Dos & Donts under FEMA for NRIs

29th January, 2011

WIRC of the Institute of Chartered Accountants of India

Presented by

CA Natwar G. Thakrar

AGENDA
Overview of FEMA Dos and donts - General Meaning of NRI/PIO and determination of Residential Status Classification of transactions Entry Strategy and avenues for investment Bank Accounts in India by NRI/PIO Borrowings & Lending from/ to NRI/PIO Miscellaneous

Overview of FEMA Provisions

Transition from FERA to FEMA

FERA Regulation Foreign ExchangeGovernments asset Considered as a Criminal Act- Imprisonment Enforcement Directorate had major role to play. Stringent FEMA Management Foreign Exchange-Earners asset Considered as a Civil ActMonetary Penalty RBI plays a larger role. Business friendly

Extraterritorial Jurisdiction
FEMA extends to the whole of India. Thus, any person who is present in India at the time of transaction has to comply with the provisions of FEMA It also applies to the branches, offices and agencies outside India owned or controlled by a person resident in India and also to any contraventions there under committed outside India by any person to whom the Act applies.

Dos and Donts - General

Dos for NRIs

Distinguish between PRII & PROI Distinguish current account transactions from capital account transactions Inform respective persons of the change in residential status Plan ahead- keep a track of investments made from rupee funds in India and funds remitted from abroad Understand repatriability of sale proceeds of assets located in India Comply with statutory guidelines for filing documents / reporting requirements for different transactions

Donts for NRIs

Executing Capital Account transactions which are prohibited/ not covered by a general permission Effecting current account transactions which are prohibited/ restricted Instructing residents to make onward payments on their behalf Netting off of transactions with residents

Meaning of NRI/ PIO and determination of Residential Status

Non Resident Indian (NRI)

The term NRI has not been defined in FEMA, 1999. Section 2(w) defines a person resident outside India as a person who is not resident in India. However, NRI has been defined under FEMA Regulation 2(vi) of the FEMA-21 (Acquisition & Transfer of Immovable Property in India) Regulations 2000 as follows:
An NRI is a person resident outside India who is a citizen of India or is a Person of Indian Origin (PIO)

It is possible you may be an NRI under FEMA, yet may be a resident under the Income tax laws. NRI could mean differently due to difference in PIO definition under different Notifications

Person of Indian Origin (PIO)

PIO also has been defined differently under several Notifications Regulation 2 of Notification 5 defines Person of Indian Origin (PIO) as follows:
a citizen of any country other than Bangladesh or Pakistan, if
(a) he at any time held Indian passport; or (b) he or either of his parents or any of his grand-parents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 or (c) the person is a spouse of an Indian citizen or a person referred to in sub-clause (a) or (b) above.

Person Resident in India

Section 2(v) ;

A person (being an individual) residing in India for more than 182 days during the course of the preceding financial year but does not include: (A) A person who has gone out of India or who stays outside India, in either case (a) for or on taking up employment outside India, or (b) for carrying on outside India a business or vocation outside India, or (c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period; (B) A person who has come to or stays in India, in either case, otherwise than (a) for or on taking up employment in India, or (b) for carrying on in India a business or vocation in India, or (c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;

Individual coming to India: Conditions for residence

1. Did he reside in India for more than 182 days during the preceding financial year ? Or 2. Purpose for coming to India:
employment business/vocation any other purpose indicating his intention to stay in India for uncertain period , -----------------------------------------------------

If answer of any of the above is yes, then he is a resident for the year.

Individual leaving India: Conditions for residence

1. Did he reside in India for more than 182 days during
the preceding financial year ? Or

2. Purpose for leaving India is otherwise than:

employment business/vocation any other purpose indicating his intention to stay outside India for uncertain period, --------------------------------------------------

If answer of 1 or 2 above is yes, then he is a resident for the year or else Non resident.

Residential Status: Illustrations

1. Person leaving India: Mr. Reddy has boarded the flight to New Zealand on 25th December 2009 for taking up employment as Software Engineer. This is his first visit abroad. His residential status for the financial year 2009 2010 is as under:
Mr. Reddy resided in India for more than 182 days during the financial year 2009 2010. Though he satisfied the basic threshold condition, the first exception in clause A [S. 2(v)(i)(A)] would be applicable since he is leaving India for taking up employment. Accordingly, Mr. Reddy will be a person resident outside India from 25th December, 2009.

ILLUSTRATION contd.
2. Person coming to India:
i)

Mr. John , a citizen of the USA, came for the first time to India on 10th April 2008 and got religiously involved and stayed in Puttaparthi, Andhra Pradesh till 7th March 2009. He left for USA on 8th March 2009 and again came to India to visit Saibaba at Puttaparthi on 23rd August 2009. Mr. John stayed in India till 31st March 2010. What is the Residential Status of Mr. John for the financial year 2008 2009 and 2009 2010? Reply:Financial year 2008 2009:He has not satisfied the basic threshold condition of physically residing in India for more than 182 days during preceding financial year (i.e. 01.04.2008 to 31.03.2009). Hence, Mr. John will be a person resident outside India for the financial year 2008 2009.

ILLUSTRATION contd.
ii ) Financial year 2009 2010:-

Mr. John satisfied the basic threshold condition of physically residing in India for more than 182 days during preceding financial year (i.e. 01.04.2009 to 31.03.2010) However, the exception in Clause B [S.2(v)(i)(B)] would be applicable to Mr. Johns case since he has not come to India on 23rd August 2009 for any of the three purposes mentioned therein. Accordingly, Mr. John would be a person resident outside India for the financial year 2009 2010.

Change in Residential Status

From Non Resident to Resident Section 6(4): A person resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India From Resident to Non Resident Section 6(5) A person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or 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

Emigrating Indians
An emigrants dilemma
Do I need to inform anyone of change in residential status from R to NRI? Will there be any benefits of doing so? Are there any risks of not informing relevant parties?

Typical stakes
Bank accounts, Fixed Deposit receipts, Credit cards Investment in partnership/ proprietorship business Directorship in private / public companies Immovable properties Investment in securities in India Loans taken from / given to a residents in India Housing loans

Classification of Transactions

Classification of Transactions

Current Account

Capital Account

Trade

Invisibles Tour Travel Remittance Gift Profit/Div/Int

FDI

Portfolio

Loan
(Govt/ Pvt (ECB)

Exports

Imports

Foreign Indian Source Source (FII)

(GDR/ADR) Fcy A/C RI & 21 NRI

Current Account Transactions

Section 2(j) A transaction other than Capital Account Transaction and without prejudice to the generality of the foregoing, such transaction includes
Payments due in connection with foreign trade, other current business, services and other short term banking credit facilities in the ordinary course of business, Payments due as interest on loans and as net of income from investments, Remittances for living expenses of parents, spouse and children residing abroad, Expenses in connection with foreign travel, education and medical care of parents, spouse and children

Fully delegated to ADs

Current Account Transactions

Section 5 - Central Government authorized to put reasonable restrictions on current account transactions Central Government vide Notification No. GSR 381E has prohibited drawal of Foreign Exchange for
Schedule I transactions Travel to Nepal and / or Bhutan Transactions with a person resident in Nepal or Bhutan

Schedule II transactions can not be undertaken without prior approval of the Government of India Schedule III transactions are freely permitted up to the prescribed limits without any specific approvals All other type of current account transactions are freely permissible

Capital Account Transactions

Section 2(e) Capital account transactions mean a transaction which alters the assets or liabilities, including contingent liabilities outside India of a person resident in India or the assets or liabilities in India of a person resident outside India and includes transactions referred to in sub-section (3) of section 6 Regulation 4(a) of Notification prohibits all capital account transactions unless permitted through general or specific approval by the RBI Examples - borrowing, lending & investment FDI , FII, ECBs , NRI deposits , Overseas Investments expanding convertibility

Capital Account Transactions Donts for NRIs

Regulation 4(b) of Notification 1 No person Resident outside India can invest in in India , in any form, in any company or partnership firm or proprietary concern or any entity, whether incorporated or not, which is engaged or proposes to engage
in the business of chit fund, or as Nidhi Company , or in agricultural or plantation activities or in real estate business, or construction of farm houses or in trading in Transferable Development Rights (TDRs).

Similarly FDI in following activities is prohibited Retail Trading Atomic Energy Lottery Business Gambling and Betting

Entry Strategy & Avenues for Investment

Entry Strategy for NRIs

Investment As

Foreign Company through -Liaison Office -Project Office -Branch Office

Indian Company through

Non Corporate Entity through - Partnership Firm - Proprietorship

-Joint Venture -Wholly Owned Subsidiary

Avenues of Investments
FDI scheme Two Routes Automatic & Approval Portfolio investment scheme (only for NRIs)
An NRI can purchase upto 5% shareholding in a listed company restriction on non-delivery based transaction One account only can be opened under PIS Scheme / Route all purchase/sale transactions through this account only.

Investment in Partnership/ Proprietorship

agricultural/plantation activity or real estate business, i.e. dealing in land and immovable property with a view to earning profit or earning income prohibited

Non-repatriable investment scheme (only for NRIs)

No cap on investment in a listed or unlisted company No restriction on non-delivery based transaction

Avenues of Investments
Investment scheme for securities other than shares / debentures (for NRIs)
Investments on repatriation basis Government securities (other than bearer securities) Treasury bills Units of domestic mutual funds Bonds issued by PSUs Shares in PSUs being disinvested by the Government of India Investments on non-repatriation basis Government securities (other than bearer securities) Treasury bills Units of money market mutual funds National Plan / Savings Certificates

NRIs can invest in exchange traded derivative contracts Investment only through rupee funds in India and on nonrepatriation basis

Avenues of Investments
Investment in Real Estate
FDI & for own use in real estate business, or construction of farm houses or in trading in TDRs prohibited.

FDI in Real Estate Development by NRIs/PIOs

100% FDI under Automatic Route (Press Note 4 (2006 Series- S. No. 11)
Types of Projects Covered
Development of Serviced plots and construction of built-up residential premises Investment in real estate covering construction of residential and commercial premises including business centers & offices Development of Townships City & Regional level urban infrastructure facilities including Roads & bridges Manufacture of Building materials Participatory ventures in above Housing Finance Institutions

Special Exemptions from conditions of PN 2/2005 for NRIs/PIOs

Minimum Area, Minimum capital, 6 Month Capitalisation Period, Condition for 50% project development within 5 years and repatriation of profits

Immovable Properties by NRIs

Dos for NRIs/PIOs Can acquire property for holding/self-use. Can sell the property & repatriate sale proceeds abroad, most of the times. Can give the property on rent & repatriate funds abroad after payment of taxes.

Donts for NRIs/PIOs Can not buy agricultural property, plantations & farm houses. Can not do Real Estate Trading, or trade in Transferable Development Rights.

Transfer of Immovable Properties by NRIs

Dos for Indian Citizens (NRIs) - can transfer immovable property without any approval except as under:
- Non-Agricultural property can be sold or gifted away to Indian residents & NRIs. (Not to foreigners who are non-residents.) - Agricultural Property can be sold or gifted, only to Indian residents. (even if they are foreign citizens.)

Dos for PIO - can transfer immovable property without any approval except as under:
They can sell or gift non-agricultural property to an Indian resident or NRI, without any approval. They can sell or gift agricultural property only to an Indian citizen & Indian resident.

Renting of Immovable Property

NRIs can rent their property. Excessive Properties/renting may tantamount to business in Real estate and become prohibited activity. Rent can be repatriated abroad after payment of taxes

Immovable Property & Change of Residential Status

Resident who becomes NR can continue to hold property in India. Agricultural activities cannot be done in case of agricultural properties. People who acquire foreign citizenship can continue to hold property in India. Non-resident who become resident can continue to hold property. Repatriability is lost.

Investment in Real Estate by NRIs/PIOs (Other than FDI)

Reg Acquire Agricultural Land, Plantation, Farm House Other Land 3(a) No except Inheritance from PROI/PRII. Restriction on use/ repatriation possible Yes 4(c) No except Inheritance from PROI/PRII Restriction on use/ repatriation possible Purchase Inheritance Gift from NRIs, PIOs & PRII NRIs Reg PIOs Reg 5 Others Branch In accordance with applicable law Remittances from abroad Form IPI has to be filed with RBI within 90 days Diplomatic offices of Foreign Government Remittances from abroad Approval from Ministry of External Affairs Repatriation Allowed

3(a)

4(a) 4(c) 4(b)

5(a)

Transfer Agricultural Land Other Land 3(b) Sale or Gift to PRII only Gift, Sale or inheritance to NRIs, PIOs & PRII 6(a) &(b) Up to Original Investment in FC and for Residential Property- maximum for 2 houses Balance under US $ 1 Million Scheme 4(e) 4(d) 4(f) Sale & gift to PRII who is Citizen of India Sale to PRII Gift to NRIs, PIOs & PRII Up to Original Investment in FC and for Residential Property- maximum for 2 houses Balance under US $ 1 Million Scheme

Repatriation

Bank Accounts/ Deposit by NRI/PIO

Bank Accounts
Type of Accounts

Non-Resident (External) Rupee (NRE) Accounts

Savings, Current & Recurring, Fixed deposits Rent, Dividend, Interest, Pensions, etc. subject to payment of tax Principal/ Interest repatriable Joint account with a Resident not permitted POA can not open the account

Foreign Currency (Non-Resident) Account (Banks) Scheme (FCNR(B) Account

Only Term Deposits of minimum duration of one year and in designated currencies i.e. US Dollar, Pound Sterling, EURO, Japanese Yen, Australian Dollar and Canadian Dollar Principal/ Interest repatriable Joint account with a Resident not permitted POA can not open the account

Bank Accounts
NRO Accounts
Type of Accounts - Savings, Current & Recurring, Fixed deposits Credits- Rent, Dividends, Interest, Pensions, etc Current earnings are repatriable Can also be opened jointly with a Resident POA can not open the account Can remit an amount up to USD 1 million per financial year, out of the balances held in his NRO account/sale proceeds of assets (inclusive of assets acquired by way of inheritance or settlement) for all bona fide purposes, to the satisfaction of the AD bank,
On production of an undertaking by the remitter Certificate by CA in the formats prescribed by CBDT vide circular No.10/2002 dated October 09, 2002.

Bank Accounts
Any individual cannot hold both the status i.e. Non-resident as well as resident at the same time. Therefore, if the individual is an NRI, he needs to close normal saving account and open NRE/NRO or both accounts. The monies lying in resident saving account can be transferred to NRO account. If the individual is resident Indian, then he needs to have a resident saving account and close NRE/NRO accounts.

Status of NRI Bank Accounts in India on Return

(a) Ordinary Non-Resident Accounts These have to be converted to resident accounts by banks on return of the account holders to India and consequently becoming resident in India. (b) Non-resident (External) Rupee Accounts: These can be converted to resident rupee accounts or RFC (Resident Foreign Currency) accounts on becoming resident in India. In case of NR(E) fixed deposits, the accounts can continue till maturity, even after being converted to resident account. (c) FCNR (Banks) Account: These deposits can be converted to resident rupee account or RFC account on maturity at the option of the account holder on his becoming resident in India.

Borrowing & Lending

Lending by NRI/ PIO

Non-residents can lend to residents either in foreign exchange or in rupees either on repatriable basis or non-repatriable basis. (1) Repatriable Basis: (a) Lending in Foreign exchange to resident individual. (b) Lending in rupees to Indian companies by issue of Non-Convertible Debentures. (2) Non-Repatriable Basis: (a) Lending in rupees to residents. (b) Lending in rupees to Indian companies by issue of Non-Convertible Debentures. Lending by NRIs on Repatriable Basis. Lending in foreign exchange to resident individual. Non-residents can lend money to resident close relatives (as defined under section 6 of the Companies Act, 1956) in foreign exchange up to us $ 2,50,000 or its equivalents subject to the following conditions: (1) Loan is interest-free. (2) Minimum maturity period of loan is one year.

Lending to NRI/ PIO

ADs are allowed to grant loans against permissible security (other than agricultural or plantation property or farm house)
Banks are prohibited from granting fresh loans or renewing existing loans in excess of Rs.100 lakhs against NR(E)RE and FCNR(B) deposits either to the depositors or to third parties.

Conditions on end use

Loan only for personal / or for own business purposes. The loan shall not be utilised for the business of chit fund, Nidhi Company, Agricultural or plantation activities, Real estate business, construction of farm houses; or Trading in TDRs. Directives from the Reserve Bank should be duly complied with. The loan can not be credited to NRE/FCNR account or remitted outside India. The repayment of loan shall be out of remittances from outside India / debit to NRO/NRE/FCNR account / sale proceeds of shares or securities or immovable property against which such loan is granted.

Miscellaneous

Remittance of Assets
Remittance of Rent, Dividend, Pension, Interest etc. of NRI/PIO (even those who do not maintain an NRO account) is freely allowed on the basis of
appropriate certification by a CA that the amount proposed to be remitted is eligible for remittance and that applicable taxes have been paid/provided for.

NRI/PIO have the option to credit the current income to their NRE (rupee) account provided
the AD is satisfied that the credit represents current income of the Non resident account holder and income tax thereon has been deducted / provided for.

Remittance of Assets
Remit an amount up to USD 1 million per financial year, out of the balances held in his NRO account/sale proceeds of assets (inclusive of assets acquired by way of inheritance or settlement) for all bona fide purposes, to the satisfaction of the AD bank,
On production of an undertaking by the remitter Certificate by CA in the formats prescribed by CBDT vide circular No.10/2002 dated October 09, 2002.

Remit sale proceeds immovable property purchased out of Rupee funds (as a person resident in India) without any lock in period subject to submit documentary evidence in support of purchase, inheritance or legacy of assets An undertaking by the remitter Certificate by CA in the prescribed format

Remittance of Assets
The remittance facility in respect of sale proceeds of immovable property is not available to citizens of Pakistan, Bangladesh, Sri Lanka, China, Afghanistan, Iran, Nepal and Bhutan The facility of remittance of sale proceeds of other financial assets is not available to citizens of Pakistan, Bangladesh, Nepal and Bhutan

NRI/ PIO on visit to India

Can bring in with themthem1. In Indian RupeesRupees(a) up to Rs. 5,000 from any country other than Nepal or Bhutan, and Rs. (b) any amount in denomination not exceeding Rs.100 from Nepal or Bhutan. Rs. Bhutan.

2. Foreign ExchangeExchangecan bring without any limit provided if 1. the value of foreign currency exceeds USD 5,000/- or its equivalent, 000/ 2. the aggregate value of the foreign exchange in the form of currency notes, bank notes or TCs brought in exceeds USD 10,000/- or its equivalent and/or 10,000/ To be declared to the Customs Authorities at the Airport in the Currency Declaration Form (CDF) on arrival in India. India.

natwarthakrar@gmail.com