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The Reserve Bank of India (RBI) is in charge of the Foreign Exchange Management Act of 1999, alias FEMA, which codifies and alters existing laws governing foreign exchange in India and regulates all forms of capital transactions involving both Indian residents and foreigners, as well as non-resident Indians.

When conducting business from abroad, taxes are often the most intimidating aspect for non-resident Indians. The FEMA consultancy is an essential part of MPVD & Associates’ NRI taxation services in an effort to safeguard stakeholders against the complexity of the foreign exchange laws and regulations and carry on with healthy foreign transactions and balance payments in business dealings.

This article by MPVD & Associates CA firm in Kolkata features valuable insights and information about FEMA-oriented taxation for NRIs to guide them on how to minimize the traffic of foreign exchange transaction-related issues through distinct planning and maintaining an overall tranquil external trade.

The Status of a Non-Residential Indian under FEMA

An NRI, as per FEMA regulations, is identified under two broad categories that are basically either an Indian citizen living or working abroad or a person of Indian origin with foreign citizenship.

  • Person of Indian Origin (PIO): A person whose parents or grandparents were Indian nationals and who is not a citizen of Pakistan, Bangladesh, or Sri Lanka but has ever carried an Indian passport.

  • A foreign national who was eligible to become an Indian citizen on January 26, 1950, or who was an Indian citizen on or after that day, or who is the child or grandchild of such a person, is referred to as an overseas citizen of India (OCI).

In conclusion, the status of an NRI under FEMA is crucial for various financial and investment transactions in India, and NRIs must comply with FEMA regulations to avoid any legal consequences.

NRIs Investors in India under FEMA

Non-Resident Indians are welcomed under the FEMA to make investments in the Indian stock market, mutual funds, and several financial instruments; however, there are certain rules and regulations that apply to NRIs that are different from how it works for Indian residents. There are different forms and accounts specialized for NRIs to invest in India, which include:

  • Non-Resident Ordinary (NRO) accounts – this type of account can be jointly owned by multiple NRIs, but all statutory obligations are owed by an account holder who is an Indian resident. This account may be credited with the proceeds of remittances received in any permitted currency from outside India through conventional banking channels, as well as transfers from rupee accounts held by nonresident banks. The account holder may also present any permitted currency while on a temporary visit to India. Therefore, remitted money cannot be returned to a different nation.

  • Foreign Currency Non-Resident (FCNR) accounts – NRIs may deposit any foreign cash into their FCNR accounts, which stand for Foreign Cash (Non-Resident) Accounts. It is a one- to five-year fixed or term deposit in a foreign currency. This kind of account has no tax consequences, and money is fully refundable when it matures.

  • Non-Resident External (NRE) accounts – This type of account allows for services for international money transfers, and the entire balance of the account can be returned to the nation where the NRI is now residing. Taxes are not withheld from any income received in this account.

Additionally, NRIs are prohibited from investing in industries including agriculture, real estate, and plantations. Any infringement may result in fines and other legal repercussions. Additionally, there are limitations on the repatriation of funds to their home nation.

Seeking local NRI taxation services and FEMA consulting is a wonderful approach to comprehending all the requirements for observing the numerous FEMA rules and regulations while making investments in India.

External Commercial Borrowings

People who moved abroad for work for an indeterminate amount of time and stayed for less than 182 days in India during a fiscal year must alter their status from resident to non-resident Indian, or NRI.

FEMA regulations for NRIs prohibit maintaining a savings account. NRIs must go through a number of procedures and comply with regulations in relation to the savings accounts they had in India before moving, and they must also open an NRO or NRE account in accordance with Reserve Bank of India (RBI) requirements, which are as follows.

  1. Only allowed end-use activities, such as new projects, the expansion or modernization of existing units, capital expenditures, etc., may be funded with ECBs.
  2. Only the automatic route, which means that no prior authorization from the Reserve Bank of India (RBI) is necessary for investments up to a specified limit, is available to NRIs for ECB investments. However, the RBI must first approve any investment that exceeds the cap.
  3. A specific account called an ECB account, which needs to be formed and maintained with an authorised dealer bank in India, should be credited with the proceeds of the ECB.
  4. Only payments made in foreign currencies and made through the same ECB account as the investment should be made to the bank.

Only authorised foreign currencies may be used to raise ECBs, and the ECB’s minimum average maturity length should be three years.

External Commercial Borrowings (ECB) are standard practice to generate funding for Indian companies under the Foreign Exchange Management Act (FEMA). NRIs can enjoy a highly transparent and profitable experience to invest in Indian firms, especially emerging startups by subscribing to their ECB.

If you are an NRI looking to invest in India, you can always get in touch with us at MPVD & Associates one of the top CA Firms in Kolkata to get more detailed and personalised guidance about RBI guidelines, legal compliances and NRI tax-related advisory.

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