You can be an RNOR for 3 years

What exactly is RNOR?

RNOR stands for Resident but not Ordinarily Resident (RNOR). This is essentially a transitional status between being an NRI and becoming a full-fledged Resident. Normally a person would be either a Resident (of India) or an NRI. However, the Indian Income Tax Act has specified this transitional status of an RNOR subject to the satisfaction of some specific conditions. Let us see what these conditions are:

Resident but not Ordinarily Resident (RNOR) is a person who satisfies any one of the following two conditions ---

a) he has been a non-resident in India in nine out of the ten previous years preceding that year, or

b) has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less.

Simply put, when you return back to India, you will be an RNOR if you have been an NRI for 9 out of last 10 years or if you have spent less than 729 days in India in the last 7 years.

It is important to note that the abovementioned conditions are alternative and not cumulative. Which means you have to satisfy any one of them and not both.

Benefits of RNOR

Having the status of RNOR, for the most part, means that after having come back to India, you can continue to get the tax benefits that you were getting as an NRI. That means your foreign income i.e. any interest or dividends that you may be getting from your investments abroad will continue to remain tax-free even after you have become an Indian resident. Similarly, interest on any FCNR deposits that you may will continue to remain tax-free as long as you are an RNOR. Ergo, the longer you have this status, the more beneficial it is.

Now, let us examine exactly how long can one maintain the status of an RNOR. For this we need to go back a little bit into history.

Earlier RNOR was for 9 years

In the good old days, several lucky NRIs have availed of nine whole years of the RNOR status. The way the words of the concerned section (Sec. 6 of the Tax Act) were framed, a plain reading resulted in the conclusion that a returning NRI could be an RNOR for nine years.

However, in April 2004, the government woke up and declared that it was never the intention of the law to grant such status for nine years. Consequently Finance Act 2003 amended the law as detailed above. The reframing of the words had the immediate fall out of lowering the number of years that a person could be RNOR from a maximum of nine to a maximum of two.

Or that's what most think.

However, this article will demonstrate how under certain conditions an NRI could be an RNOR for three years instead of two.

RNOR for 3 years

The general conception that the RNOR status is available for a maximum of 2 years is on account of the focus on the first condition only. For, if only the first condition is considered (of having been an NRI for 9 out of 10 years) one does find that the RNOR status can be indeed be availed for a max of 2 years. However, what about Condition No. 2? As mentioned before, these conditions are alternative and the satisfaction of any one is enough to qualify as an RNOR.

Case study

Therefore, lets take the example of one Mr. Kapoor who has lived for most of his life in the USA and now is intending to return to India for his retirement. In the past 9 years, Mr. Kapoor has never visited India and the first time he arrives in India is on the 4^th of April 2006 i.e. in FY 2006-07.

Let's first consider Condition No. 1.

For FY 2006-07, Mr. Kapoor has been an NRI for 9 out of the last 10 years....therefore for FY 06-07 he will be an RNOR. Now for the next year (FY 07-08) too, Mr. Kapoor has been an NRI for 9 out of the last 10 years...so he will be an RNOR again.

However, in FY 08-09, Mr. Kapoor has been a Resident in the previous two years (since he was in India) and therefore will not satisfy the 9 out of 10 condition. Consequently, he loses his RNOR status from FY 08-09 and becomes a full fledged Resident. Incidentally this status is known as R&OR (Resident and Ordinarily Resident).

This was as per Condition No. 1. Now for Condition No. 2, consider the following table.

The above table details the number of days Mr. Kapoor has and will spend in India. Remember that he has arrived on the 4^th of April, 2006....which means that for FY 06-07 he will end up spending 362 days in India.

Now lets take Condition No. 2 and apply it for each year. For FY 06-07, in the previous seven years since Mr. Kapoor hasn't spend any days in India, he will qualify to be an RNOR. For FY 07-08, Mr. Kapoor in the previous seven years will have spent 362 days in India and therefore will be an RNOR.

And for FY 08-09, Mr. Kapoor will end up spending 727 days in India (365+362). 727 days being less than 729, again Mr. Kapoor will end up being an RNOR!

Its only in FY 09-10 that Mr. Kapoor will cross the 729 day limit and transition from being an RNOR to an R&OR.

To Conclude

It is important to realize that from a tax planning angle, your date of arrival in India is extremely critical. I can go as far as saying that for returning NRIs, planning your travel itinerary is almost akin to tax planning.

If you can, always plan to arrive into India after the 1^st of October in any year. This way you can live in India for the rest of the year and yet be an NRI and not pay tax.

And if that's not possible, at least try and come after the 2^nd of April of any year. This way, you can possibly optimize the RNOR status.

And last but not the least always remember, for the RNOR status, Condition No. 2 is as important if not more for determining your taxability.

The writer may be contacted at sandeep.shanbhag@gmail.com