Taxation

RNOR Status: What Income Is Genuinely Tax-Free in India

RNOR status exempts foreign income from Indian tax for 2-3 years after return. Foreign salary, NRE interest, foreign capital gains, and Section 89A retirement relief explained.

Rakesh Sinha, NRI Finance WriterReviewed 12 May 202616 min read

You land in Mumbai in October 2025 after 12 years in the UK. You have a UK salary you will continue receiving for three more months as you work out a notice period remotely, a UK ISA with Rs 40 lakh in gains, interest on an FCNR deposit, and an NRE savings account. Your CA tells you that you are now an Indian resident but may be RNOR. The question, which surprisingly few returning NRIs can answer precisely, is: which of those income streams is taxable in India right now, and which is not?

The 30-second answer: RNOR (Resident but Not Ordinarily Resident) status under Section 6(6) exempts foreign-sourced income from Indian tax for 2-3 years after return. Tax-free during RNOR: foreign salary (if earned from services rendered abroad), interest on NRE and FCNR accounts (under Section 10(4), for the specified period), foreign capital gains (sale of foreign assets not connected to an India business), foreign rental income. Taxable even during RNOR: Indian rental income, Indian capital gains, NRO account interest, income from an Indian business. Section 89A defers India tax on US 401(k) and RRSP withdrawals once you are OR. An RFC account holds foreign currency during and after RNOR without forcing conversion to rupees.

The RNOR exemption is the most powerful, and most underused, benefit in returning NRI taxation. It is not a formal election or application; it is a status determined automatically by the statutory day-count test each year. This guide clarifies which income is genuinely inside the exemption, which income falls outside it despite common belief, and the specific provisions that apply to NRE/FCNR interest, retirement accounts, and foreign capital gains.

The RNOR rule under Section 6(6): what it says

Section 6 of the Income Tax Act defines residential status in three tiers: non-resident, Resident but Not Ordinarily Resident (RNOR), and Resident and Ordinarily Resident (OR). A person who becomes a resident in a given year (by crossing 182 days in India) is RNOR for that year if they fail to meet either or both of:

Residency condition: Resident in India in 2 or more of the 10 immediately preceding years.
Presence condition: Present in India for 730 or more days in the 7 immediately preceding years.

An NRI who spent 9 consecutive years abroad before returning will have been resident in India in 0 out of 10 preceding years (failing condition 1) and will have spent very few days in India in the preceding 7 years (likely failing condition 2). Both conditions must be met to be OR. Failing either one means RNOR.

The RNOR condition is tested every year. In year one of return, an NRI with 9 years abroad is clearly RNOR. In year two, they are still RNOR (only 1 of 10 preceding years as resident). In year three, they may still be RNOR (only 2 of 10, but need 730 days in 7 years; they will typically have only about 730 to 900 India days after 2.5 years). In year three or four, the transition to OR typically occurs. The exact timing depends on the precise day counts.

The tax consequence of RNOR: Under Section 5(1), an OR is taxable on worldwide income. Under Section 5(1) as restricted by the proviso, an RNOR is taxable only on:

Income received or deemed to be received in India.
Income accruing or arising in India.
Income from a business controlled or profession set up in India (even if the income accrues outside India).

Foreign income from foreign sources, with no India business connection, falls entirely outside RNOR taxable income. This is the exemption.

Income that is genuinely tax-free during RNOR

Foreign salary for services rendered abroad

If you continue receiving salary from a foreign employer for work performed outside India, that salary is foreign-source income arising outside India and is not taxable in India during RNOR. The condition is that the services must be rendered outside India. If you work remotely from India for a foreign employer during RNOR, the income takes on an India-accrual character and becomes taxable.

UK returner example: Rashida returned to India in October 2025 and continued working remotely for her UK employer from India until January 2026 (3 months), then resigned. Her UK salary for October to January is taxable in India (services rendered in India). Her final UK bonus, relating to the prior UK service year, is potentially foreign-source income. The distinction between services performed in India and income relating to foreign services period is fact-specific and requires careful structuring.

The clean case: Salary received for a period when the employee was physically working in the UK (or any foreign location) is foreign-sourced even if paid after return. The tax treatment follows where the services were rendered, not when the payment arrives.

NRE and FCNR account interest: Section 10(4)

Section 10(4) provides a specific statutory exemption (not just the RNOR principle) for interest on NRE and FCNR accounts. The exemption covers interest received by:

A person resident outside India.
Or a person who was previously resident outside India, during the specified period after their return.

The specified period means:

For NRE accounts: the period during which the person retains RNOR status, or two years from the date of return, whichever is later.
For FCNR deposits: the period for which the deposit was made while the person was an NRI, typically running to the deposit's maturity date even if that is after the RNOR period ends.

Practical implication: An NRI who returns on 1 October 2025 and holds RNOR status for 2 financial years (FY 2025-26 and FY 2026-27) has NRE interest tax-free through at least 31 March 2028 (the later of: RNOR period ending March 2028, or two years from October 2025 = October 2027). If RNOR extends to FY 2027-28, the specified period extends accordingly.

FCNR deposits mature at specific dates regardless of return date. If an FCNR deposit of USD 50,000 was opened in 2024 for 3 years (maturing 2027), the interest accruing until maturity is tax-free even if the person is OR by 2027, because the deposit was made as an NRI and matures within the specified period. The exemption attaches to the deposit's tenure, not the person's status at maturity.

Foreign capital gains from foreign assets

Gains from selling foreign capital assets (US stocks, UK property, foreign mutual funds, foreign ETFs, any asset situated outside India) are not taxable during RNOR. The gain arises outside India and does not accrue in India. There is no India-business connection for passive foreign investments.

Critical condition: The asset must not be connected to a business or profession controlled from India. A freelance consultant who returns to India but runs their consulting practice from India and invoices foreign clients has professional income controlled from India; that income is not protected by RNOR. But the same person's US brokerage account with index funds is a passive investment with no India-business connection; capital gains from selling those funds are RNOR-exempt.

The window: Sell foreign appreciated assets during RNOR and the gain is zero for Indian tax purposes. Sell the same assets after OR transition and the gain is taxed at slab rates (up to 30%) because foreign assets do not get the concessional capital gains rates (15%, 12.5%) that apply to listed Indian securities. The incentive to sell during RNOR is significant for NRIs with large unrealised gains in foreign portfolios.

Foreign rental income

If you own property outside India and receive rental income from it, that income is foreign-sourced and exempt during RNOR. A UK NRI who returns to India but retains their flat in London and continues renting it out: the London rental income is not taxable in India during RNOR.

After OR transition, the London rental income becomes taxable in India. You are also taxed on it in the UK. Double Taxation Avoidance Agreement with the UK provides relief; you claim a credit for UK tax paid against your Indian tax liability under Article 23 of the India-UK DTAA. See foreign tax credit and Form 67 for the mechanics.

Foreign business income (with the India-control exception)

Foreign business income is tax-free during RNOR unless the business is controlled from India. If you own shares in a foreign company as a passive investor, dividends from that company are foreign income exempt during RNOR. If you are an active director or manager who controls the business's decisions from India, the income may be treated as arising from a business controlled in India and become taxable.

Income that is taxable even during RNOR

Indian rental income

Income from property situated in India is India-sourced income, taxable under Section 22 regardless of your residency status. RNOR provides no exemption for India-source income. If you have a flat in Bengaluru that is let out, the annual rental income is taxable during RNOR exactly as it would be for any Indian resident. TDS at 30% is deducted by the tenant under Section 195 (you remain taxable as an NRI for the year of return and transition to resident during the year). After you are resident, the TDS obligation on the tenant changes.

Indian capital gains

Gains from selling Indian shares, Indian mutual funds, Indian property, or any other Indian capital asset are taxable during RNOR. The special rates (20% STCG on equity, 12.5% LTCG on equity) apply exactly as they do for residents. RNOR provides no benefit on Indian capital gains. The exemption is specifically for foreign income.

NRO account interest

NRO account interest is income accruing in India (the account is in India, the contract for deposit is Indian, the bank is Indian). It is taxable at slab rates during RNOR exactly as for an NRI. TDS at 30% (or treaty rate if applicable) continues to apply. Returning to India does not change the taxability of NRO interest.

Income from an Indian business or profession

Any income from a business set up in India or a profession established in India is taxable during RNOR. This includes salary from an Indian employer, consulting income from Indian clients, and partnership income from an Indian firm. The RNOR exemption is only for income from a business controlled or set up outside India that does not have its control in India.

Salary for services rendered in India

Even if the employer is a foreign company, salary for services physically rendered in India during RNOR is taxable in India. If you work in India for a US employer on secondment, your salary is India-accruing income.

The specified period for NRE interest: worked timeline

Setup: Vikram returns to India on 1 October 2025. He was NRI for 11 years. He has an NRE FD maturing in June 2028. His RNOR period runs through FY 2027-28 (financial year ending 31 March 2028).

NRE FD interest, October 2025 to March 2028 (RNOR period): Exempt under Section 10(4), within RNOR.
NRE FD matures June 2028: The specified period is the later of (a) end of RNOR in March 2028, or (b) two years from return October 2025 = October 2027. End of RNOR is later. Does the deposit mature within the specified period? The deposit matures in June 2028, and the specified period ends at the close of RNOR in March 2028. The June 2028 maturity is outside the specified period. However, under Section 10(4), interest "received" during the specified period is exempt. The question becomes when interest is "received" for a FD. If the bank compounds interest and credits it at maturity, the credit date (June 2028) falls after the specified period. If interest is paid periodically, the exempt portion is whatever was paid during the specified period.

Practical recommendation: Roll or redeem NRE FDs to fall within the RNOR period rather than letting them extend into OR. The interest during RNOR is exempt; interest after OR transition (whether from the same NRE deposit redesignated as a resident deposit, or from a new deposit) is taxable at slab rates.

Section 89A: foreign retirement accounts for OR-stage returners

Section 89A addresses a specific problem: withdrawals from a US 401(k), Canadian RRSP, or UK pension by a person who is now an Indian OR would, without relief, be taxed entirely in India in the year of withdrawal as ordinary income. The income may also be taxed in the source country (US, Canada, UK). The DTAA provides treaty relief, but the India tax on the gross withdrawal, even after credit for foreign tax, can be large.

Section 89A allows the income from these accounts to be spread over 5 years rather than being taxed entirely in the receipt year. The relief is available for accounts in countries notified by the Central Government. Currently notified: US (401(k), IRA, Roth IRA), Canada (RRSP, RRIF), and UK (certain pension schemes). Form 10-EE must be filed with the return in the year of the first withdrawal to elect the Section 89A relief.

During RNOR: If you have not yet transitioned to OR, 401(k) or RRSP withdrawals may be foreign income outside India's tax scope entirely (no India tax during RNOR). Section 89A becomes relevant after you are OR.

The planning point: If you can take significant 401(k) or RRSP distributions during the RNOR window (when they are not taxable in India), you reduce the balance subject to Indian tax after OR transition. This is a material planning opportunity, contingent on US or Canadian tax cost of the early distributions, which depends on age (pre-59.5 US distributions carry a 10% penalty), income level, and applicable treaty rates.

The RFC account: holding foreign currency through RNOR

A Resident Foreign Currency (RFC) account is the approved mechanism for holding foreign currency after becoming resident in India. NREs become RFC accounts; FCNR deposits can continue to maturity and then be converted to RFC. Foreign bank account balances can be transferred to RFC.

RFC accounts are permissible for residents under the Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations. They hold balances in major currencies (USD, GBP, EUR, AED, etc.) and earn interest at the bank's offered rates. Interest on RFC accounts is taxable in India once you are resident.

The RFC account's purpose during RNOR: it holds foreign currency that would otherwise need to be converted to rupees, preserving the currency option if you eventually need to remit abroad. It also receives the maturity proceeds of FCNR deposits in foreign currency rather than forcing rupee conversion.

UK returner example

Ananya spent 10 years in the UK and returns to India in September 2026.

FY 2026-27 (return year): She crosses 182 days in India by late March 2027. She is a resident for FY 2026-27 and qualifies as RNOR (10 years abroad, zero of 10 preceding years as Indian resident, very few India days in last 7 years).

Income during FY 2026-27:

UK salary (October to December 2026, working in UK): Not taxable in India during RNOR.
UK ISA redemption (October 2026): Capital gains from UK investment, not taxable in India.
India rental income from Pune flat: Taxable at slab rates in India.
NRE FD interest: Exempt under Section 10(4).
NRO FD interest: Taxable at slab rates.
UK employer pension contribution (employer side): Not taxable now; Section 89A consideration for future withdrawals.

ITR for FY 2026-27: She files as RNOR (the ITR residency question requires this). She declares India rental income and NRO interest. She does not declare UK salary, UK ISA gains, or NRE interest. She may claim DTAA relief on UK income if the UK also taxes it during the overlap period, using Form 67.

US returner example

Rahul spent 12 years in the US and returns in April 2026.

FY 2026-27: He crosses 182 days comfortably by October 2026. RNOR conditions: clearly met. He is RNOR for FY 2026-27.

Income:

US salary (April to July 2026): He worked in the US for the first 4 months, then resigned. Salary for that US-working period: Not taxable in India as RNOR (services rendered abroad, income accrues abroad).
US 401(k): He takes no distributions yet. The balance will become relevant post-RNOR.
US brokerage account (S&P 500 ETFs): He sold USD 80,000 in holdings in March 2026 (before return) and another USD 30,000 in June 2026 (during RNOR, while not connected to India business). Both gains: not taxable in India.
NRE savings interest: Exempt under Section 10(4).
Indian shares capital gains (sold July 2026): Taxable in India at applicable special rates.
Mumbai flat rental income: Taxable at slab rates.

RNOR lasts: FY 2026-27 and FY 2027-28 (two years as resident before the 2-of-10 threshold on residency condition is crossed). By FY 2028-29, he is likely OR.

Post-RNOR: From FY 2028-29, US brokerage gains, UK property income, and 401(k) distributions are all taxable in India. The pre-return liquidation of US ETFs in March 2026 saved India tax on that portion regardless.

The closing read

RNOR is not a grey area or a planning strategy; it is a statutory status with a clear mechanical test and genuine consequences for tax liability. Foreign salary for services rendered abroad, NRE and FCNR interest during the specified period, foreign capital gains, and foreign rental income are all genuinely outside India's tax net during RNOR. Indian income, including rental income, Indian capital gains, and NRO interest, is taxable during RNOR exactly as it would be for any resident. The single most common RNOR mistake is treating the entire first few years back in India as a tax-free honeymoon; the exemption is foreign-sourced, not universal. The second most common mistake is holding large unrealised foreign capital gains through the RNOR window and into OR, when those gains will be taxed at slab rates. Use the RNOR period to complete the liquidation of foreign appreciated assets before the worldwide-income net falls in full.

Cross-references:

This guide is for general information only and does not constitute tax advice. RNOR status is determined by a precise day-count test applied to individual facts; the examples in this guide are illustrative and may not apply to your situation. Section 89A relief and its scope for specific foreign retirement accounts depends on rules notified by the Central Government, which may change. NRE account specified-period exemptions depend on the timing of your return and the tenure of your deposits. Consult a qualified chartered accountant before filing returns under RNOR status or planning any asset realisation during the RNOR window.

Frequently asked questions

What is RNOR status and who qualifies for it?

RNOR stands for Resident but Not Ordinarily Resident. Under Section 6(6) of the Income Tax Act, a person who is resident in India in a given financial year is classified as RNOR if they do not meet both of the following conditions simultaneously: (a) they have been resident in India for 2 or more years out of the 10 immediately preceding years, and (b) they have been present in India for 730 or more days in the 7 immediately preceding years. An NRI who spent 9 or more of the last 10 years abroad and whose total India days in the last 7 years are below 730 will qualify as RNOR upon return. RNOR is not a status you apply for; it is determined automatically by the day-count test each year. The RNOR period typically lasts 2 to 3 financial years after return, after which the conditions shift and the person becomes Ordinarily Resident, at which point worldwide income becomes taxable.

Is NRE account interest taxable during the RNOR period?

NRE account interest is tax-exempt during the RNOR period under Section 10(4) of the Income Tax Act. The exemption applies to interest on NRE savings accounts and NRE fixed deposits held by a person who was a non-resident and continues to hold the account after returning. The exemption is available for the 'specified period', defined in the Explanation to Section 10(4) as the period for which the person retains RNOR status or for two years from the date of return, whichever is later. After the RNOR period ends and the specified period lapses, NRE account interest becomes taxable as ordinary income. Once you transition to Ordinarily Resident status, you are required to redesignate your NRE account as a resident account. The interest on the redesignated account is then taxable at slab rates from that point forward.

Are foreign capital gains tax-free during RNOR?

Yes. Capital gains arising from the sale of foreign assets, such as US stocks, UK property, foreign mutual funds, or any other foreign capital asset, are not taxable in India during the RNOR period. The RNOR exemption covers income that accrues or arises outside India and income that is received outside India. Foreign capital gains fall squarely in the category of income arising outside India from a source situated outside India. The key condition is that the gain must not arise from a business or profession controlled or set up in India. Sale of foreign shares, ETFs, real estate abroad, or redemption of foreign mutual fund units qualifies as outside-India income and remains tax-free during RNOR. After the RNOR period ends, the same assets sold as an Ordinarily Resident are taxable at slab rates (no special rates for foreign assets, no indexation for assets acquired after July 2024 under Indian law).

What does Section 89A do for foreign retirement accounts?

Section 89A provides relief from double taxation on withdrawals from notified foreign retirement accounts for individuals who are now resident in India. The provision was introduced in the Finance Act 2021 and applies to retirement accounts in countries with which India has a Double Taxation Avoidance Agreement. Notified accounts include US 401(k) and IRA accounts, Canadian RRSP accounts, and UK pension schemes. Under Section 89A, the income from these accounts can be taxed in India on a deferred basis, matching the tax treatment in the foreign country rather than being fully taxed in the year of withdrawal in India. The relief is claimed by filing Form 10-EE along with the ITR. Section 89A does not apply during the RNOR period if the retirement income qualifies as foreign-sourced income outside India's tax scope; it becomes relevant when the person transitions to Ordinarily Resident status and the withdrawals would otherwise be taxed in full in India.

Rakesh Sinha, NRI Finance Writer

Rakesh Sinha is a technology professional and an NRI since 2016. He holds a master’s from Carnegie Mellon University and a BTech in Computer Science from IIT Guwahati, and has worked at Microsoft, Cisco, InMobi and Google across Bengaluru, the United States and London. He has personally navigated the decisions these guides cover: moving foreign salary and tech-company RSUs across borders, opening NRE, NRO and FCNR accounts, filing Indian returns as a non-resident, and claiming DTAA relief between the US, UK and India. How these guides are written and reviewed.

Disclaimer: This guide is educational and general in nature. It is not individual financial, tax, or legal advice. Tax and FEMA rules change and your situation may differ, so confirm specifics with a qualified chartered accountant or financial adviser before acting. See our editorial standards for how these guides are researched, reviewed and updated.