ICICI Bank has launched a new non-resident ordinary deposit feature in order to enable NRIs to maximise their post tax yield on NRO fixed deposits.

With this scheme, namely NRO Fixed Deposit Plus, NRI customers can avail tax deducted at source at a concessional rate under the double taxation avoidance agreement. The bank will offer this feature initially to non resident Indians from countries such as US, UK, Canada and Singapore.

However, plain vanilla NRO deposits, which earn interest equal to the high yield resident deposits, are not eligible for the statutory tax benefits enjoyed by non resident external or foreign currency non resident deposits.

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This year was an eventful one for the rupee. The Indian currency advanced against the dollar despite galloping global oil prices.

Against the dollar, the rupee advanced 12.5 per cent during the year. Against the euro, another currency preferred for invoicing, the rupee has remained steady from April this year. But the euro is also losing flavour among domestic exporters in view of a possible depreciation.

Capital inflows

But a large portion of the rupee’s advance stemmed from the huge capital flows during the year from foreign institutional investors, hedge funds, and non-resident investors moving out of the dollar. Besides, investments were also pouring in from countries like Japan that have traditionally stayed away from emerging markets. In fact, Japanese investors used the yen carry trade mechanism for investing in Indian markets. The yen carry trade implied borrowing in yen denominated interest rates and reinvesting the same in the high yielding emerging market securities. The obvious preference for such investors has been India, in view of the high returns and the lowest risks as against all the emerging markets in the world, including China.

Money supply, driven by foreign inflows, expanded 35 per cent on year-on-year basis, triggering inflation worries. Exporters panicked, fearing negative margins. In fact, during the year, exporters returned to hedge their exposures. Till April, exporters hedged against only dollar exposures. But mid-year onwards, most of them were hedging against the dollar, sterling pound and the euro as well.

As a result, forward for six months crashed from 5.20 per cent in April to barely 1.2 per cent currently. But during the year, six-month premia had dipped to less than one per cent.

CRR as intervention tool
Faced with this situation, the RBI moved away from the reverse repo as an intervention instrument and increasingly preferred the cash reserve ratio for mopping up liquidity generated through foreign exchange purchases.The reason: CRR is a low-cost intervention tool. This is because there are no interest payments on the CRR. But interestingly even China has begun using the liquidity reserve ratios as a tool, after the Indian experience.

Moreover, the RBI, concerned with the fear that a liberal external commercial borrowings regime was stoking the liquidity expansion, imposed end-use restrictions. The restriction prohibited ECBs to be substituted for domestic rupee debt. Instead, ECBs were mandated to be used for only genuine capital imports.

Containing hedge funds
The capital markets regulator – the Securities Exchange Board of India (SEBI) – also stepped in to contain the hedge fund flows through an opaque instrument called participatory notes (PN). PNs were issued to hedge funds that were based in cross-border tax havens by FIIs which helped them subvert domestic registration guidelines. The new SEBI guidelines mandated that hedge funds would have to get themselves registered.

However, the impact of the measures was short-lived. The flows switched from hedge funds and ECBs to non-resident investors. Most of the funds now coming into the markets currently are from NRI investors, mostly in the form of short-term bank deposits. This is despite the low rates of interest offered. Banks’ moves to reduce rates during the last few weeks have done little to stem the flow.

The flows were to a large part on account of the interest rate differentials. After the fourth reduction in the US Federal Funds rate to 4.25 per cent, investments in India have become attractive. This was because the advancing exchange rate offset some of the losses that NRI/FCNR/NRO investors obtained from low deposit rates in India. Besides some of the investments were destined for capital markets and the slew of large public offerings that are poised to hit the stands during the next few weeks.

These flows have remained large enough to offset the impact of high global oil prices. Global oil prices are currently about $90 a barrel. Besides, attempts to make corporates prepay large foreign exchange liabilities failed to impact the exchange rates.

Sub-prime impactBut what came to the rescue of the RBI was the sub-prime crisis that has encompassed almost the entire western economy. And there are fears that even China, which has external reserves of $1 trillion, may not be free from the crisis.

In fact, due to large trade surpluses and the need to maximise returns on investments, China had diversified investments into US housing mortgages. Chinese bank’s exposure is estimated at over $14 billion, according to a US Treasury survey June 2006. The sub-prime investments has led to losses in China and likely to surface in the coming months.

The treasury survey showed that Indian holdings in US asset-backed securities are zero.

Consequently, Indian losses are negligible. The losses have mostly occurred only due to the impact of investment depreciation of investments and due to FII pull out from domestic equity markets.

No Indian bank or financial institution has directly invested in the sub- prime markets. But even for the RBI depreciation losses are minimal. Most of the external balances are held in the form of custodial balances and short term treasury balances.

Check on inflows

For the RBI, the mortgage meltdown considerably reduced the cost of intervention. The cost was in the form of a deficit between reverse repurchase rates and the returns earned from investments in dollar treasury securities.

Returns from dollar treasuries were barely 4 per cent as against the intervention costs of 6 per cent. Besides, the depreciation of the dollar has also taken away some of the gains. The CRR though helped reduce the costs even further.

However, the sub-prime meltdown and consequent Fed reaction has triggered an inflow into Indian securities, particularly from long-term pension and university funds from the US. These funds are now expected to mount in the coming months posing new challenges in exchange rate management.

Bankers are now bracing for new containment measures to check inflows and instability in the domestic markets. The CRR is one weapon.

Next year, the RBI could very well deploy a new arsenal. Perhaps sweetening ECB prepayments is just one in the pipeline.

-Hindu

The booming real estate market in the country has prompted industry players to introduce a slew of innovative products to people willing to pay. From real estate developers to real estate fund managers, from banks to housing finance companies, it’s a party time for all. But behind those euphoric times, some banks, with operations in India and outside, are offering innovative products to non-resident Indians (NRIs), which could turn tricky in case Indian real estate market falls into a trough, sources said.

It involves the foreign and Indian operations of the same bank, the NRI and his friends, relatives and associates based in India. To start with, NRI, with the help of his friends and others, establishes an Indian company that could do business in the real estate sector. Now the bank in India gives some loan to the company to buy land in India.

On the other hand, the NRI keeps a fixed deposit with the wealth management division or private banking arm of the same bank’s overseas operation. Unofficially, the foreign branch of the bank, with FD in its books, stands guarantee to the loan given by the bank’s Indian operation to the company set up by the associates of the NRI. But the same is not officially shown as a guarantee in the books of the two branches involved.

As per current FDI rules in real estate, any residential project in which foreign money in invested, should be on a land measuring 25 acres or more. For commercial properties, the minimum stipulated area should be 50,000 square metres.

However, market players said with the realty boom, NRIs find it tough to get land at market rate. Whenever the seller gets to know foreign money is involved, they demand prices higher than the market rates. The rates go up further when sellers get to know that the buyer wants adjoining plots which should aggregate at least 25 acres.

In such a situation, the company established by the associates of NRI buys smaller plots of adjoining land without raising the rates much or even raising suspicion of the sellers that an aggregation is on play or even foreign money is involved. Once enough number of plots are bought, those are aggregated (to at least 25 acres) and the company then transfers the same to the NRI to comply with FDI rule. While the NRI pays back the bank in India, his FD kept in the bank overseas is also released at the same time.

-India Times

BEING THE 10TH largest economy in the world and the 4th largest in terms of purchasing power parity (PPP), India has emerged as a potential destination for NRI investment.  It has a large reservoir of skilled labour which is internationally cost-competitive, a large entrepreneurial base and a diversified manufacturing sector.  These attributes make it easy to find partners for collaborations. 

The country has a 20 million-strong scientific and technical manpower, more than the population of Taiwan.  The number of literates in India is more than the combined population of France and Japan. India has a vast domestic market – a 300 million-strong middle class population with substantial purchasing power and another 700 million-strong population whose capacity to purchase is gradually increasing.  Being a vibrant democracy with a large democratic set-up supplemented by a broad-based legal framework including arbitration and an independent judicial system, it boasts of a vast network of bank branches, financial institutions and well-organized capital and money markets.  These attributes make India a favourable destination for NRI in-vestments.

The country also has a huge network of technical and management institutions of the highest international standard for development of excellent human resources.  India has an enviable record of honouring its international financial obligations and has never defaulted. The country has a strong English language base for business purposes.  The strong and vibrant small-scale sector is good enough for establishing strategic alliances with its foreign counterparts. The strategic location of the country in the context of the third world markets particularly the rapidly growing South and South-East Asian markets together with a supportive infrastructure base help in promoting a healthy environment for NRI inflows into the country.

A recent World Bank Report has predicted that the Indian economy will be-come one of the world’s largest by 2050 A.D. What began as a drizzle in the 1980’s is now coming down in torrents like the Indian monsoons.  A GDP growth rate of 8 percent in 2003 triggered by a rebound in agriculture has been followed by a boom in the manufacturing and service sectors, a la China.  The Economic Survey of 2006-07 says, ”The advance estimates of gross domestic product (GDP) for 2006-07, released by the Central Statistical Organization, places the growth of GDP at factor cost at constant (1999-2000) prices in the current year at 9.2 percent. While the service sector maintained its vigorous growth performance, there were distinct signs of sustained improvements on the industrial front. The overall macroeconomic fundamentals are robust, particularly with tangible progress towards fiscal consolidation and a strong balance of payments position. With an upsurge in investment, the outlook is distinctly upbeat”.

India’s economy is on the bull run of an ever-increasing growth. With positive indicators such as a stable 8-9 percent annual growth, rising foreign ex-change reserves of close to USD 180 billion, a booming capital market with the popular “Sensex” topping the majestic 20000 mark, the Government of India (GoI) has estimated an FDI inflow of USD 12 billion during this fiscal and a 35 percent plus upward growth in exports.  It is easy to understand why India is one of the top destinations for foreign investment. The Indian economy has grown by 8.9 percent during the first quarter of ’06-07, which is the highest first-quarter growth rate since 2000-01. In this period, the manufacturing sector grew by a high 11.3 percent and agriculture, which constitutes nearly a quarter of the GDP, grew by a robust 3.4 percent.  Trade, hotel, transport and communication sectors grew by 9.5 percent and construction grew by 13.2 percent. In the corresponding period of last fiscal, these sectors grew by 11.7 percent and 12.4 percent, respectively. Electricity grew by 5.4 percent in the first quarter as against 7.4 percent in the same period last year. The overall growth in this sector was fuelled by growth in July and August. The service sector also grew by 10.6 percent in the first quarter of ’06-07 as against 9.8 percent last year for the same quarter.  There has been an outstanding growth in some important industries of the Indian economy, like commercial vehicles (36 percent), telephone connections (48.9 percent) and passenger growth in civil aviation (32.2 percent).

Some of the features of the Indian economy in comparison with those of the Chinese economy are as follows:

India has more billionaires than China. This year there are 15 billionaires in China but last year in India, there were 20 billionaires, according to the Forbes magazine. India has emerged as the world’s fastest growing wealth creator, thanks to a buoyant stock market and higher earnings. A number of Indian companies surpassed last year’s net profit in just six months of the current fiscal, reflecting accelerating corporate earnings. 44% percent of the top 100 of the Fortune 500 companies are present in India. With its manufacturing and service sector on a searing growth path, India’s economy may soon touch the coveted 10 percent figure.

The comparative analysis leads to interesting findings.  India lags behind China in many areas; a lot needs to be done if India has to catch up with China.  India’s population is 1.033 billion, China’s, 1.272 billion. India’s labour force is 0.451 billion-strong; China’s, 0.757 billion-strong. India’s GDP is USD 478 billion, China’s, USD 1159 billion. 27 percent is the share of agriculture in India’s GDP; for China it is only 15 percent.  27 percent is the share of industry in India’s GDP; for China, it is 52 percent. 48 percent of India’s GDP is accounted for by services; for China it is only 33 percent.  The route-length of the railways in India is 62.5 thousand sq kms; for China it is only 56.7 thousand sq kms.  Motor vehicles per 1000 population in India is 7, while for China, it is 8. R& D expenditure in India is 0.6 % of GNP; for China, it is 0.1 %. 0.8 out of every 10000 population boasts of internet connection in India; for China, the proportion is 0.6 out of 10000. Expenditure on education in India is 3.2 percent of GNP; in China, it is 2.3 percent of GDP. Undernourished people in India account for 23 percent of the population; in China only 9 percent of the population is undernourished.

The Indian diaspora’s business has turned hot of late. Government has al-ways wooed non-resident Indians assiduously to attract more inflows.  Apart from the money transfer business, which compared to money invested in India is smaller; the Centre is trying its best to persuade NRIs to pump money into the country like never before. And, it has seen superlative success in re-cent years. The Prime Minister of India has announced dual citizenship for people of Indian origin.  It has given a big boost to the NRI community across the world. With recruitment levels for overseas jobs skyrocketing, there is scope for more money coming into India. According to a recent Business Standard report, in the last three years, 850,000 people went to West Asia alone. And even as the official figure for Indians living in the US is put at 2 million, unofficial estimates put it at 3.5 million. And emigration to Canada and Australia continues to grow. 

The ministries concerned have made sure that rules and regulations are simplified to make inflows easier. Where does the government see money being invested? Investment in bank deposits and company deposits may be made by NRIs.  They are subject to different rules; investments with and without repatriation facilities are permitted under the schemes. As of now, NRIs are permitted to make direct investment in partnership and proprietorship firms in the country. This, the NRIs can do by way of subscription for shares or debentures of Indian companies. Further, they can also now place funds in company deposits. NRIs who undertake not to seek at any time repatriation of the capital invested in India and the income earned thereon are permitted to invest on non-repatriation basis. NRIs also have the option of investing in mutual funds floated by domestic public sector and private sector mutual funds on non-repatriation basis. All they have to do is to make their applications to the Reserve Bank. They can  also now invest in money market mutual funds (MMMFs) floated by commercial banks and financial institutions with authorization from the apex bank or the Securities and Exchange Board of India (Sebi), the market regulator. Yet another option is to invest in the securities of the Central or State governments and the National Plan/Savings Certificates by making remittances from abroad or out of funds held in their NRE/FCNR accounts. In effect, with regulations tapering off, compared with the scene some 7-8 years ago, non-resident Indians today have more choices to invest their hard-earned money in India. And, to make things easier and hassle-free, the government is doing all it can to persuade Indians who make big money away from home to park their funds here.  Commendable though is the fact that the Indian diaspora has also begun to believe that it is better to channel their money home, thereby contributing to the development process of the nation they actually belong to. The old saying, ‘home is where the heart is’ seems to have finally driven the message home indeed.

However in comparison to the investments made by overseas Chinese in China the investment made by NRI’s in India is peanuts – a lot more needs to be invested by NRIs. Two-thirds of China’s FDI comes from overseas Chinese investors, notably in ’Greater China’ and South East Asia. For example, investment in China by the Shenzhen Overseas Chinese Chambers Of Commerce alone amounted to USD 20 billion for the year 2006 which in itself is a huge sum. If Hong Kong and Taiwan are included, about 80 percent of all foreign investment – some USD 200 billion totally, which has poured into China since 1980, has come from overseas Chinese. China overtook the U.S. as the biggest recipient of foreign direct investment (FDI), receiving USD 53 billion in 2003, according to the Organization for Economic Co-operation and Development (OECD). In 1990, for example, Hong Kong, Macao and Taiwan accounted for about two-thirds of China’s inward FDI. Although overseas Chinese investment has declined in recent years it still accounts for 40-45 percent of inward FDI. China’s foreign exchange reserves have recently registered a record high – exceeding USD 1.4 trillion of which almost two-thirds came from the Chinese diaspora. A report by Shen Danyang, Vice-Director of the Research Institute of the Ministry of Commerce says that over 67% of FDI in China comes from overseas Chinese.

In comparison investments by overseas Indians in India is still very low. According to M. A. Yusuf Ali, managing director of EMKE group, which runs a popular chain of retail stores under the brand name Lulu, remittances to India from Gulf Indians, is close to Rs. 20,000 crores annually. “Of the $ 23 billion in foreign remittances from overseas Indians last fiscal year, nearly half came from just five million NRIs in the Gulf” says  Overseas Indian Affairs Minister Vayalar Ravi. At the last Pravasi Bharatiya Divas Conference in January 2007 the Prime Minister of India Dr Manmohan Singh said, “We in India wish to see you engaged in India’s great adventure of building an India free from the fear of war, want and exploitation…I invite you to be active participants in this saga of great adventure and enterprise.” But mere talks and lectures would not bring dividends; what is required is real and concrete action on the ground to attract more NRI investments. As the commerce minister rightly points out in terms of FDI and NRI investments, “There is competition not only just from China but also from others like Thailand, Malaysia and so on. We can’t lose focus on attracting investments since we can’t get inflows by giving lectures but work on ways to get investors.” It’s heartening to see NRI investments flowing into India; after all it is ‘better late then never’.  But then a lot more needs to be done if India has to catch up with China in terms of diaspora investments.

-Meri News

Before you go on overseas deputation, you must be aware of certain regulatory requirements. A little effort to fully understand the issues involved can prevent a lot of eleventh-hour hassles.

You are in that dream job with that dream company. And, like the icing on the cake, that much-awaited stint abroad has arrived. While you have made the mandatory visa visits to the embassy, given your wardrobe a new look and written down recipes for your favourite dishes, spare a thought for the new tax and regulatory environment you will find yourself in. If you put in a bit of effort to fully understand the issues involved, you can save yourself a lot of eleventh-hour hassles.

Determine your residential status first. As a first step, you need to find out if you are a ‘resident’ in India for every year in which you are out of the country, under tax laws. This is necessary as, under the Income Tax (IT) Act, the tax treatment of your earnings will vary depending on your residential status. For someone travelling overseas, a simple rule of thumb to determine if he is a resident will be to check if his stay in India in a financial year (April 1 to March 31) will exceed 182 days.

For example, take the case of a programmer who works onsite in Canada from October 15, 2007 to January 22, 2008. For the year ended March 31, 2008, he will be a resident as he has been abroad only for about 100 days during that year and has stayed in India for the remaining 265 days.

If he is sent abroad from January 22, 2008 to, say, January 22, 2009, then, for the year ended March 31, 2008, he will be a resident but for the year ended March 31, 2009, he will become a non-resident as he would have spent less than 182 days in India.

So, the next time you hear the words ‘short-term’ and ‘long-term’, remember, IT law does not decide your residential status that way. It’s the 182-day rule that rules.

The FEMA angle

But, wait, didn’t your friend tell you that he opened a non-resident bank account just before he left for the UK on a ‘long-term’ deputation? How could he have opened a non-resident account even before determining his residential status?

This is because under FEMA, (Foreign Exchange Management Act) a person may become non-resident simply by leaving India on purposes of employment or for any other purpose that would indicate his intention to stay abroad for an indefinite period. While FEMA is concerned with your rights and obligations in moving funds in and out of India, the IT Act is bothered about the taxability of such funds and their movements.

So, don’t be foxed if you are considered resident for income-tax purposes and non-resident for banking purposes in the same year!

Remuneration and taxes

When an employee goes abroad for a few weeks or months, the Indian company retains him on their payrolls and continues to credit his salary to his local bank account. In addition, he will get some allowances to meet his personal expenses during the period of his stay.

In such a situation, he will be a resident in India by virtue of having spent more than 182 days here and his Indian salary will be subject to tax in the usual manner. The allowances will be exempt from tax.

In many cases, the employee is given a salary both in India and abroad. If you are on deputation for, say, three years, what will you be taxed on? A golden rule to remember is that a resident should pay tax on his global income. So, in the first year, if you are a resident, then both your Indian and your foreign salary will be taxed in India.

In the second year, when you become a non-resident, only income received, accruing or arising or deemed to be received or accrue or arise in India will be taxed in your hands.

This means that, although you are a non-resident, your Indian salary will still be taxed here while your foreign salary will be tax-free as it is received outside India from a foreign source.

When you are paid salary only in the foreign country, the tax incidence will be the same as above. Thus, in the first year, if you are a resident, your foreign salary will be taxable in India.

In the subsequent years, it will be tax-free as it arises outside India from a foreign source in the hands of a non-resident.

Double Taxation?

Relax. There’s a way out Take the case of Shilpa, who works with a software company in India. From July 2006-November 2006, she was sent to the US and was paid her salary there after withholding tax. For the rest of the months, she was paid salary in India as usual.

For year ended March 31 2007, Shilpa was surprised she had to pay tax in India for the income received in the US (because she was a ‘resident’ under IT Act for that period) though the US authorities had already deducted tax when they paid her. This is unfair! She has been taxed twice on the same income!

If you find yourself sailing in the same boat, cool off. India has signed Double Taxation Avoidance Agreements (DTAA) with several countries. You can claim a relief in India on the doubly taxed income, which will be the lower of taxes leviable in India or the other country you visited.

Want to send money home?

Most companies who send their employees abroad for a longer term, say two or three years, do so after helping them open a non-resident account with a local bank. Besides, you can also open an NRE (Non-Resident External) account. The NRE account allows funds to be freely repatriable (moved back). This fund will be maintained in rupees and any debit or credit of foreign currency will be converted immediately to rupees.

You can give your parents the ‘power of attorney’ to operate it on your behalf. Whenever your family needs money, you can credit it into the NRE account from your account abroad and your parent can withdraw it. If not, you could also send cheques or drafts.

Should you go to a foreign location for a very short period, says two months, you may not have the privilege of using bank accounts or cheques. In such cases, the most popular method seems to be to first credit the money into a friend’s bank account and then send it to India. Online money transfers are also a popular mode of sending money into India.

All remittances are tax-free.

Can you bring back savings?

At the end of your stint, you can bring foreign exchange into the country without any limits. However, if the aggregate value of the foreign exchange in the form of currency notes, bank notes or travellers cheques brought in exceeds $10,000 or its equivalent and/or the value of foreign currency exceeds $5,000 or its equivalent, it should be declared to the Customs Authorities at the Airport in the Currency Declaration Form (CDF), on arrival in India.

You can retain up to $2000 in foreign currency. Anything over and above this should be converted into rupees when you land.

Procedures to comply with

Before you go on your overseas deputation, you must be aware of certain regulatory requirements. At the time of departure, you should furnish your PAN (Permanent Account Number) number, the purpose of your visit outside India and the estimated period of your stay abroad to the income-tax authorities.

Similarly, when you go abroad, you must register with the authorities there. For example, in the US, whether you want to rent an apartment or open a bank account, you cannot do it without a Social Security Number (SSN).

Besides, you should also file your returns there and pay tax on any income that may arise, like interest on any deposits. When leaving, remember to get a tax clearance certificate or its equivalent.

-Hindu Business Line

CHANGE OF RESIDENTIAL STATUS

A Non-Resident Indian will be treated as a person resident in India if he returns to or stays in India, in either case:­-

(a) for or on taking up employment in India, or

(b) for carrying on in India, a business or vocation, or

(c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period.

From the definition given above, it can be concluded that the purpose/intention of stay in India is the most relevant factor for determining the residential status of a person. The period of stay is only of secondary importance.

Status of non-residents on temporary visits/stay in India

Non-Resident Indian citizens and Persons of Indian Origin on the temporary visits/stay in India without any intention to stay in India for an uncertain period shall continue to be treated as Non-Residents, during their stay in India. Their Non-Resident accounts/investments etc., would continue without any change and they will also not be required to surrender any foreign exchange.

Once an NRI becomes resident of India, all the rules and regulations of FEMA, as are applicable to the person resident in India would be applicable to him except that he continues to enjoy various facilities such as maintaining his foreign securities, currency, properties situated abroad or maintaining and operating Resident Foreign Currency Account in India.

FORMALITIES TO BE COMPLETED ON BECOMING RESIDENTThis is the most significant practical aspect of FEMA. Quite a few formalities have to be complied with, upon change of residential status either way. A large number of violations of FERA were occurring in this area due to ignorance. RBI was considerate in pardoning genuine mistakes thus far. The scenario has changed, now that the RBI’s power to regularise mistakes or give post-facto approval has been withdrawn. In view of this, it is imperative that we get to know about obligations under FEMA upon change of residential status.

(i) Assets Abroad

Section 6(4) of the Act deals with provisions relating to “Returning NRls”. Accordingly, a person resident in India (here the reference is to returning NRls) is permitted to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India, provided 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.

Under FERA, general permission was given to the returning NRls to hold their investments and assets outside India under several Notifications. These Notifications permitted the returning NRls to hold, convert, sell, re-invest the assets abroad and/or earn income thereon. In short, the returning NRls were permitted to deal with these assets in whatever manner they feel appropriate even after becoming resident. The only two conditions were that the assets should have been acquired legitimately (without FERA violation) while residing abroad and the returning NRI should have stayed outside India for at least one year continuously.

The condition of continuous period of one year has been removed under FEMA. However, Section 6(4) is silent on re-investment of income/sale proceeds of assets abroad after becoming resident of India, which was freely allowed under FERA. Thus, applying provisions of surrender of foreign exchange representing income on assets held outside India, all such income or sale proceeds have to be deposited, with the authorised person in India, within seven days of their receipt.

(ii) Continuation of proprietary/partnership business abroad

Section 6(4) is silent on this issue; moreover, there is no direct provision dealing with this situation. However, Section 3 puts a general restriction on a person resident in India to deal in foreign exchange or enter into any transactions of receipts or payments with non-residents, unless there is a general or special permission in that behalf. Besides this, there are specific regulations concerning a person resident in India pertaining to foreign currency bank accounts, lending and borrowing in foreign exchange, acquisition and transfer of immovable property outside India and so on. Therefore, it is advisable that a specific permission be obtained from the Reserve Bank in respect of these types of interests.

(iii) Other Movable Assets held abroad

There are no provisions under FEMA governing movable assets held abroad, excepting foreign currency and foreign securities covered by section 6(4) of the Act, pertaining to returning NRls. There are two views, namely, (i) whatever is not expressly prohibited is permitted under the law, and (ii) wherever the Act is silent, it is considered as implied prohibition. It is difficult to accept the second view; however, in order to be on right side of the law and to avoid possibility of litigation, one may obtain permission to hold such assets from the RBI.

Other movable assets may include:

• Jewellery
• Motor car
• Personal household effects
• Personal computers, Cell phones and other gadgetry.

(iv) Bank Accounts Abroad

FEMA does not specifically contain provision for maintaining foreign currency accounts abroad in respect of returning Indians. Therefore, it is advisable to obtain a specific permission from the RBI in this regard.

(v) Bank Accounts in India 

Upon change of residential status, the returning NRI must inform the bank, where upon all bank accounts would be re designated as “Resident A/C”. RBI has allowed continuance of NRE and FCNR accounts till maturity so that there is no loss of interest. Funds in NRE account can be deposited in RFC Account on returning to India. The time limit is not specified. However, it is advisable to transfer the funds immediately after maturity. In any case, it is obligatory on the part of the returning NRI to inform the banker about his change of residential status immediately upon such change. Interest on NRE deposits which are continued till maturity, will be eligible for concessional tax under chapter XII-A.

FCNR, too, can be converted into RFC Account on its maturity. RFC account is fully convertible. Therefore, it is advisable that whatever repatriable incomes are due on arrival are credited to RFC account.

(vi) Investments

A person can continue to hold an investment without requiring prior permission of the RBI, provided such investments were acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India.

(vii) Time limits for intimation

As stated earlier, no specific time limits are prescribed. However, as far as bank accounts are concerned, the regulations stipulate immediate redesignation as resident account. This is one area where many people fail to comply with the provisions of law. Many people continue to maintain NRE/FCNR and other non-resident accounts for years after becoming resident. The Reserve Bank was considerate in condoning such lapses under FERA. Now it will be difficult for the Reserve Bank to condone delay, and such lapses may invite monetary penalty.

VISA

Foreign National of Indian origin can visit India under multi-entry visa when they hold letter of Intent/Acknowledgement of Industrial Entrepreneurs Memorandum/License or Provisional Registration with the Directorate of Industries etc. Such persons can get endorsement on their passport for single/multi-entry visa from the Consulate General/High Commissioner/Embassy of India. Their spouses can also be granted multi-entry visa upto 5 years.

IMPORT OF GOLD AND SILVER

An NRI returning to India after staying abroad for a period of more than six months is permitted to import Gold upto 10 kgs and Silver upto 100 kgs on payment of custom duty which on Gold is @ Rs. 10 per gm. for a 100 gm bar and for a Tola bar it is Rs. 250 per 10 gm and on silver is @ Rs. 500 per kg subject to following conditions:-

• Ornaments studded with stones and pearls will not be allowed to be imported under the scheme mentioned above.
• The passenger can bring the gold/silver himself at the time of arrival or import the same within fifteen days of his arrival in India.
• The passenger can also obtain the permitted quantity of gold/silver from Customs Bonded Warehouse of the State Bank of India; if he had filed a declaration on the prescribed form before the Customs Officer at the time of arrival in India stating his intention to obtain the gold/silver from the Customs Bonded Warehouse and pay the duty before clearance. The imported gold or silver can be sold in open market without any restrictions, but are subject to applicable Sales Tax and Octroi duty of the respective state in which it is imported.

When gold is sold in India, the profit is liable to tax as business income or capital gains, depending upon the facts of each case i. e., the intention of the NRI. If his intention was to take advantage of the business opportunity and sell gold/silver, it will be treated as business profit. If his intention was to hold it as a capital asset, it will be treated as capital gains.

In a majority of the cases, the NRI would have purchased the precious metal just prior to his return to India and sold it within a short time after his arrival in India, such a transaction constituting an “adventure in the nature of trade” and the income therefrom would be taxable as business income. It is a well-settled principle that income from a single transaction could also constitute business income. Hence profit on sale of gold/silver would be treated as business income.

If however, the NRI has acquired the precious metal as a capital asset, the income will be treated as short-term or long-­term capital gain depending upon the period of holding.

IMPORT OF CURRENCY

Any person who arrived from outside India, may bring into India at the time of his return from any place outside India (other than from Nepal and Bhutan):­

1) No limit is prescribed for the import of coins.

2) There is no limit as such to bring in foreign exchange by an incoming passenger; however, a declaration in form CDF (Currency Declaration Form) is required if the value of such currency exceeds US $ 10,000 or its equivalent (in the form of currency notes, bank notes or traveler’s cheques) and US $ 5,000 (foreign currency notes) or its equivalent.

CONCESSIONS AVAILABLE TO NRIS ON THEIR RETURN TO INDIA

A returning Indian is permitted to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India, provided 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.

A returning Indian can convert his balances in NRE/FCNR account into RFC account. RFC account is convertible on Capital account, whereby he can buy or invest in properties and securities abroad without any permission from RBI.

Tax Benefits

A returning Indian can opt to be governed by provisions of Chapter XII-A of the Income tax Act, 1961 whereby his specified assets in India (for example, deposits with public limited companies in India placed out of convertible foreign exchange) can continue to be taxed at the concessional rate of 20 per cent.

Moneys and the value of assets brought by Returning Indian and the value of assets acquired by him out of such moneys within one year immediately preceding the date of his return and at any time thereafter are totally exempt from Wealth-tax for a period of seven years after return to India.

The NRI has to consider whether it is advantageous to keep foreign currency assets abroad, carrying much lower returns but which provides protection against the exchange rate fluctuation, as well as Indian tax on foreign incomes. In some cases, it may be advantageous to invest a large portion of their foreign liquid funds in India and earn higher income thereon, sometimes even when there are no plans to return to India permanently. Each individual NRI has to examine in detail the various avenues available in India, which give the right to repatriability, offer much higher returns than those available abroad and at the same time protect the investor against the depreciation of the Indian rupee.

BANK ACCOUNTS ABROAD

Under the FERA, RBI had granted general permission to returning Indians to maintain and operate their foreign currency accounts abroad provided the funds held in bank accounts were acquired by such person not in contravention of provisions of FERA while he was resident outside India and he had been non-resident for a continuous period of one year.

There were no restrictions on utilization of the balances in these accounts for any bona fide payments in foreign currency. Further, funds were allowed to be utilised for making investments abroad in any shares/securities, immovable properties, etc. This facilitated account holders to make any payments to persons resident outside India.

FEMA is silent on the issue of maintenance of foreign currency accounts abroad by returning NRls. Section 6(4) permits returning NRls to hold, own, transfer or invest in foreign currency, foreign security, or immovable property outside India; however, it does not mention about bank account abroad. Thus, technically a returning NRI would require approval from RBI to maintain bank accounts abroad. However, there is a school of thoughts that believes that the beneficial provisions of FERA would continue and no permission would be required in such cases. Yet, it is advisable to approach RBI for approval to be on right side of the law.

BANK ACCOUNTS ON RETURN TO INDIA

(a) Ordinary Non-Resident Accounts: Ordinary Non-Resident Accounts 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: Non-resident (External) Rupee Accounts can be converted to resident rupee accounts or RFC (Resident Foreign Currency) accounts (which is explained below vide item d) at the option of the account holder on his return to India and becoming resident in India. In case of NR(E) fixed deposits, the accounts will continue to earn agreed higher rates of interest till maturity, even after being converted to resident account.

(c) FCNR (Banks) Account: FCNR (Banks) deposits can be converted to resident rupee account or RFC account at the option of the account holder on his return to India and becoming resident in India.

In case the deposit is converted to resident rupee account the foreign currency amount will be converted to Indian rupees at IT buying rate ruling on the day of conversion. Interest on the new deposit would be payable at the relevant rate applicable for such a deposit. In case the amount is transferred to RFC account, the rate of interest as applicable to RFC deposit will be allowed.

(d) Resident Foreign Currency Account: The returning NRI being the citizen of India or a PIO who has permanently settled in India and is in India for a period of more than one year can open an RFC account on account of the following receipts:

(i) Funds received as pension or any other superannuation or other monetary benefits from his employer outside India.

(ii) Funds realized on conversion of assets referred to in sub-section (4) of section 6 of the FEMA, and repatriated to India (i.e. foreign currency, foreign security or any immovable property situated outside India).

(iii) Received or acquired as gift or inheritance from a person Funds referred to in sub-section (4) of section 6 of FEMA (i.e. returning non- resident).

(iv) Funds Acquired or received before July 8, 1947 or any income arising or accruing thereon which is held outside India by any person, or acquired as gift or inheritance therefrom [i.e. under section 9(c)].

Funds held in the RFC Account are free from all restrictions regarding utilization of foreign balances including any restrictions on investment in any form outside India. Thus, RFC account is convertible on Capital account.

Schedule 2 and 3 of the Notification No. FEMA 20/2000 RB contains provisions relating to Portfolio investment by NRIs. OCBs are not allowed to make fresh investments in India under the Portfolio Investment Scheme vide Notification No. FEMA 46 dated 29^th November 2001. Further, in September 2003, RBI has banned OCBs from investing in any manner in India. In fact, the category of OCB has been abolished. However, they can continue to hold and sell shares purchased before 29^th November 2001.

Portfolio investment is covered by general permission subject to following condition/provisions.

(i) Investment is permitted on repatriation as well as non-repatriation basis.

(ii) Purchases, sale of shares (Preference and Equity) and/or convertible debentures are covered.

(iii) Purchase/sale is done through registered broker of a registered broker of a recognised stock exchange.

(iv) One bank branch must be designated by NRIs and all purchase/sale must be routed through that designated bank branch only.

(v) All transactions of sales and purchase must be delivery based. Speculative transactions are not allowed.

(vi) Mode of investment may be in any of the following ways:

(a) For investment on Repatriation basis

• Inward remittances through normal banking channels
• Out of FCNR/NRE account.

(b) For investment on non-repatriation basis Besides the above two, investment can be made out of NRO account.

(vii) Ceiling on Investment

(a) Per investor (Each NRI)

5% of the paid-up value of shares of an Indian Company on both repatriation and non-repatriation basis.

5% of the value of each issue of convertible debenture of an Indian Company on both repatriation and non-repatriation basis.

(b) Per investee Company

(Total holding by all NRIs put together on both repatriable as well as non-repatriable basis.)

10% of paid-up value of shares of an Indian Company.

10% of paid-up value each series of convertible debenture.

This ceiling of 10% could be increased to 24%, if the General Body of concerned

Indian Company passes a special resolution to that effect.

It is interesting to note that FIIs are allowed to increase their investments under portfolio investments scheme up to the sectoral cap. Whereas NRIs are allowed to increase the limit only up to 24%.

(viii) Repatriation of Sale/Maturity Proceeds

(a) Sales proceeds of Investment held on repatriation basis can be credited to NRE/FCNR/NRO account after payment of applicable taxes.

(b) If investment is on non-repatriation basis, credit of sale/maturity proceeds is permitted in NRO account.

(ix) Existing OCBs (i.e. prior to Sep 16, 2003) must intimate the designated bank branch immediately on the holding/interest of NRIs in the OCB becoming less than 60%.

(x) NRIs are allowed to enter into forward contracts to hedge their investment made in India.

(xi) NRI is also permitted to invest in exchange traded derivatives contracts approved by SEBI from time to time out of his Rupee funds held in India on Non-Repatriable basis subject to the limits described by SEBI.

(xii) NRIs can also invest without limit on repatriable basis in Government dated securities, treasury bills, units of domestic mutual funds, bonds issued by PSUs, shares in public sector enterprises which are being disinvested by Government. They can also invest without limit on non-repatriable basis. In Government dated securities, treasury bills, units of Domestic mutual funds, units of Money market mutual funds. However, NRIs are not permitted to make Investments in Small Savings Schemes including PPF.

FAQs

(i) Can NRIs take their securities outside India?

There is no express prohibition in FEMA. As such “demat” being in vogue, physical transfer of security assumes little or no significance. Under FERA, general permission was granted for taking securities outside India.

(ii) Can NRIs invest under portfolio investment scheme out of funds borrowed in India?

No NRIs cannot invest out of borrowed funds in India.

(iii) Can power of attorney holder manage portfolio on behalf of NRIs?

Yes. A power of attorney holder can manage portfolio on behalf of NRIs. However, he cannot effect remittance outside India. With internet trading, life of NRIs has become easy for portfolio investments.

(iv) Can NRIs avail of loan against such securities?

Yes. NRIs can borrow against shares or other securities. However, the loan should be utilized for meeting the borrower’s personal requirements or for his own business purposes.

(v) Is any approval required from anyone to begin Portfolio Investment?

NRIs do not need any approval to undertake Portfolio Investment. They have to comply with the guidelines. FIIs need approval of SEBI and RBI. An application has to be filed with SEBI as the relevant rules. The application is forwarded to RBI. Both approvals are available simultaneously. One does not have to approach SEBI and RBI independently. In fact for FIIs, SEBI is the monitoring authority. Detailed rules are laid down under the SEBI law.

(vi) How can NRI begin portfolio Investment?

NRIs should comply with the following conditions:

• The NRI designates a bank branch for routing all his purchase and sale transactions through that Bank branch only.
• Purchase and sale is carried out through a registered broker on a recognized stock exchange.
• All transactions of purchase and sale must be delivery based. Speculative transactions are not allowed.

(vii) Can income earned on Portfolio Investment be remitted abroad?

Income such as interest and dividend earned by NRI from portfolio investments acquired whether on repatriation basis or on Non- repatriation basis, can be remitted abroad provided applicable taxes have been deducted/paid.

However capital gains can be repatriated only if investment is on repatriable basis.

(viii) Are NRIs required to file any reports to RBI?

The NRI investor is not required to file any Return or Report with the RBI with regard to acquisition or sale of shares and/ or debentures in an Indian Company. Only the link office of the designated bank branch is required to furnish a report on daily basis on Portfolio Investment Scheme Transactions to RBI.

Portfolio Investment Scheme for Foreign Institutional Investors (FIIs)

Schedule 2 of the Regulation 5(2) of Notification No. 20/RB-2000 dated 3^rd May, 2003 deals with the provisions relating to Portfolio Investment by FIIs. FIIs such as Pension Funds, Investment Trusts, Assets Management Companies, etc., who have obtained registration from SEBI, are permitted to invest on full repatriation basis in the Indian Primary and Secondary Stock Markets (including OTCEI) as well as in unlisted, dated Government securities, Treasuries Bills and Units of Domestic Mutual Funds without any lock-in-period.

Brief provisions of the schemes are as follows:

(i) FII must be registered with SEBI.

(ii) FII shall not obtain prior permission of RBI for purchase the share/convertible debentures of an Indian Company.

(iii) Purchase is allowed through registered brokers on recognised stock exchange in India.

(iv) Manner of Investments

FIIs are permitted to open a foreign currency account and/or a non-resident rupee account in India with a designated branch of an authorized dealer. The purchase and sale of permitted securities must be routed through this account only.

(v) Forex cover to hedge investment in India

FIIs are permitted to hedge the market value of their entire investment in equity as on a particular date without any reference to a cut off date.

(vi) Limit on Investment

(a) Individual holding

Holding by each FII (including SEBI approval sub-account of FII) shall not exceed ten percent (10%) of the total paid-up equity capital or (10%) of the paid-up value of each series of convertible debentures issued by an Indian Company.

(b) Total holding

The total holding of all FIIs/sub-accounts of FIIs put together shall not exceeds 24% of paid-up equity capital or paid up value of each series of convertible debentures.

(c) Holding in Government Securities

In case of Investment in Government Securities (para (ix) given below); the ratio of investment between equity and debt should be atleast 70:30 (i.e. (i.e. minimum 70% for equity). There is no limit on the amount of investment. If the FII wants to invest 100% in the debt fund, then it can form a debt fund and get the same registered with SEBI

(vii) Remittance of sale proceeds

FII will be allowed to remit sale proceeds of shares/convertible debentures after payment of applicable taxes.

(viii) FIIs are also permitted to invest in exchange traded derivatives contracts approved by SEBI subject to the limit prescribed by SEBI.

(ix) FIIs can also invest in dated Government securities, treasure bills, non-convertible debenture/ bonds, and units of Domestic mutual funds.

(x) Procedure for FIIs to make portfolio Investment in India

FIIs should comply with the following conditions:

• The FII should designate a bank branch for routing all purchase and sale transactions through that bank branch only.
• Purchase and sale should be carried out through a registered broker on a recognised stock exchange. Of course, in case of private placement investment, there will be no broker.
• All transaction of purchase and sale must be delivery based. Speculative transactions are not allowed.
• FIIs can open a bank account in foreign currency and rupee (known as Special Non-resident Rupee Account). Free transfer of funds between the two accounts is permitted. All transactions should be routed through these accounts. The transaction can be done through Special Rupee Account.
• For derivative trading, a separate sub-account in Rupee should be opened. The funds can be freely transferred between the special rupee account and the sub-account. However, repatriation of funds abroad can be done only through the main Special Rupee Account.

(xi) FIIs are required to submit a daily report of the transactions in a soft copy format to Chief General Manager, Exchange General Manager, Exchange Control Department, Reserve Bank of India, Foreign Investment Division, Central Office, Central Office Building, Mumbai 400 001. Details of exchange-traded derivatives are, however, not required to be submitted. This will facilitate RBI to keep tabs on limits of investment.

Investments by NRIs on Non-Repatriation Basis

Schedule -IV of notification No. 20/2000-RB deals with provisions relating to such type of investments. Briefly the provisions are as follows: -

(i) General Prohibition

Investments in shares or convertible debentures of an Indian Company engaged in following type of activities are not permitted.

• Chit Fund or Nidhi Company
• Agricultural or Plantation activities
• Real Estate Business
• Construction of farm houses or
• Dealing in Transfer of Development Rights (TDRs).

(ii) General Permission

Subject to above, NRIs are free to invest without any limit on non-repatriation basis in shares or convertible debentures of an Indian Company. However, only direct investment in the form of public issue, private placement or right issue is covered here. It follows that secondary investment, on private arrangement basis, would require prior RBI approval.

NRI can also, without any limit, purchase on non-repatriation basis dated Government Securities, treasury bills, units of domestic mutual funds, units of Money Market Mutual Funds.

However, NRIs are not permitted to make Investments in Small Savings Schemes including PPF.

I. Bank Accounts and Deposits

a) Non-Resident (External) Rupee (NRE) Accounts (Principal / Interest Repatriable)

• Savings – The interest rates on NRE Savings deposits shall be at the rate applicable to domestic savings deposits. Currently the interest rate is 3.5%.
• Term deposits – For 1 year to 3 years, the interest rates on fresh repatriable Non-Resident (External) Rupee (NRE) Term deposits should not exceed the LIBOR/SWAP rates, as on the last working day of the previous month, for US dollar of corresponding maturity plus 50 basis points.

The interest rates as determined above for three year deposits should also be applicable in case the maturity period exceeds three years.

The changes in interest rates will also apply to NRE deposits renewed after their present maturity period.

b) FCNR (B) (Principal/Interest Repatriable)

Deposits of funds in the account may be accepted in such permissible currencies as may be designated by the Reserve Bank from time to time.

• Presently the term deposit can be placed with ADs in India in 6 specific foreign currencies (US Dollar, Pound Sterling, EURO, Japanese Yen, Australian Dollar and Canadian Dollar).
• Rate of Interest – Fixed or floating within the ceiling rate of LIBOR/SWAP rates for the respective currency/corresponding term minus 25 basis points.
• Maturity of deposits: 1-5 years.

c) NRO Accounts (Current earnings repatriable)

• Savings – Normally operated for crediting rupee earnings / income such as dividends, interest. Currently the interest rate is 3.5 per cent.
• Term Deposits – Banks are free to determine interest rates.

d) Repatriation from NRO balances

Authorised Dealers can allow remittance/s upto USD 1 million per financial year (April-March) for bonafide purposes, from balances in NRO accounts subject to payment of applicable taxes. The limit of USD 1 million per financial year includes sale proceeds of immovable properties held by NRIs/PIO.

II. Other Investments on repatriation basis

• Government dated securities/treasury bills.
• Units of domestic mutual funds.
• Bonds issued by a public sector undertaking (PSU) in India.
• Non-convertible debentures of a company incorporated in India.
• Shares in Public Sector Enterprises being dis-invested by the Government of India, provided the purchase is in accordance with the terms and conditions stipulated in the notice inviting bids.
• Shares and convertible debentures of Indian companies under FDI scheme (including automatic route & FIPB).
• Shares and convertible debentures of Indian companies through stock exchange under Portfolio Investment Scheme.
• Perpetual debt instruments and debt capital instruments issued by banks in India.

III. Other Investments on non-repatriation basis

• Government dated securities (other than bearer securities)/treasury bills.
• Units of domestic mutual funds.
• Units of Money Market Mutual Funds in India.
• Non-convertible debentures of a company incorporated in India.
• The capital of a firm or proprietary concern in India, not engaged in any agricultural or plantation activity or real estate business.
• Deposits with a company registered under the Companies Act, 1956 including NBFC registered with RBI, or a body corporate created under an Act of Parliament or State Legislature, a proprietorship concern or a firm out of rupee funds which do not represent inward remittances or transfer from NRE/FCNR(B) Accounts into the NRO Account.
• Commercial Paper issued by an Indian company.
• Shares and convertible debentures of Indian companies other than under Portfolio Investment Scheme.

IV. Investment in immovable Property

• May acquire immovable property in India other than agricultural land/ plantation property or a farm house out of repatriable and non-repatriable funds.

In respect of such investments NRIs are eligible to repatriate

• Sale proceeds of immovable property acquired in India to the extent of repatriable funds used for acquiring the property, up to two residential properties. The balance will be repatriable through NRO Account subject to conditions mentioned at item (I) (d).
• Refund of (a) application / earnest money / purchase consideration made by house-building agencies/seller on account of non-allotment of flats / plots and (b) cancellation of booking/deals for purchase of residential/commercial properties, together with interest, net of taxes, provided original payment is made out of NRE/FCNR(B) account/inward remittances.
• Housing Loan in rupees availed of by NRIs from ADs / Housing Financial Institutions can be repaid by the close relatives in India of the borrower.

V. Facilities to returning NRIs/PIO

Returning NRIs/ PIO

• May continue to 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 when resident outside India.
• May open, hold and maintain with an authorised dealer in India a Resident Foreign Currency (RFC) Account to transfer balances held in NRE/FCNR(B) accounts. Proceeds of assets held outside India at the time of return, can be credited to RFC account. The funds in RFC accounts are free from all restrictions regarding utilisation of foreign currency balances including any restriction on investment in any form outside India.

I   Acquisition of Immovable Property in India

Q.1 Who can purchase immovable property in India?

A.1 Under the general permission available, the following categories can freely purchase immovable property in India:
i) Non-Resident Indian (NRI)- that is a citizen of India resident outside India
ii)  Person of Indian Origin (PIO)- that is an individual (not being a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan), who

1. at any time, held Indian passport, or
2. who or either of whose father or grandfather was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955).

 The general permission, however, covers only purchase of residential and commercial property and not for purchase of agricultural land / plantation property / farm house in India.

Q.2.  Whether NRI/PIO can acquire agricultural land/ plantation property / farm house in India?

A.2. No. Since general permission is not available to NRI/PIO to acquire agricultural land/ plantation property / farm house in India, such proposals will require specific approval of Reserve Bank and the proposals are considered in consultation with the Government of India.

Q.3. Do any documents need to be filed with Reserve Bank of India after purchase?

A.3. No.  An NRI / PIO who has purchased residential / commercial property under general permission, is not required to file any documents with the Reserve Bank.

Q.4. How many residential / commercial properties can NRI / PIO purchase under the general permission?
A.4. There are no restrictions on the number of residential / commercial properties that can be purchased.

Q.5. Can a foreign national of non-Indian origin be a second holder to immovable property purchased by NRI / PIO?

i) an NRI
ii) a PIO and
iii) a foreign national of non-Indian origin can inherit and hold immovable property in India from a person who was resident in India. However, a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan should seek specific approval of Reserve Bank.

Q.11.  From whom can  the non-resident  inherit immovable property?

However, the person from whom the property is inherited should have acquired the same in accordance with the foreign exchange regulations applicable at that point of time.

II. Transfer of immovable property in India
(i) Transfer by Sale

Q.12 Can an NRI/ PIO/foreign national sell his residential / commercial property?

i)   a person resident in India or
ii)  an NRI or
iii) a PIO.

(b) PIO can sell property in India to

A.13. (a) NRI / PIO may sell agricultural land /plantation property/farm house to a person resident in India who is a citizen of India.
(b)  Foreign national of non-Indian origin resident outside India would need prior approval of Reserve Bank to sell agricultural land/plantation property/ farm house in India

(ii) Transfer by gift

Q.14. Can a non-resident gift his residential / commercial property?

A.15.  (a) NRI / PIO can gift but only  to a person resident in India who is a citizen of  India.
(b) foreign national of non-Indian origin needs prior approval of Reserve Bank

(iii) Transfer through mortgage
Q.16. Can residential / commercial property be mortgaged?

ii) a foreign national of non-Indian origin can mortgage only with prior approval of Reserve Bank
iii) a foreign company which has established a Branch Office or other place of business in accordance with FERA/FEMA regulations has general permission to mortgage the property with an authorized dealer in India.
           
III. Mode of payment for purchase

Q.17. How can an NRI / PIO make payment for purchase of residential / commercial property in India ?

A.17. Payment can be made by NRI / PIO out of
(a) funds remitted to India through normal banking channel or
(b) funds held in NRE / FCNR (B) / NRO account  maintained in India
No payment can be made either by traveller’s cheque or by foreign currency notes.
No payment can be made outside India.

Q.18 What shall be the option if there is refund of application money / payment made by the building agencies / seller because of non-allotment of flat / plot / cancellation of bookings / contracts ?

(a) by way of inward remittance through normal banking channel or
(b) by debit to his NRE / FCNR (B) / NRO account or
(c) out of rental income from such property.
(d) by the borrower’s close relatives, as defined in section 6 of the Companies Act, 1956, through their account in India by crediting the  borrower’s loan account.

Q.21. Can NRI/PIO avail of housing loan in rupees from his employer in India?

A.21. Yes, subject to certain terms and conditions (Please refer to Regulation 8A of Notification No. FEMA 4/2000-RB dated May 3, 2000 and A.P. (DIR Series) Circular No.27 dated October 10, 2003).

IV Repatriation of sale proceeds of residential / commercial property purchased by NRI / PIO

Q.22. Can NRI / PIO repatriate the sale proceeds of immovable property? If so, what are the terms?

(a) If the property was acquired out of foreign exchange sources i.e. remitted through normal banking channels / by debit to NRE / FCNR (B) account
The amount to be repatriated should not exceed the amount paid for the property:

1. in foreign exchange received through normal banking channel or 
2. by debit to NRE account(foreign currency equivalent, as on the date of payment) or debit to FCNR (B) account.

Repatriation of sale proceeds of residential property purchased by NRI / PIO out of foreign exchange is restricted to not more than two such properties.
Capital gains, if any, may be credited to the NRO account from where the NRI/PIO may repatriate an amount up to USD one million, per financial year, as discussed below. 

(b) If the property was acquired out of Rupee sources, NRI or PIO may remit an amount up to USD one million, per financial year, out of the balances held in the NRO account (inclusive of sale proceeds of assets acquired by way of inheritance or settlement), for all the bonafide purposes to the satisfaction of the Authorized Dealer bank and subject to tax compliance.

Q.23. Can an NRI/PIO repatriate the proceeds in case the sale proceed was deposited in NRO account?

A.24. Yes, provided the loan has been subsequently repaid by remitting funds from abroad or by debit to NRE/FCNR(B) accounts (Please see A.P. (DIR) Series Circular No. 101 dated 5.5.2003)   

Q.25. If the property was purchased from foreign inward remittance or from NRE / FCNR (B) account, can the sale proceeds of property be repatriated immediately?

A.25. Yes.

Q.26. Is there any restriction on number of residential properties in respect of which sale proceeds can be repatriated by NRI / PIO?

A.26. Yes, sale proceeds of not more than two residential properties can be repatriated.

Q.27. If the immovable property was acquired by way of gift by the NRI/PIO, can he repatriate abroad the funds from sale?

A.27. The sale proceeds of immovable property acquired by way of gift should be credited to NRO account only. From the balance in the NRO account, NRI/PIO may remit up to USD one million, per financial year, subject to the satisfaction of Authorised Dealer and payment of applicable taxes.  

Q.28 If the immovable property was received as inheritance by the NRI/PIO can he repatriate the sale proceeds?

A.28. Yes, general permission is available to the NRIs/PIO to repatriate the sale proceeds of the immovable property inherited from a person resident in India. NRIs/PIO may repatriate an amount not exceeding USD one million, per financial year, on production of documentary evidence in support of acquisition / inheritance of assets, an undertaking by the remitter and certificate by a Chartered Accountant in the formats prescribed by the Central Board of Direct Taxes vide their Circular No.10/2002 dated October 9, 2002.   [cf. A. P. (DIR Series) Circular No.56 dated November 26, 2002]. 
In case of a foreign national, sale proceeds can also be repatriated even if the property is inherited from a person resident outside India. But this is allowed only with prior approval of Reserve Bank. The foreign national has to approach Reserve Bank with documentary evidence in support of inheritance of the immovable property and the undertaking and the C.A. Certificate as mentioned above.
The general permission for repatriation of sale proceeds of immovable property is not available to a citizen of Pakistan, Bangladesh, Sri Lanka, China, Afghanistan and Iran and he has to seek specific approval of Reserve Bank.
As FEMA specifically permits transactions only in Indian Rupees with citizens of Nepal and Bhutan, the question of repatriation of the sale proceeds in foreign exchange to Nepal and Bhutan would not arise.     

V. Provisions for Foreign Embassies / Diplomats / Consulate Generals

Q.29. Can Foreign Embassies / Diplomats / Consulate General purchase / sell immovable property in India ?
A.29. Yes, Foreign Embassies / Diplomats / Consulate Generals can purchase and sell any immovable property other than agricultural land / plantation property / farm house in India with prior clearance from the Government of India, Ministry of External Affairs. The payment should be made by foreign inward remittance through normal banking channel.

VI. Other issues

Q.30. Can NRI / PIO rent out the residential / commercial property purchased out of foreign exchange / rupee funds?

A.30. Yes, NRI/PIO can rent out the property without the approval of the Reserve Bank. Rent received can be credited to NRO / NRE account or remitted abroad. Powers have been delegated to the Authorised Dealers to allow repatriation of current income like rent, dividend, pension, interest, etc. of NRIs/PIO who do not maintain an NRO account in India based on an appropriate certification by a Chartered Accountant, certifying that the amount proposed to be remitted is eligible for remittance and that applicable taxes have been paid/provided for.[cf. A.P. (DIR Series) Circular No. 45 dated May 14, 2002].

Q.31. Can a person who had bought immovable property when he was a resident, continue to hold such property even after becoming an NRI/PIO?

A. 31. Yes, he can continue to hold the residential / commercial property / agricultural land/ plantation property / farm house in India without the approval of the Reserve Bank.

Q. 32. In which account can the sale proceeds of such immovable property be credited ?

A.32. The sale proceeds may be credited to NRO account.

Q.33. Can the sale proceeds of the immovable property referred to in Q.No. 31 be remitted abroad ?

A.33. Yes, provided the amount to be remitted does not exceed USD one million per financial year, for all bonafide purposes to the satisfaction of Authorised Dealers and subject to tax compliance.

Q.34. Can foreign nationals of non-Indian origin resident in India or outside India who had earlier acquired immovable property under FERA with specific approval of Reserve Bank continue to hold the same?  Can they transfer such property?

A.34. Yes, they may continue to hold the immovable property. However, they can transfer the property only with the prior approval of Reserve Bank.

Q.35. Is a resident in India governed by the provisions of Foreign Exchange Management (Acquisition and transfer of immovable property in India) Regulations, 2000?

A.35. A person resident in India who is a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan is governed by the provisions of Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000 ie. he would require prior approval of Reserve Bank for acquisition and transfer of immovable property in India even though he is resident in India. Such requests are considered by Reserve Bank in consultation with the Government in India

Definitions
Q.36.Where are the terms a `person resident in India’ and a `person resident outside India’ defined ?

A.36. Section 2 (v) and Section 2 (w) of the FEMA, 1999 defines `person resident in India’ and a `person resident outside India’ respectively.

Q.37. What is meant by a person resident in India ?

A.37. Under FEMA, a person resident in India is defined as a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year (April-March) and who has come to or stays in India either for taking up employment, carrying on business or vocation in India or for any other purpose, that would indicate his intention to stay in India for an uncertain period. In other words, to be treated as `a person resident in India’ under FEMA, a person has not only to satisfy the condition of the period of stay (being more than 182 days during the course of the preceding financial year) but has also to comply with the condition of the purpose / intention of stay.

Q.38. What is meant by a person resident outside India ?

A.39. Reserve Bank does not determine the residential status. Under FEMA, residential status is determined by operation of law. The onus is on an individual to prove his / her residential status, if questioned by any authority.

Q.40. If a foreign national is a person resident in India as per the provisions of Section 2(v) (i)B of the FEMA, 1999, does he require approval of Reserve Bank to purchase any immovable property in India ?

A.40  A foreign national resident in India  does not require approval from Reserve Bank from FEMA angle, but approvals if any required in terms of regulations prescribed by other authorities such as the concerned State Government etc. will have to be obtained by him / her. However, a foreign national resident in India who is a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan requires specific prior approval of Reserve Bank.

Acquisition and Transfer of Immovable Property in India by a Person Resident outside India

Acquiring immovable property in India by persons resident outside India is regulated in terms of Section 6(3) (i) of the Foreign Exchange Management Act (FEMA), 1999 as well as by the regulations contained in Notification issued by RBI viz Notification No FEMA. 21/2000-RB dated May 3, 2000, as amended from time to time. The persons resident outside India are categorized as   Non- Resident Indians (NRIs) or a foreign national of Indian Origin (PIO) or a foreign national of non-Indian origin. A person resident in India who is not a citizen of India is also covered by the relevant Notifications.

2. Statutorily, under the provisions of Section 6(5) of FEMA 1999, a person resident outside India can   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 a resident in India or inherited from a person who was a resident in India.

3. The regulations under the Notification No FEMA 21 dated May 3, 2000 permit a NRI or a PIO to acquire immovable property in India other than agricultural land or, plantation property or farm house. Further, foreign companies who have been permitted to open an office in India are also allowed to acquire any immovable property in India, which is necessary for or incidental to carrying on such activity. This stipulation is not available to entities which are permitted to open liaison offices in India.

4. The relevant regulations covering the transactions in immovable property have been notified vide RBI Notification No.FEMA 21/2000-RB dated May 3, 2000 and this basic notification has been subsequently  amended by the notifications detailed below:

1. Notification No.FEMA 64/2002-RB dated June 29, 2002;
2. Notification No.FEMA 65/2002-RB dated June 29, 2002; 
3. Notification No.FEMA 93/2003-RB dated June 9, 2003; and
4. Notification No. FEMA 146/2006-RB dated February 10 2006 (available with A.P.(DIR Series) Circular No. 5 dated 16.8.2006 on website)All the above notifications are available on RBI website: www.fema.rbi.org.in.

5. The restrictions on acquiring immovable property in India by a person resident outside India would not apply where the immovable property is proposed to be acquired by way of a lease for a period not exceeding 5 years or where a person is deemed to be resident in India. In order to be deemed to be a person resident in India, from FEMA angle, the person would need to comply with the criterion for residency as defined in Section 2(v) of FEMA 1999. However, citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan cannot acquire or transfer immovable property in India, (other than on lease, not exceeding five years) without prior permission of the Reserve Bank.

6. NRIs/PIO are allowed to repatriate an amount up to USD one million, per financial year (April-March), out of the balances held in the NRO account subject to tax compliance. This amount includes sale proceeds of assets acquired by way of inheritance or settlement.

7. While the statutory and regulatory provisions are indicated above, we have been receiving several queries from individuals on operational procedures regarding acquisition, holding and transferring of immovable property in India and repatriating/remitting the proceeds arising from sale of such property. In order to clarify these issues, we have attempted a set of FAQs on various issues relating to acquisition and transfer of immovable property in India by a person resident outside India and a person resident in India who is not a citizen of India.

 In case there are other issues to be resolved, a reference may be made to the

Chief General Manager-in-Charge,
Foreign Exchange Department
Foreign Investment Division,
Reserve Bank of India,
Central Office
Mumbai- 400 001