Who is an RNOR?
An individual is classified as an RNOR for income tax purposes if they qualify as a Resident in India but fail to meet both of the additional conditions required to be considered an Ordinarily Resident (ROR).
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Determining Resident Status (The First Step)
First, an individual must be classified as a Resident of India by satisfying at least one of the following two basic conditions in the relevant financial year:
- Stay in India for 182 days or more, OR
- Stay in India for 60 days or more in the previous year AND stay in India for 365 days or more in the four immediately preceding financial years.
Note: There are exceptions to the 60-day rule for specific cases, such as an Indian citizen leaving India for employment or an Indian citizen/Person of Indian Origin visiting India, where the 60 days are replaced by a higher limit (e.g., 182 days or 120 days, depending on their Indian income exceeding ₹15 Lakhs).
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Failing the Ordinarily Resident (ROR) Conditions
Once an individual is deemed a Resident, they are classified as an RNOR if they fail to satisfy both of the following two additional conditions:
- Have been a Resident in India for at least 2 out of the 10 financial years immediately preceding the relevant financial year, AND
- Have been in India for a total period of 730 days or more during the 7 financial years immediately preceding the relevant financial year.
An individual will be an RNOR if they satisfy the Resident criteria, but meet none or only one of the two ROR conditions above. This status is maintained for a few years after an individual returns to India, providing a smooth transition into the full ROR tax regime.
RNOR Tax Implications (Taxability)
The primary benefit of RNOR status lies in the scope of taxable income, which is similar to that of a Non-Resident (NR). Unlike a Resident and Ordinarily Resident (ROR), who is taxed on their global income (income earned both in and outside India), an RNOR enjoys significant exemptions on foreign income.
The income that is taxable for an RNOR includes:
- Income received or deemed to be received in India.
- Income that accrues, arises, or is deemed to accrue or arise in India (e.g., salary for work done in India, rent from property in India).
- Income accruing or arising outside India from a business controlled in India, or a profession set up in India.
The most important difference is that most income earned and received outside India is NOT taxable for an RNOR.
Key RNOR Tax Benefit
The following types of foreign income are tax-free for an RNOR:
- Rent from a property located outside India.
- Interest, Dividends, or Capital Gains from investments located outside India.
- Salary/Income for services rendered outside India, even if the salary is credited to a bank account in India (such as an NRE account).
This benefit is why the RNOR status is highly sought after by returning NRIs. It allows them to shield their accumulated foreign income and new foreign investments from Indian taxation during the initial years of their return.
RNOR and Deemed Resident Status
A significant amendment was introduced, which creates a category of "Deemed Residents," who are automatically classified as RNORs.
An individual who is a Citizen of India is deemed to be a Resident (and by default, an RNOR) if the following conditions are met:
- Their total income (excluding foreign sources) exceeds ₹15 Lakhs during the financial year, AND
- They are not liable to tax in any other country or territory by reason of domicile or any other criteria of a similar nature.
This provision is aimed at taxing Indian citizens who may attempt to evade tax by claiming non-resident status in all countries.
Residential Status of Other Assessees
While the core RNOR discussion often centers on returning NRIs (Individuals), the Income Tax Act provides specific rules for determining the residential status of other entities, which in turn determines their tax liability in India.
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Residential Status of a Hindu Undivided Family (HUF)
The residential status of a HUF is determined based on the control and management of its affairs.
Resident or Non-Resident Status
- Resident HUF: An HUF is considered a Resident in India if the control and management of its affairs are situated wholly or partly in India during the relevant financial year.
- Non-Resident HUF: An HUF is considered a Non-Resident if the control and management of its affairs are situated wholly outside India.
Ordinarily Resident (ROR) or Not Ordinarily Resident (RNOR) Status
If the HUF is determined to be a Resident, the next step is to check if it is ROR or RNOR. This determination depends on the residential status of the Karta (manager) of the HUF:
- Resident and Ordinarily Resident (ROR): The Resident HUF will be treated as ROR if the Karta satisfies both of the following conditions:
- The Karta has been a resident in at least 2 out of the 10 previous years immediately preceding the relevant financial year, AND
- The Karta's stay in India has been for 730 days or more during the 7 previous years immediately preceding the relevant financial year.
- Resident but Not Ordinarily Resident (RNOR): The Resident HUF will be treated as RNOR if the Karta fails to satisfy either or both of the above two conditions.
Crucial Note: Along with individuals, the HUF is the only other entity that can qualify for the Resident but Not Ordinarily Resident (RNOR) status. All other classes of assessees are either a Resident or a Non-Resident.
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Residential Status of a Company
A Company's residential status is determined by its incorporation and its control mechanism.
A Company is considered a Resident in India during the previous year if either of the following conditions is met:
- It is an Indian Company, OR
- Its Place of Effective Management (POEM) in that year is in India.
- Place of Effective Management (POEM): This refers to the place where key management and commercial decisions that are necessary for the conduct of the business as a whole are, in substance, made.
Taxability Note: A Company can only be a Resident or a Non-Resident. The classification of Resident but Not Ordinarily Resident (RNOR) does not apply to a Company.
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Residential Status of Firms, LLPs, AOPs, BOIs, Local Authorities, and Artificial Juridical Persons
For these entities (Firms, Limited Liability Partnerships, Association of Persons, Body of Individuals, etc.), the rules are generally similar to the HUF's initial determination:
- Resident: The entity is a Resident if the control and management of its affairs is situated wholly or partly in India during the relevant previous year.
- Non-Resident: The entity is a Non-Resident if the control and management of its affairs is situated wholly outside India.
Taxability Note: Similar to Companies, these entities can only be a Resident or a Non-Resident. The RNOR status does not apply to them.
Conclusion
The Resident But Not Ordinarily Resident (RNOR) status serves as an important tax bridge for returning NRIs and certain other entities like HUFs. It grants the tax benefit of a Non-Resident by limiting Indian tax liability mainly to domestic income, shielding most foreign income. This transitional status facilitates a financially smoother return to India before the individual becomes a fully taxable Resident and Ordinarily Resident (ROR).
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