RNOR Tax Break: What Returning NRIs Must Do Before 30 Sept
Returning NRIs get 2-3 years of RNOR status under Section 6(6), during which most foreign income stays outside Indian tax. A June 2026 RBI circular has also opened an elevated FCNR(B) rate window that closes on 30 September 2026 — and FEMA account conversion rules that trip up even careful planners.
CA Harun Raaj
Chartered Accountant · Harun Raaj & Associates
Legal basis: Income-tax Act, 1961 — Section 6(6) (RNOR determination); Foreign Exchange Management Act, 1999 — Section 2(v) (residential status). Effective: ongoing. Source: CBDT/RBI circular. Last reviewed by CA Harun Raaj: September 2026.
When you return to India after years abroad, you do not automatically become a "Resident and Ordinarily Resident" (ROR) for income-tax purposes. Section 6(6) of the Income-tax Act, 1961 grants a transitional status called Resident Not Ordinarily Resident (RNOR) — typically for 2 to 3 years. During this window you live in India but pay no Indian tax on most foreign income.
Under RNOR, India-sourced income is taxable like any resident's. But foreign-source income — salary from an overseas employer, rental income on property abroad, capital gains from selling assets outside India — is NOT taxable in India. Schedule FA (disclosure of foreign assets) does not apply to RNOR. The moment you tip into full ROR status, both advantages vanish permanently.
Key point: RNOR status under Section 6(6) shields most foreign-source income from Indian tax for 2-3 years after return, but FEMA residential status — and your NRE account obligations — change on the day you return, not when RNOR ends.
Who qualifies as RNOR — Section 6(6), ITA 1961
A person is RNOR if they meet EITHER condition:
- Was a non-resident for 9 of the 10 immediately preceding previous years, OR
- Total India presence of 729 days or less in the 7 preceding previous years.
Most returning NRIs who spent several continuous years abroad satisfy one of these conditions automatically, giving them 2–3 years of RNOR status after return.
For AY 2026-27 (FY 2025-26), the Finance Act 2025 new-regime slabs apply to RNOR individuals — same as resident individuals. The Section 87A rebate (₹60,000 on total income up to ₹12 lakh) is available for RNOR but NOT against special-rate income.
What RNOR does not change: your FEMA account obligations
This is where returning NRIs and their planning most often go wrong. Tax residency (RNOR) and FEMA residential status are governed by different laws and change on DIFFERENT dates.
- Income-tax RNOR: determined by day-count tests under Section 6(6), applied at year-end.
- FEMA residential status: changes from the day you return with the intention to reside in India for an uncertain period — Section 2(v) of FEMA, 1999. Intent matters; there is no waiting period.
From the day you return to reside in India:
- Your NRE account must be redesignated as an RFC (Resident Foreign Currency) account or converted to a domestic resident savings account. You cannot continue to operate an NRE account once you become FEMA-resident.
- Your FCNR(B) deposits may be held to maturity in foreign currency. On maturity, convert to RFC deposits.
- Your NRO account continues as a domestic account.
RFC accounts deserve attention. Unlike NRE accounts, RFC interest is taxable in India. The advantage is that the account holds foreign currency — protecting currency value if you later intend to remit back overseas.
The NRE account conversion must happen immediately on return, even though, for income-tax purposes, you enjoy RNOR status for another 2–3 years.
The 30 September 2026 window — act before you return
RBI issued an A.P. (DIR Series) Circular in June 2026 temporarily removing the interest rate ceiling on fresh FCNR(B) deposits (3–5 year maturity). Banks have responded with FCNR(B) USD rates of up to 7.10% — far above normal regulated ceilings, which typically track US Treasury rates at a modest premium.
If you are an NRI who:
- Has not yet returned to India (still FEMA non-resident), AND
- Plans to return within the next 1–3 years, AND
- Has USD or other foreign currency savings to deploy
You can book a 3-year FCNR(B) deposit at up to 7% before 30 September 2026 — while still FEMA non-resident. When you return and become FEMA-resident, you hold the FCNR(B) until maturity within the RFC framework. The Section 10(4)(ii) interest exemption applies during your RNOR period.
After 30 September 2026, the rate ceiling reverts and rates are likely to fall. This window does not repeat often.
Section 115H: continuing NRI tax benefits after return
Section 115H of the Income-tax Act, 1961 allows an individual who was previously taxed as an NRI under Chapter XII-A to elect to continue getting beneficial NRI tax rates even after becoming resident — the 15% rate on LTCG from foreign-currency assets (Section 115F) and the special investment income rate (Section 115E). The election is made via Form 10 with your ITR for the first year of residency, filed by the ITR due date.
If you hold any foreign-currency assets on return, this election is worth examining in Year 1 of RNOR.
RNOR vs full resident status
Two deadlines — next 15 days
RNOR planning checklist
While still NRI (before 30 September 2026):
- Confirm RNOR eligibility under Section 6(6) based on your travel history.
- Evaluate booking a 3-year FCNR(B) at current elevated rates before returning.
On day of return to India:
- Notify your bank immediately — the NRE account must convert to RFC.
- Inform your bank of the residential status change on FCNR(B) deposits; these may be held to maturity.
First RNOR-year ITR:
- Do not file Schedule FA (not applicable to RNOR).
- Consider the Section 115H election if you hold foreign-currency assets.
- Report foreign income on Schedule FSI only if that income has Indian tax exposure (unlikely for RNOR).
For property sale as NRI/RNOR:
- TDS applies under Section 195 (not Section 194-IA, which is for resident sellers).
- Apply for a Form 13 lower-TDS certificate if the LTCG is significantly below full consideration.
This article is prepared by Harun Raaj & Associates for general information purposes. It does not constitute legal or tax advice. RNOR eligibility, FEMA account transitions, and tax planning are fact-specific.
I'm CA Harun Raaj, Visakhapatnam. If you're planning a return to India in the next 1-3 years or have already returned and haven't sorted your NRE-to-RFC conversion, get in touch before the compliance gap becomes a penalty.
---
See Also
Frequently Asked Questions
What is RNOR status and how long does it last?
RNOR (Resident Not Ordinarily Resident) is a transitional tax status under Section 6(6) of the Income-tax Act, 1961, typically lasting 2 to 3 years after an NRI returns to India. During this period, foreign-source income remains outside Indian tax while India-sourced income is taxed as for any resident.
Do I need to disclose foreign assets in Schedule FA during RNOR?
No. Schedule FA disclosure does not apply to individuals holding RNOR status, only to full Residents and Ordinarily Resident (ROR) taxpayers.
Does my NRE account convert automatically when I return to India?
No, you must notify your bank. Under Section 2(v) of FEMA, 1999, your residential status changes from the day you return with intent to reside in India, and the NRE account must be redesignated as an RFC account or converted to a domestic resident savings account from that date.
Why does FEMA status change before my RNOR tax status ends?
FEMA residential status under Section 2(v) changes immediately based on intent to reside in India, with no waiting period, while income-tax RNOR status under Section 6(6) is determined by day-count tests applied at year-end. The two run on separate timelines even though both relate to your return.
What is the significance of the 30 September 2026 deadline for NRIs?
An RBI A.P. (DIR Series) Circular issued in June 2026 temporarily removed the interest rate ceiling on fresh FCNR(B) deposits with 3-5 year maturity, allowing banks to offer USD rates of up to 7.10% until 30 September 2026, after which the ceiling reverts.
Can I still benefit from Section 10(4)(ii) if I book an FCNR(B) deposit before returning?
Yes. If you book the FCNR(B) deposit while still FEMA non-resident and later return, the Section 10(4)(ii) interest exemption applies during your RNOR period, and the deposit can be held to maturity within the RFC framework after your status changes.
What is the Section 115H election and who should consider it?
Section 115H of the Income-tax Act, 1961 lets an individual previously taxed as an NRI under Chapter XII-A elect to continue certain beneficial NRI tax rates, such as the 15% LTCG rate under Section 115F and the special rate under Section 115E, even after becoming resident. The election is made via Form 10 filed with the ITR for the first year of residency, and is worth examining if you hold foreign-currency assets on return.
Which TDS section applies when an RNOR individual sells property in India?
TDS on property sale by an RNOR seller applies under Section 195, not Section 194-IA (which applies to resident sellers). If the LTCG is significantly below full consideration, a Form 13 lower-TDS certificate can be applied for.
Related Services
Based on this article's category and vertical tag, these services are the most relevant next steps.
Go deeper with our hub guides
Statute-cited, section-by-section guides covering the same ground this article does.
Need help with this?
Our team handles the paperwork. You focus on your business.