Most people who travel abroad for business, work or leisure are aware that the government keeps a tight leash on the amount of foreign currency that can be taken overseas by travelers.
The mechanism that the government resorts to control the outflow of foreign exchange and prevent money laundering is the Foreign Exchange Management Act (FEMA) of 1999.
FEMA, which regulates the flow of foreign currency across Indian borders, replaced the more stringent Foreign Exchange Regulation Act (FERA) in the wake of economic reforms implemented in the country in the early nineties. A main difference is that unlike FERA, the revamped FEMA makes violations related to foreign exchange a civil, rather than criminal, offense.
It is important for Indians working abroad to understand FEMA rules very carefully since it can affect the way they can send and receive funds from India.
Here are a few FEMA regulations that NRIs need to be cognizant of::
NRE, NRO and FCNR account: When you change your status from resident to Non-Resident Indian or NRI, you have to go through some formalities concerning the Savings Accounts you hold. FEMA rules do not allow NRIs to hold a resident savings bank account. The Reserve Bank of India (RBI) has stipulated that NRIs need to set up an NRE, NRO or FCNR account.
– An NRO is a Non-Resident Ordinary rupee account and can be held jointly by two or more NRIs. Only inward remittances from outside India and remittances from earnings in India are possible through this account. Funds remitted, therefore, are non-repatriable to another country. Income earned in this account is fully taxable.
– An NRE is a Non-Resident (External) Rupee account. It permits for money remittances from outside India, and the entire amount in the account is also repatriable back to the country where the NRI currently resides. Income earned in this account is exempt from taxation.
– FCNR is a Foreign Currency (Non-Resident) Account, and NRIs can deposit any foreign currency in it. It is a foreign currency fixed or term deposit available for one to five years. There is no tax implication on this type of account, and funds are completely repatriable on maturity.
Investment options: One of the important FEMA rules for NRIs is about where they can invest. NRIs are permitted an unlimited amount of investment options through repatriable and non- repatriable transactions. However, as per the FEMA rules for NRIs, they cannot make investments in small savings or Public Provident Fund (PPF) schemes of the government.
NRIs can also purchase or invest in residential or commercial properties in India. However, purchasing agricultural property, plantations, farmhouse land is not allowed. NRIs can also receive immovable property as gifts from relatives or through inheritance.
Earnings from immovable assets: Many NRIs are confused on whether they can repatriate earnings from immovable assets abroad. FEMA says that NRIs are permitted to remit foreign currency back to India on the foreign repatriable assets such as rent earned from an immovable property owned overseas. According to FEMA guidelines for NRIs, sale proceeds of such assets are non-repatriable outside India without RBI approval. Repatriation of up to US$1 million per financial year is allowed if you have inherited the property or retired from employment in India.
Students going abroad: Students pursuing higher studies overseas are treated as NRIs and are eligible for all facilities available to NRIs under FEMA. They are entitled to receive remittance up to $1 million a year from their NRE or NRO accounts or profits on property.
Change in residency status: According to the RBI, immediately upon the return of the account holder to India for taking up employment or on change in the residential status, an NRE account should be designated as resident account, or the funds held in these accounts should be transferred to the RFC accounts, at the option of the account holder.
On change in residential status, FCNR (B) deposits may be allowed to continue till maturity at the contracted rate of interest, if so desired by the account holder. Authorised dealers should convert the FCNR(B) deposits on maturity into resident rupee deposit accounts or Resident Foreign Currency (RFC) account at the option of the account holder.
An RFC Savings Account can be maintained in any convertible foreign currency for NRIs who have returned to India and hold funds in foreign currency. Besides providing safe parking for your foreign currency funds, it can be transferred to an NRE/FCNR account if you change status to that of an NRI again.
NRO accounts may be designated as resident accounts on return of the account holder to India for any purpose indicating his intention to stay in India for an uncertain period.
