Maximise RNOR Tax Benefits: What NRIs should know about FCNR and NRE deposits

Taxability rules around RNOR

When Non-Resident Indians (NRIs) return to India after living abroad for an extended period, their tax status and the treatment of their foreign currency accounts such as FCNR and NRE deposits undergo significant changes. Today's Ask Wallet Wise query decodes how Resident but Not Ordinarily Resident (RNOR) status works and how long the tax benefits last on these accounts.

Moneycontrol’s Ask Wallet Wise initiative offers expert advice on matters of personal finance and money. You can email your queries to askwalletwise@nw18.com and we will try and get a top financial expert to address your queries.

I read that if an NRI stays out of India for more than 9 years, they become Resident but Not Ordinarily Resident (RNOR) and there will be no tax on interest received on their FCNR deposits for the rest of their life, and they can keep money in FCNR for the rest of their life. Is this correct, and does it apply to NRE amounts as well? 

Expert Advice: You are partly right regarding a person becoming Resident but Not Ordinarily Resident (RNOR). If a person has been non-resident for nine out of the ten years preceding the previous year, and has been in India for not more than 729 days in the seven previous years preceding the previous year, they become a resident but not ordinarily resident, even if they have been in India for more than 182 days during the previous year. So, one can become RNOR for a maximum of three years at a stretch under the income tax laws.

Interest on Foreign Currency Non-Resident (FCNR) deposits is tax-free in the hands of a person as long as they are not a resident under the income tax laws. So, you can claim exemption for three years in respect of interest on your FCNR deposits in India. As far as taxation of interest on Non-Resident External (NRE) deposits is concerned, it is exempt as long as one remains non-resident under the Foreign Exchange Management Act (FEMA).

As per FEMA, one becomes a resident of India as soon as one comes to India with an intention to stay here for an indefinite period, to take up employment, or to start a business. An NRI who returns to India becomes a resident under FEMA as soon as they arrive in India and must convert their NRE deposits into resident deposits. The interest on such deposits becomes taxable in India from the day the NRI returns to India.

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.