As more non-resident Indians (NRIs) consider returning to India after years abroad, tax experts say one little-understood classification—“resident but not ordinarily resident” (RNOR)—is turning the emotional decision of moving home into what some call a “high-stakes timing problem” with potentially large financial consequences.

The RNOR status, available for a limited period after an NRI becomes resident in India, can affect how global income, capital gains, U.S. retirement accounts and even inheritances are taxed. Financial planners warn that missing key deadlines in the first few years of return may lead to what some describe as “phantom tax” on overseas retirement savings, unexpected Indian taxation of U.S. tax-advantaged accounts and exposure to U.S. estate tax on American securities.

Documents, passport and calculator on a table representing RNOR tax planning for returning NRIs
Returning NRIs often juggle relocation logistics while navigating RNOR rules, Indian tax residency and cross-border paperwork. Photo: Pexels

What Is RNOR and Why It Matters for Returning NRIs

Under India’s Income-tax Act, an individual who returns to India after living abroad may be classified as “resident but not ordinarily resident” (RNOR) for a limited period, depending on their past stay in India and travel history. The provisions are set out in Section 6 of the Income-tax Act, 1961.

In RNOR status, only income that accrues or arises in India, is received in India, or is derived from a business controlled or profession set up in India is generally taxable. Foreign income that is not received in India and does not stem from an Indian business is usually outside India’s tax net during this period, according to guidance from the Central Board of Direct Taxes (CBDT).

The duration of RNOR typically ranges from about two to three years for many long-term NRIs, though the exact period varies. It depends on factors such as whether the individual has been non-resident in nine out of the ten preceding years or stayed in India for 729 days or less in the preceding seven years. Tax advisers say this nuance is why many practitioners informally refer to RNOR as a “2–3 year window” rather than a fixed term.

“RNOR is a transitional bridge between being non-resident and fully resident. For many NRIs, those two or three assessment years are the cleanest opportunity to reorganize overseas holdings,” said Mumbai-based chartered accountant Ankit Jain, speaking to this publication by phone.

The RNOR ‘Hall Pass’: A Limited Window for Offshore Capital Gains

For NRIs holding sizeable portfolios of U.S. stocks and exchange-traded funds (ETFs), RNOR can operate as what some online commentators call a “legal hall pass”. During RNOR years, many returning Indians can sell foreign securities, realise capital gains outside India and remit the proceeds to India without Indian tax on those offshore gains, as long as the income is not received in India during those years and the conditions of RNOR are met.

In parallel, U.S. taxation depends on that country’s residency rules and its domestic law. Some cross-border planners say that if an individual ceases to be a U.S. tax resident and spends fewer than 183 days in the United States in a given year—while not otherwise being classified as a U.S. resident for tax purposes—the Internal Revenue Service (IRS) typically does not tax capital gains on U.S. securities for a non-resident alien, with certain exceptions. The rules are detailed in IRS guidance for nonresident aliens.

Combining these two frameworks, advisers describe RNOR as a narrow period when both India and the U.S. may have limited claims on certain investment gains, provided treaty and domestic provisions are carefully followed. However, they caution that the specifics can differ based on immigration status, green card surrender timing, and tax treaties, including the India–U.S. Double Taxation Avoidance Agreement.

Many returnees, experts say, miss this opportunity because early years back in India are often dominated by decisions about housing, schools and employment rather than tax planning.

  • Advocates of early planning argue that NRIs should map their likely RNOR period before booking flights home.
  • More cautious professionals warn that focusing solely on tax can distort life choices and recommend first clarifying immigration and career plans.

Independent planners generally agree on one point: the financial impact of ignoring RNOR timing can be significant for those with large global portfolios.


401(k) ‘Phantom Tax’ and India’s New Form 10-EE Rules

A major area of concern for returnees from the United States is the treatment of American employer-sponsored retirement plans such as 401(k)s. While these accounts often grow tax-deferred in the U.S. until withdrawal, Indian tax law does not automatically recognise this deferral once an individual becomes resident in India.

In 2023, India introduced Form 10-EE, allowing eligible taxpayers to opt for a “specified retirement benefits” regime under Section 89A of the Income-tax Act. Under this regime, taxation in India can, in some cases, be aligned with the timing of tax in the foreign jurisdiction for certain foreign retirement funds.

Tax professionals say that if a returning Indian does not make the required declaration in the prescribed time—usually in the first year they become ordinary residents—India may treat the annual accretion in the foreign retirement account (such as unrealised gains, interest or employer contributions) as taxable each year. This phenomenon is sometimes described in NRI forums as a “phantom tax” because individuals can be taxed on growth they cannot yet access without penalties in the U.S.

“Missing the Form 10-EE deadline can substantially change the effective tax rate on a 401(k). Many people only discover this after they have already become full residents and their options narrow,” said Bengaluru-based tax consultant Ritu Mehra.

Some commentators argue that the rules are overly complex for ordinary savers and call for clearer bilateral guidance between India and the U.S. Others counter that, in the absence of a specific treaty article on 401(k)-type plans, domestic anti-deferral rules are expected and that the new form represents an improvement over earlier uncertainty.

Regardless of perspective, advisers broadly recommend that returning NRIs seek professional guidance on 401(k), IRA and other foreign pension plans before or during their RNOR years to avoid unintended annual Indian taxation on notional gains.


Roth IRAs: ‘Tax-Free’ in the U.S., Not Always in India

Roth individual retirement accounts (Roth IRAs) are widely viewed in the United States as “tax-free forever” for qualified distributions, because contributions are made from after-tax income and withdrawals of earnings can be exempt from U.S. tax if conditions are met. However, Indian tax law does not contain a parallel provision that automatically exempts Roth IRA growth.

Several Indian tax practitioners state that, once a person becomes ordinarily resident, India may tax Roth IRA earnings as income when they accrue or when withdrawn, depending on how the account is characterised and the facts of the case. India–U.S. treaty provisions do not explicitly refer to Roth IRAs, leading to differing interpretations on whether such accounts qualify as “pension funds” under the agreement.

Because of this mismatch, some planners suggest that, for certain individuals, it may be financially preferable to consider drawing down or restructuring Roth balances while still non-resident or during RNOR, even if that involves early withdrawal penalties or U.S. tax. Others caution that this strategy is not universally appropriate and that any decision should account for age, time horizon, U.S. filing obligations and state tax rules.

  • Pro-restructuring view: Better to incur a known U.S. penalty today than face ongoing Indian taxation and complex reporting in the future.
  • Cautionary view: Early Roth withdrawals may erode long-term compounding, and evolving Indian guidance could alter the analysis.

There is broad agreement that returning residents should not assume that U.S. “tax-free” status automatically transfers to India. Evaluating Roth IRAs alongside 401(k)s, traditional IRAs and taxable accounts is now a standard part of cross-border financial planning for NRIs moving back.


The US$60,000 Threshold and U.S. Estate Tax on U.S. Securities

Another issue attracting attention in NRI circles is U.S. estate tax on U.S.-situs assets. Under current U.S. law, non-resident, non-U.S. citizens who die holding certain U.S. assets—such as shares of U.S. corporations and U.S.-domiciled ETFs—may be subject to U.S. estate tax if the gross value of their U.S. assets exceeds US$60,000. The rules are outlined in IRS guidance on foreign estates.

For India-based investors who maintain large U.S. portfolios in instruments such as Apple, Microsoft, Nvidia or popular ETFs like VOO and VTI, this creates what some advisers call a “death tax risk”. While marginal rates can reach up to 40 percent above applicable thresholds, the effective impact depends on the value of U.S. assets, treaty relief (if any) and the overall estate structure.

As a result, some financial planners recommend that long-term India residents consider non-U.S.-domiciled funds that provide exposure to U.S. markets, such as Ireland-domiciled UCITS ETFs, often traded on European exchanges. Because these are generally not classified as U.S.-situs assets, they may fall outside the scope of U.S. estate tax for non-residents, though they often have different withholding tax and regulatory considerations.

“Estate tax exposure becomes more relevant as people move into their 40s and 50s and accumulate larger portfolios. We see a growing shift from U.S.-domiciled funds to Ireland-domiciled alternatives among globally diversified Indian families,” said a Singapore-based wealth manager who advises South Asian clients.

Critics of such portfolio shifts note that Ireland-domiciled ETFs may involve higher expense ratios, less liquidity or currency complications. Supporters argue that for individuals with substantial wealth, potential estate tax savings and succession simplicity can outweigh these costs.


Cross-Border Gifting: Differing Rules for Cash and Securities

Gifting rules add another layer of complexity for NRIs returning to India. In the United States, the federal annual gift tax exclusion—US$18,000 per recipient for 2024—allows individuals to make cash or stock gifts up to that amount each year without using lifetime estate and gift tax exemptions, according to the IRS.

From the Indian perspective, receipt of gifts may be taxable for the recipient if the total value of money or specified property received without adequate consideration exceeds ₹50,000 in a financial year, subject to exemptions for gifts from relatives and on certain occasions, as detailed in Section 56(2)(x) of the Income-tax Act. The character of the asset—cash versus shares—can affect both countries’ reporting and tax implications.

Some cross-border advisers say that, in practice, families often use stock gifting strategies—such as transferring U.S. securities between spouses or to children—to spread future gains or optimise estate outcomes, provided local and foreign laws are respected. They caution, however, that such moves can have unintended consequences if the recipient later changes tax residency or if documentation is incomplete.

Specialists generally recommend that NRIs coordinate their gifting plans with both Indian and foreign tax professionals, particularly when large sums, overseas brokerages or complex family structures are involved.


Planning RNOR Years: Timelines, Trade-offs and Compliance

The convergence of RNOR rules, foreign retirement accounts, estate tax exposure and gifting regulations means that timing is often central to financial decisions around moving back to India.

Tax planners say a typical framework for a returning NRI might include:

  1. Determining Indian tax residency year by year, including when RNOR begins and ends.
  2. Clarifying U.S. tax residency status and any continuing filing requirements.
  3. Mapping when to realise capital gains on foreign investments, if appropriate.
  4. Evaluating options for 401(k)s, IRAs, Roth IRAs and other foreign retirement plans, in light of Section 89A and Form 10-EE.
  5. Assessing U.S. estate tax exposure on U.S. securities and considering structural changes if warranted.
  6. Designing a gifting and inheritance plan that is consistent with both jurisdictions’ rules.

Some financial advisers emphasise that, while the stakes can be high for those with significant overseas assets, not every returning NRI will need elaborate structures. For those with modest balances or primarily Indian income, basic compliance and timely disclosures may suffice.

Others argue that even middle-income families increasingly face cross-border complexities as international investing becomes accessible through online platforms, overseas ESOPs and robo-advisers.



Conclusion: An Emotional Move with Technical Deadlines

For many NRIs, the decision to move back to India is driven by family, career and lifestyle considerations. Yet the transition also triggers technical milestones in both Indian and foreign tax systems that can have long-term financial effects.

Experts from multiple disciplines—chartered accountants, cross-border planners and wealth managers—concur that the combination of RNOR rules, foreign retirement accounts, estate tax exposure and gifting regimes makes early, coordinated advice critical. While views differ on specific tactics, there is wide agreement that understanding the timelines and filing requirements in the first few years of return is more important than trying to “game” either tax system.

Ultimately, specialists say, the key for returning NRIs is to align emotional decisions about home and family with a clear-eyed understanding of the clock: when RNOR starts and ends, when forms such as 10-EE are due, and how cross-border assets will be treated as residency status changes.

Note: This article is based on publicly available regulations, professional commentary and cross-border planning practices as of December 30, 2025. It is intended for informational purposes and does not constitute legal or tax advice. Individuals should consult qualified advisers for guidance tailored to their specific circumstances.