In the Constitution of India, as per Income Tax Act 1961, Central Government has the power to levy tax on any income other than agricultural income. The government imposes a tax on taxable income of all persons who are individuals, Hindu Undivided Families (HUF’s), companies, firms, LLP, association of persons, body of individuals, local authority and any other artificial juridical person. Levy of tax on a person depends upon his residential status.
For tax purposes under Indian income tax law, an Individual can be: Resident or Non-Resident. Further the Resident category is classified into two parts i.e. Ordinary Resident and Not Ordinary Resident.
Does taxability changes on the basis of Residential status?
Yes, Indian income tax law has different tax treatment for incomes earned by each of this category. For instance, if you fall under resident status, there will be tax on overseas salary. But, if you are a non-resident, same will be non-taxable.
With our blog, we intend to help you understand who an RNOR is and why endowed with special status.
Instance to explain RNOR
Kartik resided in India till October 08, 2010 and thereafter migrated overseas. He is doing well in the business that he set up there. He transfers money to his Non Resident External (NRE) account and Non Resident Ordinary (NRO) account regularly. He visits India on an average 70 days every year. In the FY 2017-18, he resided in India for 190 days. He had income from salary, earned from overseas and India, both; and other income which consisted of interest from bank.
Now, you might have a list of questions in mind. Let’s consider them gradually.
1. What is the residential status of Kartik?
To be a Resident for a financial year, he needs to satisfy either of the following condition:
- He is in India for 182 days or more during the financial year
- He is in India for at least 365 days during the 4 years preceding that year and at least 60 days in that year
In case anyone is an Indian Citizen and leave India for employment outside of India or as a member of the crew on an Indian ship, in other words if you take up a job outside India, the 60 days minimum period will be increased to 182 days.
Being in India for 190 days in FY 2017-18, Kartik concludes to be a resident.
2. Is he an Ordinary Resident or Non-Ordinary?
To be a RNOR, you have to fulfill any of the conditions understated:
- If you have been an NRI in 9 out of 10 financial years preceding the year
- You have during the 7 financial years preceding the year been in India for a period of 729 days or less
With an average of 70 days, Kartik fulfill second condition and results to be a Resident but Non Ordinary Resident.
3. Does he have to pay any tax in India?
The RNOR is endowed with special status in order to provide some benefits to returning NRIs. For Indian income tax purposes, an RNOR is treated at par with NRIs. That means an RNOR needs to pay tax only on income received or accrued in India. Any other income will not be taxed. And you can continue this status for a period of 2 years after returning back to India. However, once you have attained the status of a Resident, all of your income within and outside India will be taxable.
Here, Kartik has income from two sources: income from salary and income from other sources. Salary income earned in India is fully taxable whereas salary from oversea is non-taxable. Interestingly, income from interest on bank accounts needs to be bifurcated whether it is accrued from NRE or NRO. NRE account is a bank account for his foreign earnings and exempted from tax. Neither the balance, nor the interest earned on these accounts is taxable. NRO account is to manage the income earned in India. These incomes include rent, dividend, pension, interest, etc. Therefore, income from NRE account’s interest will not be taxable and interest from NRO account will be a part of taxable income.
4. Is he required to file an income tax return?
If an individual’s income exceeds the basic exemption limit, before deductions in the financial year then they are required to file Income Tax Return. The same rule applies on NRI as well. Therefore, Yes, Kartik needs to file an Income Tax Return if his Gross Total Income exceeds the basic exemption limit. Even if the tax payable calculated be “NIL”, then also he has to file the return.
There is a saying in Income Tax, “An Indian Citizen may not be resident Indian, but a Foreign Citizen may be resident Indian.” With this blog, we made sure that you conclude the same. Our team can assist you for kinds of tax planning, tax compliance, filling of returns, assessments and tax representations.
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