For most Non-Resident Indians (NRIs), the Financial and Monetary Exchange Management Act (FEMA) does not make its presence felt until something goes wrong, an account freeze, a stalled remittance, or a bank query about your funds.
But behind the scenes, FEMA plays a critical role in shaping how NRIs manage their money, invest, and transfer funds across borders.
Who is an NRI as per FEMA?
Under FEMA, an NRI (Non-Resident Indian) is defined as an individual who resides outside India for employment, business, or vocation, with a stay exceeding 182 days in a financial year, affecting their tax and financial responsibilities in India
FEMA rules NRIs should know
According to FEMA, NRIs are not permitted to maintain regular savings accounts. Instead, they must open one of three specific types: NRE (Non-Resident External), NRO (Non-Resident Ordinary), or FCNR (Foreign Currency Non-Resident) accounts. Each of these accounts has distinct benefits and regulations designed for NRIs.
However, when an NRI returns to India, these specialised accounts must be converted into resident accounts or an RFC (Resident Foreign Currency) account. The switch is not only a matter of paperwork but can affect how easily funds can be accessed or transferred.
When it comes to property, NRIs are permitted to invest in residential and commercial real estate, but they face restrictions when it comes to agricultural land or plantations.
Remittance is another area heavily influenced by FEMA. NRIs holding an NRO account can send up to $1 million per financial year abroad, but this amount is subject to taxes that must be cleared first. Ensuring compliance with FEMA regulations can save significant time and trouble during remittance transactions.
Foreign assets held during the NRI years can remain with the individual after they return to India. NRE and FCNR account balances, for instance, can be transferred to an RFC account, but this must be done in line with FEMA guidelines.
Non-compliance with FEMA rules can lead to hefty penalties. Violations could incur fines that are up to three times the amount involved.