RNOR Tax Planning: When to Withdraw from 401k/IRA and How to Handle the NRE-to-RFC Transition

The RNOR (Not Ordinarily Resident) status is one of the least understood provisions in Indian income tax law, and one of the most valuable for a returning NRI who plans correctly. It creates a transition window — typically two to three years — during which your foreign income remains outside India's tax net, even though you are physically present and tax-resident in India. If you withdraw from your 401k or IRA during this window, execute your NRE-to-RFC conversion in time, and exit higher-yielding foreign positions before the window closes, you can substantially reduce the Indian tax cost of your return. If you miss the window, you cannot recreate it.

This guide covers the conditions that create the RNOR window, what is and is not taxable during it, the specific treatment of US retirement accounts under s.89A ITA 1961, the NRE account conversion rules under FEMA, and a year-by-year planning timeline.

How RNOR Status Is Determined

Residency under the ITA 1961 is a facts-and-circumstances test applied fresh for each financial year. Under s.6(1) ITA 1961, an individual is resident in India for a year if they are present in India for 182 days or more, or 60 days or more (with a prior-year aggregation test). Once you meet the residency threshold, the next question is whether you are "ordinarily resident" or "not ordinarily resident."

An individual who is resident in India is treated as Not Ordinarily Resident (RNOR) under s.6(6) ITA 1961 if they satisfy either of two conditions:

s.6(6)(a): The individual has been a non-resident in India in 9 or more of the 10 financial years immediately preceding the relevant year. A single year of non-residency in the right sequence is enough to reset the count; 9 out of 10 is the standard for a long-tenure overseas NRI.

s.6(6)(b): The individual has been present in India for 729 days or fewer during the 7 financial years immediately preceding the relevant year. For a 10-year overseas posting, 729 days over 7 years means an average of under 105 days per year in India during that period, which is typical for someone on a work visa abroad.

Only one of these conditions needs to be met. For most returning NRIs with 7+ years of continuous overseas residence, both conditions are typically satisfied simultaneously.

RNOR is not a status you elect — it is automatically applicable for any year in which you qualify. If you do not qualify, you are either ROR (ordinary resident) or NR (non-resident), with significantly different tax consequences.

What Is — and Is Not — Taxable During RNOR

The scope of total income under s.5 ITA 1961 differs sharply across the three residency categories:

• ROR: Taxable on worldwide income — Indian and foreign.
• NR: Taxable only on income that accrues or arises in India, or is received or deemed received in India.
• RNOR: The same as NR for foreign source income — foreign income is not taxable unless it is derived from a business controlled from India or a profession set up in India.

This means that during your RNOR years, the following foreign income sources are not taxable in India:

• US salary (if you have already left employment but are receiving deferred compensation)


• Rental income from US property


• Dividends from US stocks


• Interest on US bank accounts (including high-yield savings)


• Capital gains from selling US securities


• Distributions from 401k or IRA accounts

The following is taxable during RNOR, because the source is in India:

• Indian salary from an Indian employer


• Capital gains on Indian securities or property


• Interest on Indian bank accounts (except RFC — see below)


• Rental income from Indian property


• Income from an Indian business or profession

This distinction is the core of the RNOR planning opportunity. The window is not permanent. Once you become ROR, the worldwide income rule applies and all of the above foreign income sources come into India's tax net.

Section 89A: The Deferred Tax Provision for Foreign Retirement Accounts

s.89A ITA 1961, inserted by Finance Act 2021 and effective from AY 2022-23, is the provision that directly addresses Indian tax on foreign retirement accounts.

The provision allows the Central Government to prescribe, by notification, the income from "specified foreign retirement benefit accounts" to be taxed in India only in the year of actual withdrawal, rather than on accrual basis (which would otherwise require you to include annual 401k/IRA growth in your Indian taxable income on a mark-to-market basis — a wildly unworkable result).

CBDT Notification 39/2022 (dated 5 July 2022) prescribes the countries whose retirement accounts qualify as "specified accounts" for the purpose of s.89A. The list includes the United States, United Kingdom, and Canada, among others.

CBDT Notification 44/2022 (dated 26 July 2022) prescribes the specific account types that qualify. For the US, the specified accounts are 401(k) plans and Individual Retirement Accounts (IRAs) — including traditional IRAs, Roth IRAs (subject to interpretation), SEP-IRAs, and similar vehicles. Canada's RRSP is also covered.

The practical effect for RNOR years is powerful: a 401k or IRA withdrawal during your RNOR years is income arising from a foreign source (the US retirement account). Since RNOR individuals are not taxable on foreign source income under s.5, and since s.89A defers taxation to the year of withdrawal (not accrual), a withdrawal made during your RNOR period is either taxable at nil or at a very favourable position — the income arose from a foreign account during a year when you were RNOR and therefore not taxable in India on foreign income.

This is the core RNOR retirement planning play: if you intend to tap your 401k or IRA, do it before you become ROR.

One important caveat: the US will still impose federal income tax (and potentially a 10% early withdrawal penalty if under age 59½) on 401k/traditional IRA distributions. The India-US DTAA may provide some relief on double taxation depending on how the income is characterised, but the US-side tax is unavoidable. Roth IRA qualified distributions are US-federal-tax-free and, during RNOR, also Indian-tax-free — making them the most tax-efficient vehicle to withdraw from.

NRE Account to RFC Account: The 90-Day Conversion Window

Under FEMA Notification No. FEMA 5(R)/2016-RB (Foreign Exchange Management (Deposit) Regulations 2016), an NRI who returns to India and becomes resident is required to convert their NRE (Non-Resident External) account to either a Resident Foreign Currency (RFC) account or a regular resident rupee account. The conversion must be done within 90 days of becoming a resident in India — that is, within 90 days of first qualifying as resident (crossing the 182-day threshold in a financial year).

Failure to convert within 90 days is a FEMA violation, though it is commonly overlooked and enforcement has been inconsistent. Practically: schedule the NRE-to-RFC conversion the moment you become aware you have crossed the residency threshold.

Why RFC rather than a regular resident account? The RFC account is specifically designed for returning NRIs and allows you to hold foreign currency (USD, GBP, EUR, etc.) on Indian soil. Interest on RFC deposits is exempt from income tax for non-residents and RNORs under s.10(15)(iv)(fa) ITA 1961. The exemption is lost when you become ROR, at which point RFC interest becomes fully taxable as income from other sources at your marginal rate.

This creates a secondary planning point: if you have substantial foreign currency deposits, the RFC account preserves the interest income in a tax-free vehicle during your RNOR years. Once you become ROR, that exemption is gone — the account continues to exist and can hold foreign currency, but the interest is taxable from that year onwards.

FCNR (Foreign Currency Non-Resident) deposits, which are term deposits, face a similar rule: maturing FCNR deposits held in RFC after becoming ROR are taxed on interest income.

Year-by-Year: What RNOR Status Actually Looks Like in Practice

Consider someone who has worked in the US for 10 continuous years and returns to India in FY 2024-25 (i.e., they arrive and settle after April 2024).

FY 2024-25 (return year):
If they return mid-year and are present in India for fewer than 182 days in this financial year, they are non-resident for FY 2024-25. Indian tax applies only to Indian-source income. Foreign income (US salary earned before return, 401k growth) is not taxable in India. FEMA: not yet triggered — they are still NR, so NRE account maintenance continues normally.

FY 2025-26 (first full year back):
They cross 182 days in India. They are now resident. But do they qualify as RNOR? Under s.6(6)(a): in 9 of the last 10 preceding financial years (FY 2015-16 through FY 2024-25), they were NR. Yes — easily satisfied. So: RNOR for FY 2025-26. Foreign income (US dividends, 401k withdrawal, IRA distributions) = not taxable in India. RFC conversion must happen within 90 days of becoming resident. RFC interest: exempt under s.10(15)(iv)(fa).

FY 2026-27 (second full year back):
Re-examine s.6(6)(a): looking at FY 2016-17 through FY 2025-26. They were NR in FY 2016-17 through FY 2023-24 (8 years) and RNOR in FY 2025-26 (resident, so not NR). That is 8 out of 10 preceding years as NR — still ≥9? Wait — RNOR counts as resident for the purpose of s.6(6)(a) backward look. But FY 2024-25 was NR (they were still overseas / just arriving). So the count is: FY 2016-17 to FY 2023-24 = 8 NR years, FY 2024-25 = NR (1 more) = 9 out of 10. The condition is still satisfied. RNOR for FY 2026-27 as well.

FY 2027-28 (third full year back):
Looking back at FY 2017-18 through FY 2026-27: FY 2025-26 and FY 2026-27 are both RNOR (resident). Only 8 years NR out of 10. s.6(6)(a) fails. Check s.6(6)(b): days in India in the 7 preceding years (FY 2020-21 through FY 2026-27). Includes two RNOR years of full presence = approximately 365 + 365 = 730 days from those two years alone, exceeding 729 days. s.6(6)(b) also fails. Result: ROR from FY 2027-28 onwards. All worldwide income is now taxable.

For a 10-year NRI, the RNOR window is typically FY of return + 1 to 2 additional years, depending on the exact arrival date and the day-count in the prior 7 years.

Practical Action Points by Phase

Before departure from the US:

• Maximise Roth IRA contributions in your final US tax year — these grow tax-free in the US and will be withdrawable tax-free in India during RNOR.


• Understand your 401k plan's distribution rules — some plans require employment termination before distribution.


• Note the SBI TT rate on the date of any large asset movements — you will need this for Indian disclosure purposes.

In the 90 days after becoming resident:

• Submit NRE-to-RFC conversion request at your Indian bank.


• Do not let NRE accounts remain open post the 90-day window — they become irregular under FEMA.


• Begin tracking India presence days precisely (calendar / passport stamps).

During RNOR years:

• Withdraw from 401k/IRA accounts in coordination with your tax adviser, especially if you need liquidity — the Indian tax shield on these withdrawals is real but requires careful substantiation.


• File ITR-2 (which has Schedule FA and Schedule FSI for foreign income) every year, even if no Indian tax is payable. Schedule FA non-filing is a strict-liability penalty risk.


• File Form 67 (online, before ITR due date) for any US federal taxes withheld, even if FTC is nil.

As RNOR window closes:

• Sell US securities and book any capital gains before becoming ROR.


• Maximise RFC account deposits before RNOR ends — interest earned post-ROR will be taxable.


• Review FCNR deposit maturity dates and plan accordingly.

Key Takeaways

• RNOR status under s.6(6) ITA 1961 — satisfied by either the 9/10-year NR test or the 729-day presence test — creates a 2-3 year window where foreign income is not taxable in India under s.5 ITA 1961.
• s.89A ITA 1961 (as operationalised by CBDT Notifications 39/2022 and 44/2022) defers Indian tax on 401k and IRA withdrawals to the actual withdrawal year — making withdrawals during RNOR years the most tax-efficient time to access US retirement savings.
• NRE accounts must be converted to RFC accounts within 90 days of becoming resident, per FEMA 5(R)/2016-RB; RFC interest is exempt under s.10(15)(iv)(fa) ITA 1961 during RNOR, then fully taxable on becoming ROR.
• A 10-year NRI returning mid-year typically gets the return year as NR + 2 full RNOR years before becoming ROR — the window is finite and cannot be extended by wishing; plan before you board the flight back.

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See Also

• Property Capital Gains: Indexation vs 12.5% Tax in 2026
• Section 148A Reassessment: Time Limits & Valid Notice Rules
• Capital Gains on Property Sale AY 2026-27: 12.5% or 20%?

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