Yearly Archives: 2023

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

                                                                            

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;

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.

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.