Introduction – Why is FEMA Important for Non-Residents?
By becoming a non-resident, you have only put a distance between yourself and your country. You might have continued to maintain your social relationships with relatives, friends and others. You would have participated in periodic events like weddings, festivals and perhaps even joined reunions with old classmates. That being so there is no need for you to keep away from the financial world in your country. India has become a favourite investment destination for many people across the world. We are sure you too would find opportunities to be a part of this nation-building process. But, to do this, you would need to keep in mind certain rules and regulations. Let us look briefly at some of the important FEMA [Foreign Exchange Management Act, 1999] rules in this regard.
When are you a non-resident as per FEMA?
Succinctly put, an NRI is a person resident outside India who is a citizen of India or person of Indian origin. FEMA identifies you as a resident in India if you were in the country for more than 182 days in the preceding financial year. That is to say if you were in India for 182 days or less you would be treated as a non-resident. But there is a catch. You would be considered a non-resident even if you were residing in India for more than 182 days in the preceding year but left India for either taking up employment or carrying on business or for any purpose with the intention to stay outside for an uncertain period. Under FEMA, unlike the Income Tax Act, it is your purpose for going abroad which determines your residential status.
If you are settled abroad and have come to India for a purpose other than employment or business and have no intention to stay in India permanently, you will continue to be considered NRI irrespective of your duration of stay in India.
Bank accounts permitted for non-residents
As soon as you become a non-resident, you need to convert your existing bank accounts to accounts that are permitted under FEMA. These are:
Non-Resident (External) Rupee Account [NRE Account]
This account is in Indian Rupees and can be in the form of Savings, Current, Recurring or Fixed Deposit. Credits to this account can only be through remittances from outside India, interest paid on the account, interest on investments, as also income from local sources like rent, pension, interest, dividend, etc. If investments were made either through this account or from inward remittances, the maturity proceeds of these investments can also be credited to this account. Transfers from other NRE accounts and FCNR accounts are also permitted. Since the balance in this account is repatriable, only those credits which are repatriable can be held in this account.
The amount in this account can be used for local expenditure, remittance outside India and investments in India.
Foreign Currency (Non-Resident) Account (Banks) Scheme [FCNR (B) Account]
This account can only be in the form of a Term deposit for terms not less than one year and not more than five years. It can be held in any foreign currency which is freely convertible. On maturity, the balances can be either transferred to your NRE account or repatriated abroad.
Non-Resident Ordinary Rupee Account Scheme [NRO Account]
This is an account that can be opened by any person resident outside India for putting through bonafide transactions in rupees. Nationals of Pakistan or Bangladesh require the prior approval of the Reserve Bank of India.
Post Offices in India are also allowed to maintain savings bank accounts for persons residing outside India and allow operations on these accounts, subject to the same terms and conditions as are applicable to NRO accounts maintained with an authorized bank.
These accounts would be in the form of Savings, Current, Recurring or Fixed Deposits. Permitted credits include Inward remittances from outside India, legitimate dues in India, and transfers from other NRO accounts. The account can be debited only for local payments, transfers to other NRO accounts, or remittance of current income abroad. Balances in the NRO account can be repatriated abroad only by NRIs and PIOs, and that too up to USD 1 million only per financial year. These funds can also be transferred to the NRE account within this USD 1 Million facilities. Repatriation facility is available only for current income.
Special Non-Resident Rupee Account (SNRR account)
This account can be opened by any person residing outside India, who has a business interest in India for the purpose of putting through bona fide rupee transactions. As in the case of NRO accounts, Pakistan and Bangladesh nationals and entities require prior approval from the Reserve Bank of India. This is a non-interest bearing account.
The account can be opened only with tenure concurrent to the tenure of the contract or period of operation or the business of the account holder. In no case can it exceed seven years, except with the approval of the Reserve Bank. The balance in the account is repatriable.
Investment in companies
Foreign Investment by person/s residing outside India is essentially through what are called capital instruments. It can be done through either Foreign Direct Investment (FDI) or Foreign Portfolio Investment (FPI). FDI is when the foreign investment is (a) in an unlisted Indian company, or (b) in 10 per cent or more of the post issue paid-up equity capital of a listed Indian company. FPI refers to an investment that is (a) less than 10 per cent of the post issue paid-up equity capital of a listed Indian company or (b) less than 10 per cent of the paid-up value of each series of capital instruments of a listed Indian company.
Capital Instruments’ indicate the following:
- Equity shares (including partly paid shares issued after July 8, 2014)
- Debentures which are fully, compulsorily and mandatorily convertible
- Preference shares which are fully, compulsorily and mandatorily convertible
- Share warrants issued on or after July 8, 2014, by the Indian company
You will notice that all these instruments are fully convertible to shares. The 10% limit is calculated on the equity capital on a fully diluted basis, that is, the share capital after all the convertible instruments are fully converted into shares.
Before making the investment, you would need to verify whether the same can be done through the automatic route or through prior approval of the Government. Some industries or activities have sectoral caps as well. Also, some of these investments can be repatriable or non-repatriable.
The following investment avenues are available to a person resident outside India:
- Subscribe, purchase or sell capital instruments of an Indian company
- Purchase or sale of capital instruments of a listed Indian company on a recognized stock exchange in India
- Purchase or sale of capital instruments of a listed Indian company on a recognized stock exchange in India by NRI or Overseas Citizen of India (OCI) can be repatriated
- Purchase or sale of capital instruments of an Indian company or Units or contribution to the capital of a Limited Liability Partnership (LLP) or a firm or a proprietary concern by NRI or OCI will be on a non-repatriation basis
- Purchase or sale of securities other than capital instruments.
- In addition, investment by a Foreign Venture Capital Investor (FVCI) is also permitted so is an investment in an investment vehicle. Investments through the issuance of depository receipts by eligible persons can be effected through the issue or transfer of eligible instruments to a foreign depository.
- You can also purchase and sell Indian Depository Receipts (IDRs) issued by companies resident outside India.
Investing in immovable property
As per Section 6(5) of FEMA, a person resident outside India may hold, own, transfer or invest in any immovable property situated in India, if such property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India.
As a non-resident, you can purchase or acquire as a gift immovable property other than agricultural land, farmhouse, plantation, etc., from a resident or NRI or OCI. If acquired as a gift, it can only be from a relative. Inheritance can be from any resident person who has acquired it under laws in force. If you already have agricultural land, you can sell it or gift it only to residents. You can sell or gift any property (other than agricultural land, farmhouse or plantation, etc.,) including residential or commercial property only to a resident or NRI or OCI. Repatriation of sale proceeds in the case of residential property is restricted to two properties only.
In the case of purchase, payment for immovable property can only be routed through banking channels to India, subject to payment of all taxes and other duties or levies in India. The payment can also be transferred from NRE/ FCNR(B)/ NRO accounts of the NRIs. Payments cannot be made through travellers’ cheques and foreign currency notes. Please notes that RBI approval is required to repatriate the sale proceeds of the property acquired under section 6(5) of FEMA by a non-resident or his successor. You could however repatriate up to USD 1 million per financial year.
On return to India
Returning to India, you are at liberty to bring with you foreign exchange without any limit. However, you will need to declare to the Customs Authorities at the airport if the total value of the foreign exchange in the form of currency notes, bank notes or travellers’ cheques brought in exceeds USD 10,000 or if the value of foreign currency alone exceeds USD 5,000 or its equivalent.
If you are returning to India for permanent settlement, you can continue to hold and deal in foreign currency, foreign security or any immovable property situated outside India, if you had acquired such assets when you were a non-resident or were inherited from a non-resident person. You will also continue to be liable for all the debts you had incurred while abroad. Generally, you are be expected to extinguish these with the funds you held in that country.
All the bank accounts you held as a non-resident will have to be re-designated as resident accounts. As a resident, you will be able to open a Resident Foreign Currency account into which the amount lying in your FCNR (B) account, on maturity, can be transferred. With respect to your holdings of shares or securities, you will need to change your status to a resident with the issuing companies or depository participant.
While the above may sound quite simple, please remember that there are also penal provisions if you contravene any FEMA regulations. The penalty can be levied up to thrice the amount involved in the contravention where quantifiable. Else up to Rs.200,000. You could be charged a further penalty of Rs.5000 per day of continuous contravention. There is, of course, a procedure called voluntary compounding where the non-compliance can be regularized by paying a lesser amount.
It is best to take the services of a professional when it comes to taking care of FEMA compliance as a non-resident.