RBI UNIFORMS THE LATE SUBMISSION FEE – AN ALTERNATE TO FEMA COMPOUNDING

The Reserve Bank of India (“RBI”) vide A.P. (DIR Series) Circular No. 16 dated September 30, 20221 (“RBI Circular”) has revised the late submission fee (“LSF”) computation matrix for reporting delays under the Foreign Exchange Management Act, 1999 (“FEMA”), in order to bring uniformity in imposition of LSF across functions.

BACKGROUND

Practically, the reporting documentation of Foreign Investment (“FI”), External Commercial Borrowing (“ECB”) and Overseas Investment (“OI”) transactions involves a great deal of coordination amongst the multiple parties and the Authorised Dealer Bank (“AD Bank”), which may sometimes result in reporting of such transactions beyond the stipulated timeframes. While such reporting delays are mere procedural lapses, prior to introduction of LSF, the party in default had no other option but to undergo a cumbersome process of compounding to regularise such delays. This was a time consuming exercise and could take up to 6 months’ time to pay the penalty and obtain the order. Requiring a person to go for compounding to regularise the procedural lapses was an enormous administrative burden on the regulators. To address this, the RBI introduced LSF as an alternate mechanism. It was first introduced on November 07, 20172 for the reporting delays of FI and subsequently, for ECB and OI transactions w.e.f. January 16, 20193 and August 22, 2022 through the Foreign Exchange Management (Overseas Investment) Directions, 20224 (“OI Directions”), respectively.

LSF has been a great initiative to deal with procedural lapses in a much faster and efficient way. By easing the process for regularization, this has de-clogged the RBI compounding cell from such trivial matters and allowed the compounding authorities to focus on serious contraventions.

HOW DOES LSF WORKS?

LSF mechanism has laid down a simple process of paying a prescribed late fee to regularise reporting delays of FI, ECB and OI transactions. As a process, once the reporting of transaction (through Single Master Form (SMF) on RBI’s FIRMS portal5 for FI transactions and in physical form for ECB and OI transactions) is completed, in the event of delay in reporting, such cases shall be forwarded by AD Bank to the RBI. The RBI shall then condone the delay and issue a conditional acknowledgment subject to payment of LSF within a stipulated timeframe. LSF is levied as per the computation matrix. Final acknowledgment of reporting shall be issued only upon payment of LSF by the reporting party. The amount once paid as LSF is not refundable in any manner.

LSF payment is an additional facility for regularizing reporting delays without undergoing the compounding procedure. Hence, an option to undergo the compounding process is always available when the reporting party decides not to avail LSF facility. Importantly, the LSF applies only for the reporting delays, and contravention of any other provisions under the FEMA would still be subject to adjudication or compounding with the RBI.

NEW UNIFORMED LSF MATRIX

Prior to the RBI Circular, although LSF was applied for all the transactions, the manner of computation of LSF was not consistent across functions (i.e. FI, ECB and OI). While LSF was applied as a percentage of the amount involved for FI reporting delays, in case of ECB reporting delays, it was applied as a fixed amount which is linked to the period of delay occurred. Further, LSF which was recently applied for OI reporting delays under the OI Directions prescribed a different method of computation depending upon the nature of reporting involved.

In order to streamline and bring uniformity, the RBI Circular introduced a new uniformed LSF matrix (as below) (“New LSF”) which shall apply to all the reporting delays on or after September 30, 2022, across functions.

Sr. NoType of Reporting delaysLSF Amount (INR)
1Form ODI Part-II/ APR, FCGPR (B), FLA Returns, Form OPI, evidence of investment or any other return which does not capture flows or any other periodical reporting7500
2FC-GPR, FCTRS, Form ESOP, Form LLP(I), Form LLP(II), Form CN, Form DI, Form InVi, Form ODI-Part I, Form ODI-Part III, Form FC, Form ECB, Form ECB-2, Revised Form ECB or any other return which captures flows or returns which capture reporting of non-fund transactions or any other transactional reporting[7500 + (0.025% x A x n)]

Notes:

“n” is the number of years of delay in submission rounded-upwards to the nearest month and expressed up to 2 decimal points.

“A” is the amount involved in the delayed reporting.

NRI SERVICES

info@nriservices.in

RBI amends Foreign Investment guidelines for reporting in SMF on FIRMS

The Reserve Bank of India (RBI) vide Notification no. RBI/2022-23/160 A.P. (DIR Series) Circular No. 22, dated 04.01.2023 has amended the guidelines for reporting in SMF on FIRMS and issued a circular on Foreign Investment in India – Rationalisation of reporting in Single Master Form (SMF) on FIRMS Portal in exercise of power conferred under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions/approvals, if any, required under any other law

RBI has introduced a Single Master Form (“SMF”) to integrate the reporting structure of various types of Foreign Investment in India. SMF would provide a facility for reporting total foreign investment in an Indian entity {as defined in Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations 2017, dated November 7, 2017}, as also investment by persons resident outside India in an Investment Vehicle

The following changes are being implemented with respect to the reporting of foreign investment in SMF on FIRMS portal:  

  1. The forms submitted on the portal will be auto-acknowledged. The AD banks shall verify the same within five working days based on the uploaded documents, as specified.
  2. In cases of delayed reporting, the AD banks shall either advise the Late Submission Fee (LSF) to the applicants, which will be computed by the system or advise for compounding of contravention, as the case may be.

Auto-acknowledgement of SMF in FIRMS and online calculation of LSF

The forms submitted in FIRMS will now be processed as detailed below:

All forms submitted with the requisite documents will be auto-acknowledged on the FIRMS portal with a time stamp and an auto-generated e-mail will be sent to the applicant.

  1. The forms submitted within prescribed timelines, will be verified by the AD banks based on the uploaded mandatory documents and ensure that the same are in compliance with the extant guidelines.  
  2. The system would identify the delay in reporting, if any.  
  3. For forms filed with a delay less than or equal to three years, the AD banks will approve the same, subject to payment of LSF.  
  4. The LSF will be computed by the system and an e-mail will be sent to the applicant and the concerned Regional Office (RO) of RBI specifying the amount and the timeline within which it is to be paid to the concerned RO of RBI.  
  5. Once the LSF amount is realised, the concerned RO will update the status in the FIRMS portal and the updated status will be communicated to the applicant through a system generated e-mail, which can also be viewed in the FIRMS portal.  
  6. The AD bank will approve the forms filed with a delay greater than three years, subject to compounding of contravention. The applicant may thereafter approach RBI with their application for compounding.
  7. The remarks of the AD Bank for rejection of forms, if any, will be communicated to the applicant through a system generated e-mail and the same can also be viewed in the FIRMS portal.

NRI Services

info@nriservices.inc

A Guide to Compounding Contraventions before the Enforcement Directorate

Pranav Singla

Introduction

The Foreign Exchange Management Act, 1999 (FEMA) plays a crucial role in regulating foreign exchange transactions in India. However, there may be instances when individuals or entities inadvertently or negligently contravene the provisions of FEMA. In such cases, seeking compounding of contraventions before the Enforcement Directorate (ED) can provide an opportunity to rectify the mistake and avoid severe penalties. This article aims to guide individuals and businesses on how to tackle FEMA compounding contraventions before the ED effectively.

Understanding FEMA Contraventions

Before diving into the compounding process, it is important to identify the contravention that occurred. Familiarize yourself with the provisions of FEMA and ascertain the nature and extent of the violation. This will help in assessing potential penalties and consequences associated with the contravention.

Seek Professional Guidance

Given the complexity of FEMA and its implications, it is advisable to seek professional assistance. Engage a legal professional or a qualified chartered accountant with expertise in FEMA and foreign exchange regulations. They can provide valuable guidance, help you understand the nuances of the compounding process, and ensure compliance with relevant regulations.

Prepare a Compounding Application

A well-drafted compounding application is essential to present your case effectively. Include the following key elements in your application:

  1. Detailed Facts: Provide a comprehensive account of the facts and circumstances surrounding the contravention. Include relevant dates, transactions, and parties involved.
  2. Specify FEMA Provisions Violated: Clearly state the specific provisions of FEMA that have been contravened. This demonstrates your awareness of the violation and shows a commitment to rectify it.
  3. Quantify the Contravention: Specify the monetary value or any other quantifiable aspect associated with the contravention. This helps in assessing the seriousness of the violation and determining the appropriate compounding fees.
  4. Reasons for Contravention: Provide a clear and honest explanation of why the contravention occurred. Highlight any mitigating factors or unintentional errors that contributed to the violation.
  5. Steps Taken for Rectification: Outline the actions taken to rectify the contravention promptly. This demonstrates your commitment to compliance and rectification of the mistake.
  6. Supporting Documents: Include all relevant documents, such as transaction records, contracts, correspondence, or any other evidence that supports your case. Make sure to provide documents requested by the ED.

Payment of Compounding Fees

Compounding fees must be paid along with the compounding application. The fees are determined based on the nature and severity of the contravention. It is crucial to ensure that the correct fees are paid as per the FEMA compounding guidelines. Failure to pay the appropriate fees can result in the rejection of the compounding application.

Follow-Up and Cooperation

After submitting the compounding application, actively cooperate with the ED throughout the process. Respond promptly to any queries or requests for additional information from the authorities. If required, attend hearings or meetings as scheduled. Maintaining open communication and demonstrating a cooperative attitude will positively impact the outcome of the compounding process.

Obtain the Compounding Order

If the ED accepts the compounding application, they will issue a compounding order. This order will specify the terms and conditions of the compounding. It is vital to carefully review and comply with the terms outlined in the order to avoid further legal consequences.

Conclusion

Tackling FEMA contraventions through compounding before the Enforcement Directorate is a crucial step towards rectifying mistakes and ensuring compliance. By following the outlined steps in this article, individuals and businesses can effectively navigate the compounding process. Remember to seek professional guidance, prepare a comprehensive compounding application, pay the prescribed fees, cooperate with the authorities, and comply with the terms of the compounding order. By doing so, you can address the contravention under FEMA and mitigate potential penalties while striving for regulatory compliance in foreign exchange transactions.

20% TCS on Foreign Remittance Transactions under LRS

The Union Budget 2023 proposes a Tax Collection at Source (TCS) for foreign outward remittance under LRS (other than for Education and medical purpose) of 20% applicable from July 1, 2023. Before this proposal, the TCS of 5% was applicable on foreign outward remittances above INR 7 lakhs. 

What is the meaning of TCS (Tax Collected at Source) ?

Tax Collected at Source (TCS) is an income tax, collected by the seller of specified goods, from the buyer. TCS is a concept where a person selling specific items is liable to collect tax from a buyer at a prescribed rate and deposit the same with the Government. Under the Liberalised Remittance Scheme (LRS), the Bank is required to collect TCS at the rate of 5% on the aggregate remittance amount exceeding Rs. 7 lakhs during a Financial Year before Budget 2023.

What is Liberalised Remittance Scheme (LRS) ?

The Liberalised Remittance Scheme (LRS) is part of the Foreign Exchange Management Act (FEMA) 1999 which lays down the guidelines for outward remittance from India. Under LRS, all resident individuals, including minors, are allowed to freely remit up to USD250,000 per financial year (April – March). This can be for any permissible current or capital account transaction, or a combination of both.

Budget 2023: TCS on Foreign Remittance Transactions under LRS

Finance minister, Nirmala Sitharaman has proposed changes in the TCS structure in Budget 2023, to be applicable from 1st July 2023 →

“For foreign remittances for other purposes under LRS and the purchase of overseas tour programs, the TCS rates will get increased to 20% from the previously applicable 5% from 1st July 2023.”

The TCS rates with the changes brought about in Finance Act 2023 are tabulated as under:

  • Remittance for the purpose of any education [NO CHANGE]
 Old Position (up to 30.06.2023) After Finance Act (from 01.07.2023) 
NatureThresholdRateThresholdRate
If the amount being remitted out is a loan obtained from any financial institution as defined in section 80E7 lacs0.50%7 lacs0.50%
Remittance is not out of loan from a financial institution7 lacs5.00%7 lacs5.00%
  • Remittance for the purpose of any medical Treatment [NO CHANGE]
 Old Position (up to 30.06.2023) After Finance Act (from 01.07.2023) 
NatureThresholdRateThresholdRate
Remittance is for Medical Treatment7 lacs5.00%7 lacs5.00%
  • Sale of Overseas Tour Package
 Old Position (up to 30.06.2023) After Finance Act (from 01.07.2023) 
NatureThresholdRateThresholdRate
Remittance is for the purchase of a tour packageNil5.00%Nil20%
  • Any other remittance (for Bonds, Shares, Real Estate Gifts etc.)
 Old Position (up to 30.06.2023) After Finance Act (from 01.07.2023) 
NatureThresholdRateThresholdRate
Remittance is for any other purpose7 lacs5.00%Nil20%

How does this impact you from 1st July 2023?

  • If you are converting INR to any other currency for the purpose of investment in listed equities or any other purpose: As per the newly proposed Budget 2023, the Bank is required to collect TCS at the rate of 20% on the aggregate remittance amount during a Financial Year. Example: An individual wants to remit and convert Rs. 10 Lakh to US Dollars. The bank would deduct a TCS of 20% on Rs. 10 Lakh. The TCS would be Rs. 2,00,000 in this case. 
  • If you are converting INR to any other currency for the purpose of an overseas tour package: As per the newly proposed Budget 2023, the Bank is required to collect TCS at the rate of 20% on the aggregate remittance amount during a Financial Year. Example: You want to convert Rs. 10 Lakh to US Dollars for spending on overseas tour/ travel etc. The bank would deduct a TCS of 20% on Rs. 10 Lakh. The TCS would be Rs. 2,00,000 in this case. 
  • For the purpose of overseas Education, and overseas medical treatment a TCS of 5% will be applicable for an aggregate amount in excess of INR 7 lacs being remitted.

CA Nipan Bansal (info@nriservces.in)

Liberalised Remittance Scheme

Pranav Singla

The Liberalised Remittance Scheme (LRS) is a scheme introduced by the Reserve Bank of India (RBI) in 2004. The scheme allows resident individuals to remit up to USD 2,50,000 per financial year (April-March) for any permitted current or capital account transaction or a combination of both. The scheme is not available to corporates, partnership firms, HUF, trusts, etc.

The LRS limit has been revised in stages consistent with prevailing macro and micro economic conditions.

From, till date, the LRS limit has been revised multiple times.

Date of revision of limitLIMIT (USD)
February 4, 200425,000
December 20, 200650,000
May 8, 20071,00,000
September 26, 20072,00,000
August 14, 201375,000
June 3, 20141,25,000
May 26, 20152,50,000

The LRS is available to all resident individuals, including minors. In the case of a remitter being a minor, the Form A2 must be countersigned by the minor’s natural guardian. Remittances under the scheme can be consolidated in respect of family members subject to individual family members complying with its terms and conditions. However, clubbing is not permitted by other family members for capital account transactions such as opening a bank account/investment if they are not the co-owners/co-partners of the overseas bank account/investment.

Remittances for the purchase of property shall be in accordance with the provisions under paragraph 6(ii). Further, a resident cannot gift to another resident, in foreign currency, for the credit of the latter’s foreign currency account held abroad under LRS.

All other transactions that are otherwise not permissible under the Foreign Exchange Management Act (FEMA) and those in the nature of remittance for margins or margin calls to overseas exchanges/overseas counterparty are not allowed under the scheme.

The permissible capital account transactions by an individual under LRS are opening a foreign currency account abroad with a bank; acquisition of immovable property abroad; Overseas Direct Investment (ODI) and Overseas Portfolio Investment (OPI), in accordance with the provisions contained in Foreign Exchange Management (Overseas Investment) Rules, 2022, Foreign Exchange Management (Overseas Investment) Regulations, 2022 and Foreign Exchange Management (Overseas Investment) Directions, 2022; and extending loans including loans in Indian Rupees to Non-resident Indians (NRIs) who are relatives as defined in Companies Act, 2013.

The limit of USD 2,50,000 per financial year (FY) under the scheme also includes/subsumes remittances for current account transactions available to resident individuals under Para 1 of Schedule III to Foreign Exchange Management (Current Account Transactions) Amendment Rules, 2015 dated May 26, 2015. Release of foreign exchange exceeding USD 2,50,000 requires prior permission from the Reserve Bank of India.

For private visits abroad, other than to Nepal and Bhutan, any resident individual can obtain foreign exchange up to an aggregate amount of USD 2,50,000 from an Authorised Dealer or FFMC in any one financial year irrespective of the number of visits undertaken during the year. Further, all tour-related expenses including cost of rail/road/water transportation; cost of Euro Rail; passes/tickets, etc. outside India; and overseas hotel/lodging expenses shall be subsumed under the LRS limit. The tour operator can collect this amount either in Indian rupees or in foreign currency from the resident traveller.

Any resident individual may remit up-to USD 2,50,000 in one FY as a gift to a person residing outside India or as a donation to an organization outside India. A person going abroad for employment can draw foreign exchange up to USD 2,50,000 per FY from any Authorised Dealer in India. A person wanting to emigrate can draw foreign exchange from AD Category I bank and AD Category II up to the amount prescribed by the country of emigration or USD 250,000. Remittance of any amount of foreign exchange outside India in excess of this limit may be allowed only towards meeting incidental expenses in the country of immigration and not for earning points or credits to become eligible for immigration by way of overseas investments in government bonds; land; commercial enterprise; etc.

IFSC at GIFT City & Benefits for Non-Resident Indian (NRI) Investors

Context

Non-resident Indians (NRIs) and foreign investors enjoy low tax rates on investments made in the International Financial Services Centre (IFSC) in the Gujarat International Finance Tec-City (GIFT) located at Gandhinagar, Gujarat.

A large number of Alternative Investment Funds (AIFs) have also sprung up in the GIFT city, catering to NRIs.

About

Investing in alternative investment funds (AIFs):

Investing in derivatives:

IFSC and resident Indians:

  • Resident Indians have not been given any tax breaks for investing through the IFSC.
  • They can remit money to the IFSC through the Liberalised Remittance Scheme (LRS) of the RBI. However, they can only invest in securities issued by entities outside India.
  • Indian residents must also report these holdings in the foreign assets schedule of the income tax return.
  • Derivative trading is not permitted under LRS. 

What is International Financial Services Centre?

  • An international financial services centre caters to customers outside the jurisdiction of the domestic economy, dealing with flows of finance, financial products and services across borders.
  • Gujarat International Finance Tec-City Co. Ltd is being developed as the country’s first international financial services centre (IFSC)

What are the services an IFSC can provide?

  • Fund-raising services for individuals, corporations and governments
  • Asset management and global portfolio diversification is undertaken by pension funds, insurance companies and mutual funds
  • Wealth management
  • Global tax management and cross-border tax liability optimization, which provides a business opportunity for financial intermediaries, accountants and law firms.
  • Global and regional corporate treasury management operations that involve fund-raising, liquidity investment and management and asset-liability matching
  • Risk management operations such as insurance and reinsurance
  • Merger and acquisition activities among trans-national corporations

Acquisition or Transfer of Immovable Property under Foreign Exchange Management Act, 1999

                                                                            

RBI/FED/2015-16/7                                                                                         

FED Master Direction No. 12/2015-16

January 1, 2016 

[Updated as on September 01, 2022]

Master Direction – Acquisition or Transfer of Immovable Property under Foreign Exchange Management Act, 1999

Acquisition or transfer of immovable property by Indian residents outside India and Non-residents in India is regulated in terms of sub-sections 2(a), (4) and (5) of section 6 of the Foreign Exchange Management Act, 1999 (FEMA) read with Rule 21 of Foreign Exchange Management (Overseas Investment) Rules, 2022 dated August 22, 2022, and paragraph 25 of the Foreign Exchange Management (Overseas Investment) Directions, 2022 dated August 22, 2022, and Foreign Exchange Management (Non-debt Instruments) Rules, 2019, dated October 17, 2019, respectively.                                                                    

(Master Direction No. 18 dated January 1, 2016)

The Central Government has, accordingly, notified the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, dated October 17, 2019, as amended from time to time, in supersession of the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018. These Rules do not apply to the acquisition or transfer of immovable property in India by a person resident outside India on a lease not exceeding five years.

Some key terms used in the Rules are given below:

A ‘Non-Resident Indian’ (NRI) is a person resident outside India who is a citizen of India.

An ‘Overseas Citizen of India (OCI)’ is a person resident outside India who is registered as an Overseas Citizen of India Cardholder under Section 7(A) of the Citizenship Act, 1955.

‘Relative’ means relative as defined in section 2(77) of the Companies Act, 2013.

Acquisition of immovable property

An NRI or an OCI can acquire by way of purchase any immovable property (other than agricultural land/ plantation property/farmhouse) in India.

An NRI or an OCI can acquire by way of gift any immovable property (other than agricultural land/ plantation property/ farm house) in India from a person resident in India or from an NRI or an OCI who is a relative as defined in section 2(77) of the Companies Act, 2013.

An NRI or an OCI can acquire any immovable property in India by way of inheritance from a person resident outside India who had acquired the property in accordance with the provisions of the foreign exchange law in force at the time of acquisition.

An NRI or an OCI can acquire any immovable property in India by way of inheritance from a person resident in India.

Transfer of immovable property

  • An NRI or an OCI may transfer any immovable property in India to a person resident in India;
  • An NRI or an OCI may transfer any immovable property (other than agricultural land or plantation property or farmhouse) to an NRI or 15an OCI. In case the transfer is by way of gift, the transferee should be a relative as defined in section 2(77) of the Companies Act, 2013.

Payment for Acquisition of Immovable Property

  • NRIs or OCIs may make payment, if any, for the transfer of immovable property out of funds received in India through banking channels by way of inward remittance from any place outside India or by debit to their NRE/ FCNR (B)/ NRO account;
  • Such payments cannot be made either by traveler’s cheque or by foreign currency notes or by other modes except those specifically mentioned above.

Joint acquisition by the spouse of an NRI or an OCI

A person resident outside India, not being a Non-Resident Indian or an Overseas Citizen of India, who is a spouse of a Non-Resident Indian or an Overseas Citizen of India may acquire one immovable property (other than agricultural land/ farm house/ plantation property), jointly with his/ her NRI/ OCI spouse.

Consideration for transfers made under this para should be out of funds received in India through banking channels by way of inward remittance from any place outside India or by debit to the non-resident account of the person concerned maintained in accordance with the Act or the rules framed thereunder. Payments cannot be made either by traveler’s cheque or by foreign currency notes or by other mode except those specifically mentioned in this para.

The marriage should have been registered and subsisted for a continuous period of not less than two years immediately preceding the acquisition of such property.

The non-resident spouse should not otherwise be prohibited from such acquisition.


A person acquiring property in accordance with section 6(5) of FEMA (reference para 1.2 of Part II) or his successor cannot repatriate outside India the sale proceeds of such immovable property without the prior permission of the Reserve Bank. However, if such a person is resident outside India, he/ she can utilize the remittance facilities available under the Foreign Exchange Management (Remittance of Assets) Regulations, 2016, as amended from time to time.

In the event of the sale of immovable property other than agricultural land/farmhouse/ plantation property in India by 21a PIO resident outside India [who held property in India in terms of the erstwhile FEM (Acquisition and transfer of Immovable Property in India) Regulations, 2000] or an NRI or an OCI, the Authorised Dealer may allow repatriation of the sale proceeds outside India, provided the following conditions are satisfied, namely:

  • the immovable property was acquired by the seller in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him;
  • the amount for acquisition of the immovable property was paid in foreign exchange received through banking channels or out of funds held in FCNR(B) account or NRE account;

Amendment on TCS under Section 206C(1G)

What is Tax Collected at Source (TCS)?

Tax Collected at Source (TCS) is a tax payable by a seller which he collects from the buyer at the time of sale of goods. Section 206 of the Income Tax Act mentions the list of goods on which the seller should collect tax from buyers.

TCS Amendment

Section 206C(1G) – Enhanced TCS rate on certain remittances made outside India

Tax is to be collected at an enhanced rate of 20% as against the existing rate of 5% in the case of all the remittances under Liberalised Remittance Scheme (LRS) and overseas tour packages. However, the TCS rate on remittances made for medical and educational purposes in excess of INR 7 lakh continues to be at 5%. Further, in case a remittance in excess of INR 7 lakh is made for educational purposes out of a loan obtained from the financial institution, the TCS rate of 0.5% remains unchanged.

The proposed amendment will be applicable from 1 July 2023.

Though the taxpayer is eligible for a credit of tax collected by way of filing a return of income, it may lead to blockage of funds till the refund is credited to the taxpayer’s bank account. Moreso, in cases where large refunds are claimed by the taxpayer, it may result in unwarranted scrutiny. This will largely impact the foreign tourism industry and the overseas investments made by residents under LRS.

Accounts to be maintained by NRIs as per FEMA, 1999

There are two types of Accounts:

Non-Resident Ordinary Rupee (NRO) Account

NRO accounts help you manage Indian rupee income sources like rent, dividends, or any other income such as profits that come to you from the sale of property or investments, here in India. It could be a savings account or a fixed deposit account. Here, both non-resident and resident Indians can be joint account holders. The account also allows you to receive income from foreign currency converted to Indian rupees and in Indian rupees as well. The money lies in Indian rupees in the NRO account.

The NRO account can be debited for the purpose of local payments, transfers to other NRO accounts, or remittance of current income abroad

However, NRIs should give prominence to NRE accounts to remit income abroad because the repatriation of money in NRE accounts does not require any permission and has no limits. The NRO account has a restriction of repatriating not more than 1 million US dollars, per financial year, inclusive of taxes. You also need to submit form 15CA/CB, which is a chartered accountant’s certificate confirming the tax payments as due.

Any gift in rupees or a loan by a resident Indian to an NRI within the remittance limits prescribed can be credited to the NRO account.

There are certain drawbacks to holding NRO accounts. The interest you earn in the NRO account is subject to tax deducted at source (TDS), whereas interest earned on NRE accounts is tax-free.

You can also link your NRO account to make investments in India.

NRE Account

The NRE account is an Indian rupee-denominated account. It could be savings, Foreign Currency Non-Resident Account (FCNR) or a fixed deposit account. You can deposit your earnings from overseas or transfer funds from one NRE to another NRE account and in certain cases, from NRO to NRE account along with form 15CA/CB. The foreign currency deposited into the NRE account gets converted into Indian rupees.

An NRE account comes with many benefits. The most important benefit is the principal and interest income are fully repatriable, which means you can move it out of India, as per your will and you do not need anyone’s permission to repatriate this money. Further interest income on deposits earned in an NRE account is tax-free. You can also link your NRE account to make investments in India.

Consequences of operating local savings account by NRI

As per the Foreign Exchange Management Act (FEMA) guidelines, an NRI cannot have a local savings account in his or her name in India. You must convert all your savings (money earned abroad) into an NRE or NRO account. Continuing to use the local savings account in India can attract hefty penalties. You need to inform your bank in case traveling abroad for an indefinite period to convert a savings account to NRE or NRO account as per usage.

Opening an NRE or NRO account helps NRIs in multiple ways. For instance, you can transfer your foreign earnings to India in case you have family over here who is dependent on you. Also, income from India through any investments can be retained here.