Taxation Liabilities For NRIs, RNORs, & Resident Indians

What’s your status in India?

Do you live abroad and have plans to return to India one day? Or have several investments in India? But don’t exactly know your status as an overseas citizen? 

People of Indian origin can be classified into 2 main categories: Resident of India and a Non-resident of India. These are the general broad terms used. 

The two categories mainly help identify citizens living in India and those residing in foreign locations but do not prove to be much helpful while determining their taxation liabilities – tax implications depend on residential status with respect to India. 

While both terms hold valid though the broad classification of resident and non-resident Indians, people belonging to the former category are further divided into two subcategories of “ordinary residents” and “resident but not an ordinary resident”. 

Citizenship categories for Indians (living in India and abroad):

  1. What makes you an NRI 
  2. What makes you a RNOR
  3. What makes you a Resident Indian
  4. Taxation Liabilities For NRI, RNOR, Resident Indian

NRIs, RNORs and Resident Indians

The differences between each category is based on the duration of stay of an individual in a particular place. 

NRIs (Non-Resident Indians)

An individual of Indian origin is categorized as a non-resident Indian (NRI) when the individual spends less than 182 days of a financial year within the country. 

Individuals, who have spent less than 60 days in India or less than 365 days in the country during the 4 years preceding the relevant financial year, are also categorized as non-resident Indians. 

This rule is, however, not applicable to individuals working abroad while they are still on the payroll of an Indian company, irrespective of the duration of their foreign stay. 

Ordinary Residents/Resident Indians

Ordinary residents (resident Indians) are individuals of Indian origin who do not fulfill any of the above criteria and have spent at least 2 out of the 10 years immediately preceding the relevant financial year in India. 

In addition, people, who lived in India for a duration of 730 days or more during the 7 years immediately preceding the relevant financial years are also categorized as ordinary residents

Resident but not an ordinary resident (RNOR) Residents

RNOR is used to define a resident but not an ordinary resident and is applicable to people of Indian origin choosing to return to India after spending several years abroad. 

NRIs, who have spent 9 out of the 10 previous years immediately preceding the current year outside India, can be categorized as RNOR. 

In addition, NRIs who have spent 729 days or less in India during the seven years immediately preceding the current year, also qualify for RNOR status.  

Taxation Liabilities For NRI, RNOR, Resident Indian

The above mentioned categories are important when it comes to understanding the tax liabilities that are applicable to the various categories. 

NRI Taxation Liabilities

The procedure for acquisition and transfer of immovable property is laid down in the Master Direction titled Acquisition and Transfer of Immovable Property under Foreign Exchange Management Act, 1999

  • A NRI who holds a valid Indian passport is permitted by the Reserve Bank of India (RBI) to acquire immovable property in India, by way of purchase. Such a person is permitted to transfer any immovable property without the need to obtain special permission from RBI.  
  • NRIs do not need to inform the RBI about buying commercial or residential property in India.
  • A non-resident Indian can buy as many properties as they want under as per the regulations issued by the RBI and the income tax laws.
  • Under the general permission of RBI, a non-resident Indian can buy a property individually or jointly with another NRI. They are also allowed to gift or sell such immovable properties to another NRI or any Indian resident. 
  • An NRI investor can also authorize the purchase of property to be executed by another person who is given a legally binding power of attorney.
  • An NRI can neither purchase nor transfer agricultural land, plantation property or a farmhouse. With the exception of inheritance – an NRI can transfer agricultural land, plantation property or a farmhouse which is acquired by way of inheritance. This transfer can only be made to permanently residing citizens of India. This means that an NRI cannot invest in farmhouses without prior permission from the RBI. 

NRIs are exempted from paying taxes in India unless the income is earned from any source in India. 

This can include rental income from properties owned in any part of the country, any capital gains from the sale of the property, as well as interest or dividend earned on financial investments within India. 

In such cases, the taxes will be charged at the prevalent rates and according to the provisions of the Income Tax Act. 

NRIs can claim a deduction of INR 1 Lakh under Section 80C of the Income Tax Act, 1961. If the property is sold within three years of its purchase, it is counted as a short-term capital gain and the earnings through this sale are taxable. 

Further, if the property is sold after three years, then there is an option of reducing the long-term capital gains tax via investing in other properties.

Here’s the Complete Guide to Taxes For NRIs.

Ordinary Resident Taxation Liabilities

Ordinary residents of India will be charged the taxes on gross annual income as per the provisions of the IT Act. 

An ordinary resident is eligible to claim various deductions provided within the specific tax rate slabs as per their total income.

RNOR Taxation Liabilities

People belonging to the RNOR category are treated at par with NRIs. A RNOR is  allowed to keep the status for up to 3 financial years post their return back to India. After which they are liable to be subjected to the same taxation rules as ordinary residents for any income earned in the country.

This is a major benefit as taxation will be in line with that of an NRI and therefore income that is earned outside of India (while you may have returned back) will continue to be not taxed in India. 

However, once the 3 years commence and you have attained the status of a Resident, all income within and outside India will be taxable in India. 

Understanding your status as an investor is essential as you need to know where you stand and policies are applicable to you as an overseas citizen. As mentioned in this blog, there are many benefits you can reap as an NRI and make the most use of being in the NRI category. 

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