulted in grave tax complexities. This experience underscored how important it is for coming-back NRIs to actually comprehend this special tax category beyond the simplistic descriptions that tend to be online.

What Is RNOR Status and Why It Matters

Let’s establish what RNOR status is first, before we examine the misconceptions. Consider it a transition tax category meant specifically for coming-back NRIs India’s method of giving you a “soft landing” when you return after abroad living. With RNOR status, you enjoy great tax advantages: the bulk of your foreign-earned income is exempt from taxation in India. This can encompass earnings on investments in foreign accounts, rent from foreign properties, and foreign pension schemes. Yet this safeguard has significant constraints that returning NRIs frequently misinterpret and this can cost them dearly. Fun fact: The concept of RNOR is comparatively novel to Indian taxation law most nations do not have such returning citizen transitional statuses, so it’s particularly precious as an advantage for returning NRIs!

Misconception 1: RNORs Pay No Tax in India

The most perilous myth I see among returning NRIs is that RNOR status entails full Indian tax exemption. This can cause you severe trouble with tax authorities. The reality is that RNOR status only exempts your foreign-sourced income from Indian taxation. Any income earned or received in India remains fully taxable. This includes rental income from Indian properties, interest earned on NRO accounts, dividends from Indian companies, and any salary or business income generated within India. I had a client recently who came back from Canada thinking that his RNOR status exempted him from reporting rental income from his Bangalore apartment or interest from his Indian fixed deposits. He was surprised to find out that these were taxable in full even though he had RNOR status. Keep in mind: the exemption only applies to what you earn abroad.

Fun fact: Even if you enjoy RNOR status, not reporting your Indian income can cost you as much as 200% of the tax due, along with interest!

Misconception 2: All Foreign Income Is Automatically Tax-Free

Although most foreign income does qualify as exempt for RNORs, there is a significant exception that many returning NRIs miss. If your foreign income comes from a business operated out of India or a profession established in India, that income is taxable in India even during your RNOR period. For instance, if you are a digital consultant who has returned to India but continue to service US or UK clients, doing the work while in India physically would make this income taxable in India whether payments flow to your foreign bank account. The determining factor is where the business is controlled from, not where the money is received. This nuance catches many independent professionals and freelancers by surprise. Fun fact: The “control and management” test used by Indian tax authorities looks at substantive factors like where strategic decisions are made and work is performed, not just formal arrangements!

Misconception 3: RNOR Status Lasts Indefinitely

Most coming back NRIs wrongly believe that RNOR status remains forever or till they want it. The truth is that it’s a temporary one and generally remains in force for maximum three financial years upon your return, depending on your earlier NRI stay.

You are an RNOR if you satisfy either of the following:

• You were a non-resident of India in 9 out of the 10 last financial years, OR
• You have been resident in India for 729 days or less in the 7 preceding financial years

As soon as you no longer meet these criteria, you become an ordinary resident for tax purposes and your worldwide income is taxable in India. Organizing your finances with this inevitable shift in mind is vital to prevent surprise tax burdens. Fun fact: The 729-day rule translates into an average of 104 days a year for seven years a number that comes as a shock to many returnees who weren’t keeping tabs on their India travels so neatly!

Misconception 4: NRE/FCNR Account Interest Remains Tax-Free Forever

This assumption is very cost-heavy. Several people returning NRIs are of the opinion that interest accruing on NRE (Non-Resident External) and FCNR (Foreign Currency Non-Resident) accounts is tax-free forever. In reality, this interest is tax-exempt only until you have NRI or RNOR status. Once you acquire ordinary resident status, this interest is fully taxable in India. But then there is an option that few are familiar with: re-routing such money to a Resident Foreign Currency (RFC) account when returning to India. Interest accrued on RFC accounts continues to remain tax-free even when you become an ordinary resident. I highly suggest that comeback NRIs switch their NRE and FCNR accounts to RFC accounts prior to the expiration of RNOR status. This easy action will help safeguard tax efficiency for money you’ve remitted from overseas to India. Interesting fact: While the RFC account is tax-advantageous, it doesn’t have domestic transfer limitations like NRE accounts lack understanding these working disparities is critical to smart money management!

Misconception 5: RNOR Status Is Automatically Available

A fatal misconception most people have is that RNOR status is granted automatically. In fact, your residential status for each financial year is decided by your physical stay in India and previous residential status. You have to keep an eye on your days in India and use the applicable norms. When submitting tax returns, you need to specifically declare your RNOR status—tax authorities do not classify you by default. It’s up to you to claim this status properly and support it with valid documents if challenged. Keep accurate records handy: your travel-stamped passport, boarding passes, bank statements that reflect foreign transactions, and proof of your NRI period. These documents will be your best defense should tax authorities ever challenge your residential status. Fun fact: Some NRIs maintain spreadsheets tracking every entry and exit from India, with supporting documentation, to ensure they can accurately determine their residential status each year!

Misconception 6: All Financial Professionals Understand RNOR Status

Surprisingly, RNOR status isn’t widely understood, even among many bankers and financial advisors in India. Many clients tell me their local bank managers or accountants never mentioned this option to them. This lack of knowledge is not limited to most tax professionals, either. While they may not specialize in NRI taxation, there are few who have extensive experience with RNOR provisions. Having specific advisors who possess cross-border and NRI tax expertise is central to maximizing your tax situation. When choosing financial planners upon return to India, ask directly about their exposure to RNOR clients and cross-border taxation issues. Their experience in these matters usually exposes their fit for your particular requirements. Fun fact: Certain Indian financial institutions have dedicated NRI services cells, but even in those, comprehension of RNOR status varies significantly—do not assume competence without confirmation!

Misconception 7: RNOR Status Shields Against All Indian Taxation Responsibilities

The last myth is that RNOR status in some way protects you from any Indian tax liabilities. As we have outlined, it only shields foreign-sourced income (with the exception of business income as outlined above). Additionally, after your period of RNOR expires, all your foreign income is taxable in India, unless exempted under a Double Taxation Avoidance Agreement (DTAA) between India and the nation of income origin. It is very important to know how DTAAs function in order to make effective long-term tax planning once your period of RNOR is over. Planning during your RNOR years must be on readjusting your international assets to maximize your tax situation both through and after this period of transition. This may entail where to place investments, when to realize capital gains, and restructurings of business interests. Fun fact: India has entered into DTAAs with more than 85 countries, each with its own special provisions—leaving your post-RNOR tax planning very much subject to which countries income flows from!

Making the Most of Your RNOR Status

RNOR status offers valuable but temporary benefits. Using this transition period wisely can set you up for tax efficiency even after becoming a regular resident. Here are key actions to consider during your RNOR years:

1. Realize long-term capital gains on foreign assets before your RNOR status expires
2. Convert NRE/FCNR accounts to RFC accounts
3. Reorganize investments considering their future tax treatment in India
4. Explore DTAA benefits for ongoing foreign income streams
5. Document your NRI period and RNOR qualification thoroughly

Understanding the true nature of RNOR status beyond the misconceptions allows you to make informed decisions that can significantly impact your financial well-being as you resettle in India.

For personalized guidance on navigating your RNOR status and optimizing your tax position as a returning NRI, reach out to us at office@primewealth.co.in or visit www.primewealth.co.in to schedule a consultation.

FAQs

1. How long does RNOR status typically last after returning to India?
   Ans- Up to three financial years, depending on how long you were an NRI and which RNOR qualification criteria you meet.
2. Can I extend my RNOR status beyond its normal duration?
   Ans- No, RNOR status duration is determined by statutory criteria and cannot be extended through applications or requests.
3. Is income from foreign mutual funds taxable during RNOR status?
   Ans- Generally not, as this is typically considered foreign-sourced income not derived from a business controlled from India.
4. Do I need to disclose my foreign assets in my Indian tax return during RNOR status?
   Ans- No, RNORs are exempt from foreign asset disclosure requirements that apply to ordinary residents.
5. Can I continue contributing to my foreign retirement accounts during RNOR status?
   Ans- Yes, but consider whether these contributions remain tax-efficient under Indian tax laws once you become an ordinary resident.
6. If I work remotely for a foreign employer while in India, is that income taxable during RNOR status?
   Ans- Yes, income from employment exercised in India is taxable regardless of where the employer is located or where payment is received.
7. What happens to my NRE account once my RNOR status expires?
   Ans- It should be redesignated as a resident account, but you can transfer funds to an RFC account before expiry to maintain certain benefits.
8. Can I hold foreign currency accounts after becoming an ordinary resident?
   Ans- Yes, through RFC accounts, though these have certain restrictions on domestic transfers that NRE accounts don’t have.
9. How does RNOR status affect my tax obligations in the foreign country I’m returning from?
   Ans- RNOR status is an Indian tax concept and doesn’t directly affect your tax status abroad, which depends on that country’s residency rules.
10. If I leave India again before becoming an ordinary resident, do I retain any benefits?
    Ans- If you leave India and become an NRI again before your RNOR period expires, you’ll need to re-qualify for RNOR status upon any future return.

Disclaimer: The information provided here is for educational and informational purposes only and should not be construed as financial, legal, or tax advice. Consult with a qualified professional before making any investment decisions. We do not accept any liability for errors or omissions in this information nor any direct, indirect, or consequential losses arising from its use.