NRI/OCI: FEMA Provisions to Know

The political world is often confounded with the problems (both real and imagined) associated with immigration and unwanted immigrants. Thankfully, Indians are often the acceptable immigrants around the world. Non-Resident Indians (NRI) /Overseas Citizens of India (OCI) are increasing year upon year. As per a recent UN data, out of 272 million global migrants internationally, 17.5 million have origins in India, which is around 6.4% of the world’s total immigrant population.

NRI/OCI have been significant contributors to the Indian Economy. In absolute numbers, NRI/OCI segment is less than 1% of the Indian population and yet contributes 3.4% to Indian GDP. India has been top recipient of remittances worldwide in 2018, as per data from World Bank. As compared to Persons Resident Outside India (PROI), NRI/OCI community enjoys certain privileges under Foreign Exchange Management Act, 1999 (FEMA). This article brings out the relevant FEMA provisions applicable to them.

NRI means a person resident outside India (PROI) who is Indian citizen.

OCI means an individual resident outside India who is registered as an Overseas Citizen of India Cardholder under section 7A of Citizenship Act, 1955

Permissible Capital Account Transactions by PROI:

While current account transactions are permissible transactions unless prohibited, but capital account transactions are prohibited transaction unless specifically permitted. Below are the permissible capital account transactions, and its related regulations, by PROI.

Prohibition on Investment by PROI:

Under Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000, as amended time to time, PROI, including NRI/OCI, is prohibited for making investment in below sectors:

• Business of chit fund (subject to authorization by Registrar Chits/Officer authorized by State Government)
• Nidhi company
• Agricultural or plantation activities
• Real estate business or construction of farmhouse
• Trading in TDR

Purchase of Immovable Property in India by NRI/OCI

Provision for acquiring/transfer of immovable property in India by NRI/OCI are governed by rule 24 and 25 of Foreign Exchange Management (Non-debt Instruments) Rules 2019, hereinafter referred as NDI Rules. A NRI/OCI is permitted to acquire immovable property in India in the following manner: –

a. Purchase: Acquire immovable property (other than an agricultural land/ farmhouse/plantation property) in India. The consideration should be paid from foreign inwards remittance/ out of funds in any non-resident account in India. Payment should not be made by traveler’s cheque / foreign currency notes.

b. Gift from Relative: NRI/OCI can acquire immovable property in India, (other than agricultural land/farmhouse/ plantation property), by way of gift from PRI/NRI/OCI who is relative u/s 2(77) of Companies Act 2013. The definition includes husband, wife, father, mother, brother, sister, son, daughter, son’s wife, daughter’s husband etc.

c. Inheritance: Acquire any immovable property, including agricultural land/farmhouse/plantation property, in India by way of inheritance from PRI/PROI.

There is no limit on the number of properties that can be acquired or hold by NRI/OCI. Further, spouse of NRI/OCI who is foreign national and non-resident, can also purchase, in joint name, one immovable property (other than agricultural land or farmhouse or plantation property) in India, subject to condition that the marriage is registered and subsisted for minimum 2 years and non-resident spouse is not otherwise prohibited from such acquisition.

Sale/Transfer of Immovable Property in India by NRI/OCI

• May sale/transfer any immovable property in India to PRI;
• Transfer any immovable property (other than agricultural land/farmhouse/plantation property) to an NRI or an OCI.

Mr Sha Mathew, a NRI, acquired, without RBI approval, two agricultural properties in India in 2012 for a consideration of Rs. 16.40 lacs. NRI is permitted to acquire immovable property (other than agricultural land/farmhouse/plantation property) in India. Hence acquiring agricultural land in India by NRI was contravention of the regulation. He approached RBI to approve defacto transaction of acquiring agricultural land in India. RBI advised him to sell/transfer the agricultural land within 6 months to person resident in India who is Indian citizen, and then apply for compounding.  This condition was duly complied with. Undue gains in the compounding were worked out to Rs. 24 lacs approx. The contravention was regularized through compounding on payment of Rs. 25 lacs approx. (CA 87/2019)

Mr Barry Kendal Dansie, & Others, all British Citizens and resident of UK acquired, without RBI approval, an immovable property in Goa, consisting of residential house, cultivation of coconut and other trees. The property was purchased for Rs. 10 lacs in 1995.  Acquisition of immovable property in India by a non-resident foreign national & non origin of India, was a contravention of regulation. RBI advised them to dispose off the property within 6 months to a person eligible to acquire the immovable property in India as per FEMA regulation and approved this subject to compounding. The property was sold for Rs. 90 lacs in 2016. The contravention was regularized through compounding on payment of Rs. 30 lacs (CA 48/2016).

Mrs Jill Roberts, wife of Mr. Richard Piviroto, was a foreign national and not resident in India. Mr Richard Piviroto has been granted permission to acquire immovable property in India by RBI. However, Mr Richard acquired the property in joint name with his wife. RBI advised to sale the property to the person who is eligible to acquire the same as per FEMA regulations. The contravention was regularized through compounding on payment of Rs. 7 lacs approx (CA 103/2019).

NRI/OCI must check the nature of immovable property being purchased by them in India-

Iqbal Singh Sabharwal, a NRI, purchased an open plot in India at auction conducted by Debt Recovery Tribunal in Nov 1999. In 2003, Enforcement Directorate, initiated investigation against him alleging that the plot acquired in the open auction is an agricultural plot which has been purchased by violating the provisions of FEMA Act. Respondent informed the petitioner that the plot purchased by him fell under industrial zone and hence there was no violation of any penal law. Supporting documents including letter issued by the District Town Planner, was submitted. Enforcement Directorate (ED) imposed a penalty of Rs. 5 lacs, which finally was quashed by Punjab & Haryana High Court. (Iqbal Singh Sabharwal vs Union of India March, 2009).

NRI/OCI may hold, own, transfer, invest in Indian currency, security, immovable property in India if it has been acquired/held/owned by him when he was resident in India/ inherited from PRI. Hence if a person is holding agricultural land which was acquired by him when he was resident in India and subsequently becomes NRI/OCI, then such NRI/OCI may continue holding agricultural land in India.

Following precautions should be taken by NRI/OCI:  

• Not to purchase agricultural land, plantation property or farmhouse.
• Not to engage in real estate trading or trading in TDR.
• Citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Macau, Hong Kong and Democratic People’s Republic of Korea not to acquire or transfer immovable property in India, without prior permission of Central Government. However, they are permitted to take immovable property on lease for a period up-to 5 years. (this condition is not applicable to OCI).

Opening, Holding or Maintenance of Bank Accounts in India by NRI/PIO:

NRI/PIO are permitted to open NRE/FCNR(B)/NRO account in India, the details as given below:

A resident power of attorney holder cannot open any account for NRI/OCI but permitted to make local, rupee payments on behalf of the NRI/OCI.

If NRI/PIO returns to India, then deposits may be allowed to continue till maturity, if so desired by NRI/OCI. However, excepts the provisions relating to rate of interest and reserve requirements, for all other purposes such deposits are treated as resident deposits from the date of return of the account holder to India.

In FCNR(B), the deposit in rupee denomination is not possible, in NRE account rupee denomination is possible but only if it is net of tax. Hence if NRI/PIO have income from India like dividend, rent, or sale of property etc then NRO account becomes necessity. Similarly, if one has foreign income but wish to maintain liquidity in INR, then NRE account is advisable as it has benefit of full reparability and interest income is exempt from tax.

Mr. Rakesh Kumar, NRI returned to India in 1995 but despite change in residential status from NRI to resident individual (PRI), he continued to renew his FD under FCNR(B) account till April 2019. As per regulation, when an account holder becomes a PRI, the deposits may be allowed to continue till maturity at the contracted rate of interest, if so desired by him but cannot be renewed further. The contravention of getting the FD renewed inspite of change in residential status, was sought to be regularized through compounding. The amount involved in FD was Rs. 4.5 Cr. The compounding was done for Rs. 1.20 Cr, but since the compounding amount was not made with in the permitted timelines of 15 days, the compounding became null and void. (CA 107/2019).

Mr. Thakorbhai Dahyabhai Patel, an OCI, opened and maintained an ordinary savings bank account with ICICI Bank and Prime Co-operative Bank Limited. NRI/OCI are not eligible to open and maintain ordinary savings bank account. He also transferred sum of Rs. 85 lacs from his NRE account to ordinary savings bank account and earned interest of Rs. 36 lacs during 2013 and 2014. Transfer of Funds from NRE to ordinary savings bank account was a contravention of Foreign Exchange Management (Deposit) Regulations, 2000, as amended time to time. 4(C) of Schedule 1 of the regulation states that permissible debit to NRE account is transfer to NRE / FCNR (B) accounts of the account holder or any other person eligible to maintain such account. The contravention was regularized through compounding on payment of Rs. 1 lacs approx. (CA 85/2019).

Investment in Equity Instruments of Indian Company by NRI/OCI:

Investments in equity instrument of Indian Companies by PROI are governed by NDI Rules. A NRI/OCI can invest in equity instrument of an Indian Company either on repatriation or on non-repatriation basis. Investment on repatriation basis means funds invested (along with capital appreciation/ profit) can be remitted outside India. Investment on non-repatriation basis means capital and its appreciation would not be allowed to be remitted outside India but interest and dividend on such investment can be repatriated.

Subscription/ Direct Allotment/Purchase of Equity from Indian Company by NRI/OCI on repatriation basis {Schedule I}

Indian Company may issue equity instrument to PROI, including OCI/NRI, subject to entry route, sectoral cap and attendant conditionalities. However, If investor/beneficial owner of investment under this schedule is a resident of/citizen of the country that shares land border with India, then such investment, irrespective of entry route and sector, requires prior approval of government. However, PROI including NRI/OCI is prohibited to invest in the following sectors: –

• Lottery business (whether government or private) online/offline.
• Gambling/betting including casinos.
• Foreign technology collaboration in lottery/gambling.
• Real estate business/construction of farmhouses.
• Prohibited sectors for private investment viz (i) Atomic energy and (ii) Railway operations
• Chit funds (except investment by NRIs/ OCIs on non-repatriation basis).
• Nidhi company.
• Trading in TDRs
• Manufacturing of tobacco products /substitutes. However, FDI in other activities such as wholesale, cash & carry/retail trading etc. are permitted and governed by the sectoral restrictions.

Permissible Investment by NRI/OCI on repatriation basis under Schedule III:

• Purchase/Sale of Equity Instrument on Recognized Stock Exchange of listed Indian Company: Permissible subject to NRI/ OCI individual holding is restricted to 5% of the total paid-up equity capital on a fully diluted basis or paid-up value of each series of debentures or preference shares or share warrants issued by an Indian company. Total holdings of all NRIs and OCIs in the company should not exceed 10% of the total paid-up equity capital on a fully diluted basis or paid-up value of each series of debentures or preference shares or share warrants. This limit may be increased by the company to 24% through special resolution in general body.
• Purchase/Sale of Shares in Public Sector Enterprises: Permissible without any limit. Provided purchase of shares of public sector enterprises are made in accordance with the terms & conditions of inviting bids. Payment for purchase of shares can be made out of foreign inward remittance or out of fund held in NRE (PIS) Account. Sale proceeds (net of taxes) of equity instruments may be remitted outside India or may be credited to NRE (PIS) account.
• Purchase or Sale of Units of Mutual Funds that invest more than 50% in equity: Permissible without any limit. Payment can be made out of foreign inward remittance or out of funds held in NRE/FCNR(B) account. Sale proceeds net of tax may be remitted outside India or may be credited to NRE(PIS)/FCNR(B)/NRO a/c.
• Subscription to National Pension Scheme: NRI/OCI may subscribe to NPS governed and administered by Pension Fund Regulatory and Development Authority (PFRDA), provided he is eligible to invest as per the provisions of the PFRDA. Payment can be made out of foreign Inward remittance/out of funds held in NRE/FCNR(B)/NRO a/c. Sale proceeds net of tax may be remitted outside India or may be credited to NRE(PIS)/FCNR(B)/NRO a/c.

Investment by NRI/OCI on non-repatriation basis under Schedule IV:

a) Investment on non-repatriation basis is deemed to be domestic investment and treated at par with investment made by residents. Hence there is no limit for investment under this schedule. NRI/OCI or company, a trust and a partnership firm incorporated outside India and owned and controlled by NRI/OCI, may purchase or contribute, on non-repatriation basis in below mentioned securities. Please note that investment by NRI/OCI, should not be done in Nidhi company or a company engaged in agricultural/ plantation activities/real estate business/construction of farmhouse/dealing in TDR.

• Equity instrument of listed/unlisted Indian Company
• Units issued by an investment vehicle without any limit
• Convertible notes issued by a startup company.

 Here it may be noted that NRI/OCI would not be bound by the restriction imposed in Schedule I but would be governed by the restrictions imposed under Schedule IV. Hence NRI/OCI can purchase the shares of the company engaged in tobacco or lottery business on non-repatriation basis.

b) Purchase or sale of units of domestic mutual funds which invests more than 50% in equity

c) Contribution to Capital in a firm/LLP/ proprietary concern by NRI/OCI on non-repatriation basis is permissible, without any limit, provided such firm or proprietary concern is not engaged in any agricultural or plantation activity or print media or real estate business.

Payments for investment/capital contribution, on non-repatriation basis, can be made out of foreign inward remittance/NRE/ FCNR(B)/NRO account, however sale proceeds may be credited only to the NRO account of NRI/OCI.

Investment in LLP on repatriation basis under Schedule VI:

• NRI/OCI may also contribute to the capital of an LLP operating in sectors where 100% foreign investment is permitted under automatic route and there are no FDI linked performance conditions. Investment in LLP should be in compliance with Limited Liability Partnership Act, 2008.
• This Investment should not be less than the fair price worked out as per internationally accepted valuation norm duly certified by Chartered Accountant/Cost Accountant/Approved Valuer.
• Transfer of capital contribution/profit share from a PRI to a PROI, should not be less than the fair price of capital contribution/profit share of LLP. Similarly, transfer from a PROI to a PRI, should not be more than the fair price.
• Payment by NRI/OCI can be made from foreign inward remittance/ out of funds held in NRE/FCNR(B) account. On sale, the proceeds can be remitted outside India or may be credited to NRE/FCNR(B) a/c.

Investment in an Investment Vehicle on repatriation basis under Schedule VIII:

NRI/OCI may purchase/sale/redeem the units of investment vehicle as per regulations/directions by SEBI/RBI. Payment can be made from foreign inward remittance/swap of shares/out of funds held in NRE/FCNR(B)/SNRR a/c. Sale proceeds net of tax, may be remitted outside India or credited to NRE/FCNR(B)/SNRR a/c.

Purchase/Sale of Indian Depository Receipt (IDR) under Schedule X:

NRI/OCI may purchase, hold, or sell IDRs. IDR should not be redeemable into underlying equity shares before expiry of one year from the date of issue. Payment can be made through foreign inwards remittance or out of funds held in NRE/FCNR(B) a/c.

Transfer of Shares of Indian Company (Rule 9 & 13 of NDI Rules):

Compliances on Transfer of Shares of Indian Company:

Form FC TRS: On sale of equity instrument held by NRI/OCI on non-repatriation basis to PROI intending to hold the shares on repatriation basis, Form FC-TRS should be filed with AD Bank within 60 days from the date of transfer of equity instrument or receipt/remittance of funds whichever is earlier. Onus of reporting is on resident transferor / transferee or PROI holding equity instruments on a non-repatriation basis. Thus, if NRI/OCI purchases the shares of an Indian Company on non-repatriation basis from PROI, then also Form FC TRS has to be submitted by them.

Form LLP (II): NRI/OCI should file Form LLP (II) on disinvestment / transfer of capital contribution/profit share to a non-resident This should be filed with AD Bank within 60 days from the date of receipt of funds.

A NRI was allotted the shares of an Indian company on repatriation basis as a part of subscription to memorandum on May 26, 2001. He transferred, without RBI approval, these shares to PROI (non-resident company) in 2001 and 2011. The transfer of shares by NRI to NR (other than NRI/OCI) was subject to RBI approval as per the then regulations. The contravention was regularized through compounding on payment of Rs 79k (CA 5047/2019 & CA HYD 283).

Gift of shares of Indian Company held by NRI/OCI on non-repatriation basis to PROI:

Permissible with prior approval of RBI subject to adherence to below mentioned conditions.

• Donee eligible to hold equity instrument under NDI Rules.
• Value <= 5% of Paid-Up Capital/each series of debenture/mutual fund scheme. This limit is cumulative from a donor to a particular donee.
• Donor & donee to be relative {u/s 2(77) of the Companies Act}.
• Gift not resulting in breach of sectoral cap.
• Value of security (current + already gifted to any PROI in FY) should not exceed USD 50,000.
• Other conditions as may be imposed in public interest by the Central Government

Gift by NRI/OCI to Indian residents:

• Gift in INR through NRO/NRE account to resident individual is permissible under FEMA.
• Gift through bank transfer/property by NRI/OCI to resident Indian who is relative, is exempt from tax.
• Gift by NRI/OCI to resident individual, who is not a relative, would be taxable if value of gift exceeds Rs. 50000.
• Gift by NRI/OCI to resident individual at the time of marriage is also exempt from tax.
• Gift of immovable property outside India by NRI/OCI to resident individual would not be subject to tax in India.

Relative have been defined u/s 56(2) of the income tax act and the definition is wide enough and includes brother, sister, parents, grandparents etc.

Borrowing in INR from Indian Residents:

A resident individual may grant Rupee loan to a NRI/OCI Cardholder relative within the overall limit under LRS subject to such terms and conditions as prescribed by RBI time to time. Borrowed funds should not be used for restricted end uses.

• Interest free loan with minimum maturity of 1 year.
• Overall limit in FY restricted to limit under LRS (USD 250 K per FY)
• Utilization: Personal requirement/for business in India.
• Loan not be utilized for investment in prohibited activities for PROI
  • Chit fund,
  • Nidhi,
  • Agricultural land/real-estate business/construction of farmhouse,
  • Trading in TDR
• Loan amount be credited to NRO account of NRI/OCI
• Loan amount not to be remitted outside India.

Repayment of loan should be made out of foreign inward remittance through normal banking channel/by debit to NRO/NRE /FCNR account/out of sale proceeds of shares/ securities/ immovable property against which loan was sought.

Lending to Resident Indian by NRI/OCI: PRI, other than company incorporated in India, may borrow in INR from a relative NRI/OCI subject to the terms and conditions as specified by RBI time to time. Borrowed funds should not be used for restricted end uses (Real Estate Business, Agricultural/Plantation, trade in TDR, Nidhi or Chit Fund). The amount should also not be used for investment or for on-lending. However, RBI may permit borrowers to use the borrowed amount for on lending to infrastructure sector or to keep them in fixed deposits with banks in India, pending utilization for permissible end-uses.

Loan by NRI/OCI from banks in India: An AD in India may grant loan to a NRI/OCI for meeting the borrower’s personal requirements/own business purposes/acquisition of a residential accommodation/motor vehicle / or for any other purpose in India. Borrowed funds should not used for restricted end uses.

How much Foreign Currency can be brought in or take out of India by NRI/OCI?

• Send into India, without limit, foreign exchange (other than currency notes, bank notes & traveler’s cheques)
• Bring into India, without limit, foreign exchange (other than unissued notes). NRI/OCI, on arrival in India, should make a declaration in Form CDF to Custom authorities. Declaration in Form CDF is not required if total foreign exchange brought in by NRI/OCI does not exceed US$10,000 and out of that foreign currency notes does not exceed US$ 5,000.

NRI/OCI may take out of India unspent foreign currency not exceeding the amount brought in by him and declared in CDF, if applicable, at the time of arrival.

How much Indian Currency can be brought into India or can be taken out of India (Other than Nepal/Bhutan) by NRI/OCI?

• Indian coins covered by Antique and Art Treasure Act, 1972 not permitted to be send out or taken out of India.
• NRI/OCI may take in or take outside India Indian currency notes upto Rs.25000 per person.

Export/Import of Indian currency to/from Nepal and Bhutan:

• Bring in/ take out of India to Nepal/Bhutan, Indian currency notes in denomination of Rs. 100 or below. Individual travelling from India to Nepal/Bhutan can carry currency notes of denomination of above Rs. 100/- up to the limit of Rs.25,000.
• Bring into India from Nepal/Bhutan, any amount of Indian currency notes in denomination of currency note of Rs. 100 or below.
• Take out of India to Nepal/Bhutan, or bring into India from Nepal/Bhutan, currency notes of Nepal /Bhutan.

Other Provisions:

• Resident individual is permitted to make the payment of medical expenses for NRI relative (as defined u/s 2(77) of the Companies Act, 2013)who is on a visit to India.
• Resident individual is permitted to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if the same was acquired, held or owned by him as PROI/NRI/OCI or inherited from PROI. This includes FCA accounts and income arising from such property/security/currency.
• Resident individual is permitted to include relative NRI as joint holder in any type of resident bank account on either or survivor basis subject to specified conditions.
• NRI/PIO is permitted to remit upto USD 1 mn per financial year out of NRO a/c or sale proceeds of assets.
• NRI/OCI is permitted to receive rupee gift from relative resident individual under LRS. Also permitted to receive gift in foreign currency from resident individual irrespective of whether he is related or not.

Its important for NRI/OCI to exercise due care while transacting in Indian Currency or dealing with Indian asset/investment and ensure adhere with FEMA regulations. Contravention under FEMA leads of penalty upto 300% of the sum involved in the contravention, if the amount is quantifiable, or upto Rs. 2 lacs if the amount is not quantifiable. In case of continuing contravention, further penalty up-to Rs. 5000 per day can be imposed.

If any contravention has taken place in past, it would be advisable to opt for compounding of contravention. Compounding is being done at much lesser amount as compared to penalty. Once compounding is done and timely payment is made as per compounding order, then contraventions is regularized and no further penalty or proceedings on contravention so compounded can be undertaken by RBI/ED.

****

About Author: Vikas Maheshwari, FCA, Founder of VM Consulting & Advisory, engaged in interpreting FEMA, PMLA and laws relating to Black Money and Benami Properties. He has more than 3 decades of professional experience and has served at various senior position including CFO, Global Treasury Head etc. in MNCs. Author can be reached at below coordinates: