The Residential status of an individual plays a pivotal role in determining the scope of their taxable income in India. The Income-tax Act, 1961, categorises individuals into three primary residential statuses for any given financial year: Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), and Non-Resident (NR). Each category dictates the extent to which an individual’s global income is subjected to Indian taxation. Understanding these distinctions is fundamental for effective tax planning, especially for individuals with international financial interests or those who frequently travel across borders.

Among these categories, the “Resident but Not Ordinarily Resident” (RNOR) status is particularly nuanced and offers a unique tax advantage, primarily by limiting the scope of foreign income taxable in India. This status acts as a transitional bridge for individuals who are establishing or re-establishing their residency in India, or for those who are considered residents under specific conditions but do not have a deep-rooted historical connection as an “ordinarily resident.” The conditions for attaining RNOR status have undergone significant changes over the years, most notably with the amendments introduced by the Finance Act, 2020, which aimed to broaden India’s tax base and address concerns of individuals escaping tax residency in any jurisdiction.

Understanding Residential Status: The Foundation

Before delving into the specific conditions for an individual to be classified as “Resident but Not Ordinarily Resident” (RNOR), it is imperative to first understand the foundational requirement: an individual must first qualify as a “Resident” in India. Only after meeting the criteria for “Resident” status can the subsequent tests for “ordinarily resident” or “not ordinarily resident” be applied. The Income-tax Act, 1961, through Section 6(1), lays down the basic conditions for determining residency.

An individual is considered a “Resident” in India in any previous year if they satisfy at least one of the following “basic conditions”:

  1. Stay in India for 182 days or more: The individual has been in India for a period or periods amounting in all to 182 days or more during the relevant previous year. This is the most straightforward and commonly applied condition.
  2. Stay in India for 60 days or more, combined with past residency: The individual has been in India for a period or periods amounting in all to 60 days or more during the relevant previous year AND has been in India for a period or periods amounting in all to 365 days or more during the four previous years immediately preceding the relevant previous year.

It is crucial to note that there are specific exceptions to the “60-day rule” mentioned in the second basic condition. For certain categories of individuals, the 60-day period is extended to 182 days, effectively meaning that only the “182 days or more” condition remains applicable for them to be considered resident. These exceptions apply to:

  • Indian citizens leaving India for employment: An Indian citizen who leaves India during the previous year for the purpose of employment outside India, or as a member of the crew of an Indian ship. For such individuals, to be resident, their stay in India must be 182 days or more.
  • Indian citizens or Persons of Indian Origin (PIOs) visiting India: An Indian citizen or a person of Indian origin who is outside India and comes on a visit to India during the previous year. For these individuals, the 60-day period is extended. Prior to Finance Act, 2020, it was extended to 182 days. However, post-Finance Act, 2020, for those falling under this category and having a total income (excluding income from foreign sources) exceeding fifteen lakh rupees during the previous year, this extended period is 120 days instead of 182 days. If their stay is less than 120 days, they remain Non-Resident. If their stay is 120 days or more but less than 182 days, they become Resident. If their stay is 182 days or more, they also become Resident. This particular amendment has significant implications for RNOR status, as will be discussed later.

Deemed Residency: The Finance Act, 2020 Impact

The Finance Act, 2020, introduced a significant amendment by inserting a new clause, Section 6(1A), which creates a “deemed resident” category. This provision was specifically designed to tackle the issue of “stateless persons” or individuals who avoid tax residency in any country by strategically managing their stay periods.

As per Section 6(1A), notwithstanding anything contained in clause (1) of Section 6, an Indian citizen shall be deemed to be a resident in India in any previous year, if he has:

  1. Total income (other than income from foreign sources) exceeding fifteen lakh rupees during the previous year; AND
  2. Is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.

It is crucial to understand that “income from foreign sources” refers to income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India). This provision creates a new pathway to residency, separate from the traditional “day-count” basic conditions. An individual deemed resident under this provision automatically acquires RNOR status, as explained in the subsequent section.

Conditions for "Not Ordinarily Resident" (RNOR)

Once an individual qualifies as a “Resident” in India based on either the basic conditions under Section 6(1) or the deemed residency rule under Section 6(1A), the next step is to determine whether they are “Ordinarily Resident” or “Not Ordinarily Resident.” This distinction is critical because it dictates the taxability of foreign-sourced income.

Section 6(6) of the Income-tax Act, 1961, specifies the conditions under which a “Resident” individual is considered “Not Ordinarily Resident” (RNOR). An individual is deemed “Not Ordinarily Resident” if they satisfy any one of the following two conditions:

  1. Non-Resident status in past years: The individual has been a “non-resident” in India in 9 out of the 10 previous years immediately preceding the relevant previous year. This means that for the individual to be RNOR, their connection to India, in terms of tax residency, must have been minimal for the majority of the preceding decade. If they were resident for 2 years or more in the preceding 10 years, they would fail this condition and move towards ROR status (assuming they also meet the second condition for ROR).
  2. Limited stay in past years: The individual has been in India for a period or periods amounting in all to 729 days or less during the 7 previous years immediately preceding the relevant previous year. This condition looks at the cumulative physical presence of the individual in India over the past seven years. If their aggregate stay exceeds 729 days, they would fail this condition and move towards ROR status (assuming they also meet the first condition for ROR).

If an individual satisfies the basic conditions for “Resident” status (either 182 days or the 60+365 days rule, keeping exceptions in mind) but fails to meet both of the above conditions under Section 6(6), they will be classified as “Resident and Ordinarily Resident” (ROR). Conversely, if they meet the basic conditions for “Resident” but satisfy at least one of the conditions under Section 6(6), they are “Resident but Not Ordinarily Resident” (RNOR).

Automatic RNOR Status for Specific Categories (Post-Finance Act, 2020)

The Finance Act, 2020, introduced specific scenarios where an individual, if they become a resident, is automatically treated as RNOR, irrespective of the historical tests under Section 6(6). This simplifies the determination for certain groups:

  1. Indian Citizen/PIO with high income and 120-181 days stay (Section 6(1) read with explanation): As discussed, for an Indian citizen or person of Indian origin who is outside India and comes on a visit to India during the previous year, if their total income (other than income from foreign sources) exceeds fifteen lakh rupees during the previous year, the 60-day threshold for residency is extended to 120 days.

    • If such an individual stays for 120 days or more but less than 182 days, they become a Resident. The Finance Act, 2020, specifically states that such an individual shall be deemed to be a Resident but Not Ordinarily Resident (RNOR) in India. This is an automatic RNOR classification for this specific group, bypassing the 10-year/7-year tests of Section 6(6).
    • If their stay is 182 days or more, they are resident and then the regular Section 6(6) tests apply to determine if they are ROR or RNOR.

  2. Deemed Residents under Section 6(1A): Any Indian citizen who becomes a resident solely by virtue of the “deemed resident” provision under Section 6(1A) (i.e., total income > Rs. 15 lakhs, not liable to tax in any other country) is automatically classified as Resident but Not Ordinarily Resident (RNOR) for that previous year. This is a crucial aspect of the 2020 amendments, ensuring that while such individuals are brought into the Indian tax net due to their unique global tax position, their foreign-sourced income (not derived from an Indian business/profession) remains exempt, aligning with the spirit of RNOR status.

Scope of Income Tax for an RNOR Individual

The primary advantage and defining characteristic of the RNOR status lies in the limited scope of taxable income. Unlike a Resident and Ordinarily Resident (ROR) individual, whose global income is taxable in India, an RNOR individual enjoys a narrower tax base.

For a “Resident but Not Ordinarily Resident” (RNOR), the following types of income are taxable in India:

  1. Indian Sourced Income:

    • Income received or deemed to be received in India during the previous year. This includes salaries received in India, dividends from Indian companies, interest from Indian bank accounts, etc.
    • Income accruing or arising or deemed to accrue or arise in India during the previous year. This covers income from a business located in India, rental income from property in India, capital gains on transfer of assets situated in India, professional fees for services rendered in India, etc.

  2. Foreign Income from Indian Business/Profession:

    • Income which accrues or arises outside India, but is derived from a business controlled in or a profession set up in India. This is a significant carve-out. For example, if an RNOR owns a business with its head office or management control in India, but the business generates income from operations outside India, that foreign income would still be taxable for the RNOR. Similarly, if an RNOR has a profession (e.g., consultancy) set up in India, and provides services outside India through that setup, the income would be taxable.

The key distinction is what is NOT taxable for an RNOR:

  • Foreign Income not linked to Indian business/profession: Any income that accrues or arises outside India, and is not derived from a business controlled in or a profession set up in India, is not taxable for an RNOR. This includes:
    • Passive income like interest, dividends, or rental income from properties located outside India, as long as the underlying business or profession generating that income is not controlled or set up in India.
    • Capital gains from the sale of foreign assets (e.g., shares of foreign companies, foreign real estate), provided the related business or profession is not controlled or set up in India.
    • Salary for services rendered outside India, even if received in a foreign bank account.

This limited scope of taxation makes RNOR status attractive for individuals who are returning to India after a long stint abroad (often NRIs) or those who might be deemed resident under the new provisions but still have significant foreign income sources unrelated to any Indian business or profession. It provides a grace period or a specific carve-out for their global earnings.

Practical Implications and Beneficiaries of RNOR Status

The RNOR status has significant practical implications, particularly for Non-Resident Indians (NRIs) who decide to return to India and for high-net-worth individuals with complex international financial arrangements.

  1. Returning NRIs: Many NRIs, upon their return to India, find themselves in RNOR status for the initial few financial years. This is because they would likely satisfy the basic conditions for residency (e.g., staying for more than 182 days) but would also meet the conditions for “not ordinarily resident” (having been non-resident for 9 out of 10 preceding years or having stayed less than 729 days in the preceding 7 years). This transitional RNOR status is highly beneficial as it allows them to continue holding foreign assets and earning foreign passive income (e.g., foreign dividends, interest, rent from foreign properties, capital gains on foreign shares/property) without attracting Indian tax liability on that foreign income, provided it is not derived from a business controlled in India or a profession set up in India. This “soft landing” period helps them settle back into the Indian tax regime without immediately being subject to worldwide taxation.

  2. High-Net-Worth Individuals (HNIs) and Global Citizens: The Finance Act, 2020’s introduction of the “deemed resident” concept (Section 6(1A)) directly impacts this group. Indian citizens with significant non-Indian income (over Rs. 15 lakhs) who strategically arrange their affairs to not be tax resident in any country are now deemed residents in India. Crucially, they are automatically classified as RNOR. While this brings them into the Indian tax net, the RNOR status limits the tax incidence to their Indian-sourced income and foreign income from businesses controlled in or professions set up in India. This prevents complete worldwide taxation for them, striking a balance between expanding the tax base and acknowledging their limited ordinary connection to India.

  3. Short-Term Visitors / Assignments for Indian Citizens/PIOs with High Income: The adjusted 120-day rule for Indian citizens/PIOs visiting India with high Indian-sourced income (exceeding Rs. 15 lakhs) also leads to an automatic RNOR status if their stay is between 120 and 181 days. This ensures that even a relatively short visit can trigger residency, but the RNOR classification provides relief from taxation on foreign passive income.

Careful planning and precise tracking of days of stay in India are paramount for individuals to manage their residential status effectively and optimise their tax liabilities. Miscalculation or misunderstanding of these rules can lead to unintended tax consequences.

Conclusion

The “Resident but Not Ordinarily Resident” (RNOR) status is a critical component of India’s income tax framework, serving as a distinct intermediate category between a full Resident and Ordinarily Resident (ROR) and a Non-Resident (NR). It provides a specific set of rules for individuals who, while meeting the basic criteria for residency in a given financial year, do not have the long-term, deep-seated connection to India that would qualify them as “ordinarily resident.” This status is primarily defined by backward-looking tests related to an individual’s residency in the preceding ten or seven financial years.

The legislative amendments, particularly those introduced by the Finance Act, 2020, have significantly reshaped the landscape of RNOR status. The introduction of the “deemed resident” provision for Indian citizens with high income not liable to tax elsewhere, and the specific 120-day threshold for high-income Indian citizens/PIOs visiting India, now automatically assign RNOR status in these particular circumstances. These changes reflect an intent to expand the tax base for certain globally mobile high-income individuals while still providing the limited tax liability characteristic of RNOR status, especially concerning their foreign passive income not linked to an Indian business or profession.

Ultimately, the RNOR status offers a nuanced approach to taxation for individuals with evolving or limited connections to India. It ensures that while such individuals are brought within the ambit of Indian tax laws as residents, their foreign-sourced income (unless tied to an Indian-controlled business or profession) generally remains outside the Indian tax net. This transitional or specific classification is invaluable for tax planning for returning NRIs and for Indian citizens who navigate complex international tax landscapes, making precise understanding and application of these conditions essential for compliance and financial prudence.