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RNOR Tax Guide 2025: NRE & FCNR Interest Exemption for Returning NRIs

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RNOR Tax Guide 2025: NRE & FCNR Interest Exemption for Returning NRIs

Returning to India after a period abroad? While the excitement of coming home is immense, navigating the nuances of Indian taxation, especially concerning your overseas investments, can be a complex affair. One common question that arises for returning Non-Resident Indians (NRIs) is about the tax implications on interest earned from their Non-Resident External (NRE) and Foreign Currency Non-Resident (FCNR) accounts, particularly when they attain the ‘Resident But Not Ordinarily Resident’ (RNOR) status.

As experienced professionals at Tax2Save.in, we understand these concerns. This detailed guide aims to demystify the tax treatment of NRE and FCNR interest for RNORs, ensuring you’re up-to-date with the latest amendments and compliance requirements for the current financial year. Don’t let tax complexities cloud your homecoming – let’s explore what happens to your hard-earned interest!

Table of Contents

Introduction: Understanding RNOR Status

Before diving into the taxability of specific accounts, it’s crucial to understand what RNOR status entails. In India, your tax liability is primarily determined by your residential status for tax purposes. This status is assessed based on your physical presence in India during a financial year (April 1st to March 31st).

Who is an RNOR (Resident But Not Ordinarily Resident)?

As per Section 6 of the Income Tax Act, 1961, an individual becomes ‘Resident but Not Ordinarily Resident’ (RNOR) if they satisfy the basic conditions for being a ‘Resident’ but fail to satisfy at least one of the two additional conditions for being an ‘Ordinarily Resident’.

Specifically, an individual is considered RNOR for the current Financial Year (FY 2025-26) if they meet the basic residency criteria (e.g., stay in India for 182 days or more) AND:

  • Have been a non-resident in India for at least 9 out of the 10 previous years immediately preceding the relevant previous year; OR
  • Have been in India for a period of 729 days or less during the 7 previous years immediately preceding the relevant previous year.

Recent Amendment (Finance Act 2020): A significant change introduced for Indian citizens or Persons of Indian Origin (PIOs) with total income (excluding foreign sources) exceeding INR 15 Lakhs in a financial year, who are not liable to tax in any other country. Such individuals are deemed ‘Resident’ in India. If their stay in India during the relevant financial year is between 120 days and 181 days (inclusive), and they have stayed 365 days or more in the four preceding years, they will be classified as RNOR.

Typically, individuals returning to India may qualify as RNOR for up to the first two or three financial years, depending on their past stay records.

If you’re confused about your residential status, our expert team at Tax2Save.in can help you determine it for hassle-free filing.

NRI Tax Status: The Baseline Exemption

As an NRI, the interest earned on your NRE (Non-Resident External) and FCNR (Foreign Currency Non-Resident) accounts enjoys significant tax benefits:

  • NRE Account Interest: Fully exempt from income tax in India under Section 10(4)(ii) of the Income Tax Act, 1961. This interest is also freely repatriable.
  • FCNR Account Interest: Also fully exempt from income tax in India under Section 10(15)(iv)(fa) of the Income Tax Act, 1961. Like NRE accounts, the principal and interest are fully repatriable.

This exemption is a major incentive for NRIs to invest in India.

NRE Interest Taxability for RNORs: The Key Shift

Here’s where the change occurs. Once you transition from NRI to RNOR status, the tax exemption on your NRE account interest typically ceases.

  • Taxable from Change of Status: As per general tax principles and FEMA regulations, interest earned on your NRE account becomes taxable in India from the date you become a Resident (which includes RNOR status). This is because NRE accounts are meant for Non-Residents, and upon change of residential status, they are no longer considered “Non-Resident External.”
  • No Grace Period for Exemption: Unlike some misconceptions, there is generally no multi-year grace period for NRE interest to remain tax-exempt once you become an RNOR. The interest starts accruing tax liability from the date your residential status changes.

RBI and FEMA Rules on NRE Accounts

The Reserve Bank of India (RBI) through its Foreign Exchange Management Act (FEMA) guidelines mandates that upon your return to India for good (i.e., becoming a resident), your NRE accounts must be converted:

  • They should be designated as resident accounts; OR
  • The funds held in these accounts may be transferred to a Resident Foreign Currency (RFC) account, at your option.

This conversion is required immediately upon the change in your residential status. While the deposits can continue with the stipulated interest rate until maturity, the interest accrued after the date of your arrival in India will become taxable in India. Your bank will deduct Tax Deducted at Source (TDS) on this interest.

Key Takeaway: The tax-exempt status of NRE interest is tied to your NRI status. Once you become an RNOR (a type of Resident), NRE interest generally becomes taxable.

Also Read | Simplifying GST Registration in India: A Comprehensive Guide

FCNR Interest Taxability for RNORs: Continued Exemption

Unlike NRE accounts, interest earned on FCNR (Foreign Currency Non-Resident) accounts continues to enjoy tax exemption for individuals holding RNOR status.

  • Continued Exemption: Interest income from FCNR deposits remains tax-exempt in India as long as you maintain your NRI or RNOR status.
  • Maturity and Conversion: While the interest remains exempt, FEMA regulations require FCNR deposits to be converted into resident rupee deposit accounts or RFC accounts upon maturity, or if you opt for earlier conversion. The exemption applies until the original FCNR deposit matures.

The Role of Section 10(15)(iv)(fa)

This specific section of the Income Tax Act, 1961, provides for the exemption of interest payable to a non-resident or an RNOR on deposits in foreign currency in FCNR accounts. This provision ensures that the foreign exchange brought into India through FCNR accounts continues to receive favorable tax treatment even when the depositor becomes an RNOR.

Key Takeaway: FCNR account interest generally remains tax-exempt even when you become an RNOR, until its maturity.

Navigating Account Conversions and Compliance

Understanding the tax implications is only half the battle; knowing the practical steps for account management is equally vital.

Compliance Checklist for Returning NRIs

When your residential status changes to RNOR (or ROR), ensure you complete the following:

  • Inform Your Bank: Immediately notify your bank(s) about your change in residential status. This is a crucial first step.
  • Convert NRE Accounts:
    • Convert your NRE savings account to a Resident Savings Account.
    • Convert NRE fixed deposits (FDs) to Resident Fixed Deposits or transfer funds to a Resident Foreign Currency (RFC) account. The interest on these FDs will become taxable from the date of conversion/status change.
  • Manage FCNR Accounts:
    • You can continue to hold FCNR deposits until their maturity.
    • Upon maturity, convert the proceeds to a Resident Rupee account or an RFC account.
    • Remember, the interest on the FCNR deposit remains exempt until maturity.
  • Consider RFC Accounts: If you continue to have foreign currency income or wish to hold funds in foreign currency, opening an RFC account is a smart move. Funds from NRE/FCNR/NRO accounts can be transferred to RFC accounts. While RFC interest is generally taxable for RNORs (unless it’s foreign-sourced income not derived from a business controlled or profession set up in India), it offers flexibility for holding foreign currency.
  • Update KYC: Ensure your Know Your Customer (KYC) details with your bank are updated to reflect your new residential status.
  • Income Tax Filing: File your Income Tax Return (ITR) accurately, declaring all taxable income, including interest from NRE accounts after the status change.

Important Due Dates

While there aren’t specific due dates for account conversion itself, timely action is key to avoid complications. However, remember the general income tax filing due dates:

  • For Individual Taxpayers: Generally, July 31st of the assessment year (e.g., July 31, 2026, for FY 2025-26).
  • For Businesses (requiring audit): Generally, October 31st of the assessment year.

Don’t risk penalties – let Tax2Save.in’s CA-led services take care of it.

Real-Life Example: Understanding the Impact

Let’s consider Mrs. Sharma, who returns to India on October 1, 2025 (mid-FY 2025-26). Based on her past stay, she qualifies as an RNOR for FY 2025-26. She has:

  • An NRE Fixed Deposit of $50,000, earning 3% interest per annum, maturing on December 31, 2026.
  • An FCNR Fixed Deposit of $70,000, earning 2.5% interest per annum, maturing on June 30, 2026.
Taxability of Interest for Mrs. Sharma (FY 2025-26)
Account Type Period of Interest Tax Status Reason
NRE FD Interest April 1, 2025 – September 30, 2025 (NRI Period) Exempt Accrued while she was an NRI.
NRE FD Interest October 1, 2025 – March 31, 2026 (RNOR Period) Taxable Becomes taxable upon becoming a Resident (RNOR). Bank will deduct TDS.
FCNR FD Interest April 1, 2025 – March 31, 2026 (Full FY) Exempt FCNR interest remains exempt for RNORs until maturity.

Tips, Common Mistakes, and Best Practices

Tips for RNORs:

  • Plan Your Return: Understand how your arrival date impacts your residential status for the current and subsequent financial years.
  • Review Investments: Before returning, review your NRE and FCNR portfolios. Consider if converting NRE funds to RFC accounts immediately upon arrival aligns with your financial goals.
  • Open RFC Account: An RFC account can be a strategic tool to hold foreign currency funds and repatriate them when needed, offering flexibility.
  • Seek Expert Advice: Given the complexities, consulting a tax expert is highly recommended to ensure compliance and optimize your tax position.

Common Mistakes to Avoid:

  • Delaying Status Change Notification: Failing to inform your bank about your change in residential status can lead to penalties and incorrect tax deductions.
  • Assuming Continued Exemption for NRE: Many mistakenly believe NRE interest remains exempt for the entire RNOR period.
  • Incorrect Calculation of Stay Period: Errors in calculating days of stay in India can lead to incorrect residential status determination and subsequent tax issues.
  • Ignoring RFC Accounts: Not leveraging RFC accounts for continued foreign currency holdings can limit financial flexibility.
  • Improper Documentation: Lack of proper records for income sources, foreign tax paid (if any), and conversion dates can create challenges during assessments.

Best Practices:

  • Maintain a meticulous record of your entry and exit dates to and from India.
  • Keep all bank statements related to your NRE and FCNR accounts.
  • Understand the difference between resident and RNOR tax rules, especially for foreign vs. Indian-sourced income.
  • Consult with a qualified Indian tax consultant or CA experienced in NRI/RNOR taxation.

Also Read | Maximize Your Savings: HUF Tax Benefits in India 2025

Expert Opinion

According to Balwant Jain, a tax and investment expert, as quoted in Livemint, “If your status becomes resident, then the interest income from NRE account becomes taxable… However, interest on FCNR account continues to be exempt even if you are an RNOR.” This aligns with our detailed explanation, emphasizing the critical distinction between NRE and FCNR interest taxability for RNORs.

Frequently Asked Questions (FAQs)

1. What is the main difference between NRI and RNOR tax status for bank accounts?

For NRIs, both NRE and FCNR interest are tax-exempt. For RNORs, NRE interest generally becomes taxable, while FCNR interest remains tax-exempt until maturity.

2. Do I need to close my NRE account when I become an RNOR?

You don’t need to close it, but you are required by FEMA to convert your NRE account to a Resident Rupee account or an RFC account immediately upon your change of residential status to Resident (which includes RNOR).

3. Can I still earn tax-free interest on FCNR accounts after becoming an RNOR?

Yes, the interest income from FCNR accounts generally remains tax-exempt in India as long as you hold RNOR status, until the maturity of the deposit.

4. What is an RFC account and should I open one?

An RFC (Resident Foreign Currency) account allows returning residents to hold foreign currency. It’s often beneficial for RNORs who continue to have foreign income or wish to retain funds in foreign currency. Funds from NRE/FCNR/NRO accounts can be transferred to an RFC account.

5. Will my bank automatically convert my NRE account when I become RNOR?

No, you need to proactively inform your bank about your change in residential status. The bank will then guide you through the conversion process.

6. Do I have to pay TDS on NRE interest after becoming an RNOR?

Yes, once your NRE account interest becomes taxable (i.e., after your residential status changes to Resident/RNOR), your bank will typically start deducting TDS (Tax Deducted at Source) on that interest as per applicable rates.

7. Is there a fixed period for which I can remain an RNOR?

Your RNOR status depends on your physical presence in India over several previous financial years. Generally, one can maintain RNOR status for a maximum of 2-3 financial years upon returning to India, provided they meet the specific criteria outlined in Section 6(6) of the Income Tax Act.

Also Read | Ultimate ITR Filing Guide for Indian Udemy Instructors

Conclusion

Understanding the tax implications of your NRE and FCNR accounts when transitioning to RNOR status is vital for seamless financial management in India. While NRE interest typically becomes taxable, the exemption for FCNR interest offers a continued advantage. Proactive planning, timely communication with your bank, and accurate tax filing are your best allies.

As experienced professionals, we reiterate that navigating these financial transitions requires precision and up-to-date knowledge. Join 500+ clients who trust Tax2Save.in with their tax and compliance needs. Need expert help with your residential status determination, account conversions, or tax filing? Don’t hesitate to connect with our experts at www.Tax2Save.in. We make tax and compliance simple, with expert guidance every step of the way.

Disclaimer: This blog post is for informational purposes only and does not constitute professional tax advice. Tax laws are subject to change, and individual circumstances vary. Please consult with a qualified tax professional for personalized advice regarding your specific tax situation.