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

Taxability rules around RNOR

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.