Friday, December 30, 2016

How to Find if returning NRI is a Resident but not Ordinarily resident (RNOR) and Tax benefit

Let me answer the second question first to convince you why a returning NRI would like to find out whether he is a resident or a non-ordinarily reside (RNOR)? Well, there is big tax benefit of filing income tax return in India as RNOR i.e.  Resident But Not Ordinarily Resident, unlike ROR (Resident and Ordinarily Resident) whose global incomes in taxed in India e.g. interest earned on foreign currency fixed deposit kept abroad or in FCNR account or in RFC account in India, RNOR is asked to pay tax only on income earned in India.

This can be a huge benefit for NRIs who are bringing their assets back to India. For anyone returning to India, one can file taxes as a RNOR for a maximum of three years and this would be identified by following two rules which is used to find out if a returning NRIs is RNOR or not.

A returning NRI is considered RNOR (Resident but Not Ordinary Resident) if he satisfies at least one of the following two conditions in a given financial year.

  • He is in India during the given financial year for a period of 182 days or more. If this condition is true then he cannot be NRI and now more condition is needed to find out whether he is R, ROR or RNOR.
  • He is in India for a period of 60 days or more during the year and 365 days or more during four years immediately preceding the year in question. 

Once an NRI met any of above condition, he cannot be NRI and we need to check more to find out if he is a Resident (R), Resident and Ordinary Resident (ROR). or Resident but not ordinary Resident i.e. RNOR.

1) A person is said to be “not ordinarily resident” in India in any previous year if such person is an individual who has been a non-resident in India in nine out of the 10 previous years preceding that year.
2) During the seven previous years preceding that year NRI has not been in India for a period of, or periods amounting in all to, 729 days.

This rule can be difficult to understand for most of us, thankfully we have a flow chart to correctly identify if a returning NRI is a Resident or RNOR for income tax purpose on current financial year. The following chart makes you understand these conditions better and identifies if a returning NRIs is ROR or RNOR in a given financial year.

How to Find if returning NRI is a Resident but not Ordinarily resident (RNOR)

Why Returned NRIs Should File Income Tax as RNOR

The RNOR is the status accorded to most returning NRIs to make the process of coming home back smoother and helping them to bring back their foreign assets to India. As an RNOR, the NRI needs to pay tax only on his Indian income. His global income like interest income or dividend income on investments or capital gains on assets outside India will not be taxed in India.

The exclusions also covers interest on foreign currency non-resident (FCNR) bank account held in India (until maturity) and interest on resident foreign currency (RFC) account. This can be a huge amount if you are not careful with your status while filling income tax return in India.

Any returning NRI can file income tax as an RNOR for a maximum of three years depending upon the date he returned to India, so if you can plan it better and smarter, you can save a good amount of money in tax.

Once you become R&OR, all your foreign (global) income will also be taxable in India subject to concessions and exemptions granted under the Double Taxation Avoidance Agreement, if any, between India and the country of your original residence

An Example

Now, let's see an example. Suppose Joe who lived in London for 10 years returned India on 15th October 2016. Now for the financial year 2016-2017, he will still be NRI because between October 15, 2016 (inclusive) and March 31, 2017 (inclusive) there are only 169 days because the day you land in India is counted towards stay. Since you stayed less than 182 days, you will be considered NRI for FY 2016-17 while filling income tax return.

Now, for next financial year, 2017-2018 you won't be NRI but RNOR because you have stayed 9 out of 10 years in preceding previous year e.g. 2015-16. Hence Joe doesn't need to pay tax on his global income, he only needs to pay income tax on income earned in India.

That's all about how to find whether a returning NRI is Resident but not Ordinarily Resident (RNOR). As I said, a returning NRI can be a RNOR for a maximum of three years since he returned back to India. The main benefit of filing income tax return as RNOR is that your overseas income will not be taxed in India which also includes interest earned on FCNR deposits and RFC accounts. Once you become ROR then your global income e.g. investment made overseas, interest and dividend earned overseas will also be taxed in India subject to any concession available to you using DTAA, if any, between the India and country of your original residence.

1 comment:

  1. Hi Jacob,
    If the The RNOR individual is non resident in the uk then his dividend income from U.K. companies will not be taxable in the uk. Given the RNOR status they will also not be taxable in India. Is my understanding correct? Thanks