GUIDE TO TAXATION FOR RESIDENT BUT NOT ORDINARILY RESIDENT [2023]

As per the Income Tax Act, an individual who has spent a significant period of time outside India and has returned to the country for employment or any other purpose is categorized as an RNOR. This category of taxpayers enjoys certain tax benefits that are not available to ordinary residents.

However, understanding the cross border tax services for RNOR can be a daunting task, especially for those who are not well-versed in the Indian tax system. In this blog, we will discuss the various aspects of taxation for RNORs in India, including their tax liability, tax exemptions, and the criteria to be classified as an RNOR. They can also take help in this matter from any chartered accountant firm in India.

We will also cover the tax implications for RNORs who have income from foreign sources and the double taxation agreements that India has signed with other countries. This blog aims to provide a comprehensive guide to help RNOR taxpayers navigate the complex taxation services in India and make informed decisions regarding their tax obligations.

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A. Definition of Resident but not Ordinarily Resident (RNOR)

Resident but not ordinarily resident meaning an individual is considered an RNOR if they have been a non-resident in India for nine out of the ten previous years, or if they have stayed in India for less than 729 days in the seven preceding years.

Resident but not ordinarily resident status has several tax implications for individuals, such as exemption from taxation on income earned outside India. However, it’s important to note that the exact tax rules and regulations for RNORs can be complex and may change based on the individual’s specific circumstances. It’s essential to seek advice from a qualified tax expert before making any decisions regarding RNOR status.

B. Criteria For Being Classified As RNOR

To be classified as a Resident but Not Ordinarily Resident in India for taxation purposes, an individual must meet certain criteria.

• The individual must have been a non-resident in India in nine out of the ten previous financial years.
• The individual must have been in India for a period of 729 days or less in the seven preceding financial years.
• The individual must either be a citizen of India or a person of Indian origin who is outside India and visits India for less than 182 days in the financial year. Meeting these criteria allows an individual to be classified as an RNOR, which comes with certain tax benefits and exemptions. It is important for individuals to understand their residency status in India for taxation purposes in order to avoid any potential penalties or issues with the Indian tax authorities.

C. Tax rates for RNORs

When it comes to ordinary resident but not ordinarily resident taxability in India, the rules differ slightly from those for ordinary residents. For instance, RNORs are not required to pay tax on their foreign income as long as it is not earned in India. However, any income earned in India is subject to tax at the applicable rates.

The resident but not ordinarily resident income tax depends on their income level. For the financial year 2021-22, the following tax rates apply to RNORs:

• Income up to INR 2.5 lakhs: No tax
• Income between INR 2.5 lakhs and INR 5 lakhs: 5% tax
• Income between INR 5 lakhs and INR 7.5 lakhs: 10% tax
• Income between INR 7.5 lakhs and INR 10 lakhs: 15% tax
• Income between INR 10 lakhs and INR 12.5 lakhs: 20% tax
• Income between INR 12.5 lakhs and INR 15 lakhs: 25% tax
• Income above INR 15 lakhs: 30% tax

It is worth noting that these rates are applicable to RNORs who are under the age of 60 years. For RNORs who are over the age of 60 years, there is an additional tax exemption of INR 50,000. This means that RNORs who are over the age of 60 years and have an income of up to INR 3 lakhs are not required to pay any tax.

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D. Investment and Tax Planning for RNORs in India

When it comes to investment planning, RNORs have several options to choose from. They can invest in mutual funds, stocks, bonds, and other securities offered by Indian companies. RNORs can also invest in NRE (Non-Resident External) accounts, which are tax-free accounts that allow for repatriation of funds without any restrictions. Additionally, RNORs can invest in properties in India, as long as they comply with the Foreign Exchange Management Act (FEMA) regulations.

In terms of tax planning, resident but not ordinarily resident India can benefit from several tax exemptions and deductions. For instance, they are not required to pay tax on foreign income that is earned outside of India. Additionally, RNORs can avail of certain tax deductions on their Indian income, such as deductions for medical expenses, charitable contributions, and education expenses. It’s important for RNORs to plan their tax liabilities carefully and take advantage of all available deductions and exemptions to minimize their tax liability. By consulting with a tax advisor, RNORs can ensure that they are taking advantage of all the available tax benefits and making informed financial decisions that align with their long-term financial goals. 

Taxation for residents but not ordinarily residents (RNORs) is a complex issue that requires careful consideration of various factors, including an individual’s residential status, income sources, and tax treaties between countries. While RNORs may benefit from certain tax exemptions and deductions, they also need to navigate the complexities of tax laws and regulations to avoid penalties and other legal issues. Therefore, it is crucial for RNORs to seek professional advice from qualified tax experts who can help them understand their tax obligations and minimize their tax liability. Ultimately, by staying informed and taking a proactive approach to tax planning, RNORs can effectively manage their tax obligations and maximize their financial well-being.