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Legal Landscape for NRI’s in India

By April 1, 2020 May 1st, 2020 No Comments
Legal Landscape for NRIs in India

Legal Landscape for NRIs in India

A. INTRODUCTION:

India is the seventh-largest country by area and the second-most populous country in the world. It has a large and growing middle-class population with an increasing rate of domestic consumption that makes it an important market. Additionally, it has strong fundamentals like a stable Westminster-style parliamentary democracy, cost-competitiveness and abundant supply of well-qualified and well-trained human resources across functional areas that make it a preferred destination for investment, both as a source of manufacturing, and delivery of services and also as a market for the consumption of the goods and services generated as a consequence of such investment. All in all, there is little doubt that India is one of the world’s most attractive investment destinations and will continue to be so in the future. NRI’s (as defined hereinafter) play a crucial role in developing the Indian economy. They are not being called the backbone of the Indian economy but they are a part of the whole nervous system of it.

NRI are basically Indians but settled elsewhere in the world for one or another purpose. India has enough natural resource, much required for economic development but has not enough capital to exploit them and progress the economy. For this, India depends, largely, on foreign investments.

This article has been designed to provide at a glance, the various investment opportunities, which are available to a Non-Resident Indian.

B. MEANING OF NRI FROM A FEMA PERSPECTIVE:

Previously the term Non-Resident Indian (“NRI”) was defined to mean a non-resident individual who is a citizen of India or is a person of Indian origin (“PIO”). A PIO means a citizen of any country, other than Bangladesh or Pakistan, who had (a) at any time held Indian passport or (b) he or either of his parents or any of his grandparents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 or (c) the person is a spouse of an Indian citizen or a person referred to in (a) or (b).

The Citizenship Act, 1955 was amended in 2015 whereby the concept of registration as a PIO cardholder was replaced with the concept of registration as an Overseas Citizen of India (“OCI”) cardholder. The category of individuals (other than Bangladesh or Pakistan) entitled to apply for registration as an OCI cardholder is as under:

a.        a major who is a citizen of another country, but,

·     was a citizen of India at or after the commencement of the constitution;

·     was eligible to become a citizen of India at the commencement of the constitution;

·     who belonged to a territory that became part of India after independence; or;

·     who is a child or a grandchild or a great-grandchild of such a citizen.

b.       a minor child of a person mentioned in (a) above;

c.        A person, who is a minor child, and whose both parents or one of the parents are citizens of India; or;

d.       or spouse of any individual who is a citizen of India or a is an OCI cardholder falling within the categories mentioned above; However, in case of individual applying for OCI cardholder registration as a spouse of a citizen of OCI cardholder, their marriage should have subsisted for a continuous period of at least two years immediately prior to the application.

In order to align with the amendment in the Citizenship Act, the definition of NRI under the Foreign Exchange Management Act was also amended. Now the definition of NRI means an individual resident outside India who is a citizen of India or is an OCI cardholder within the meaning of the Citizenship Act, 1955. PIO cardholders registered as such under the PIO Card Scheme, 2002 are deemed to be the OCI cardholders.

C. FACILITIES AVAILABLE TO AN NRI:

The following facilities are available to NRI:

a)       Maintenance of bank accounts in India;

b)       Investment in shares/securities of Indian companies/firms; and

c)       Investment in immovable properties in India.

Each of the aforesaid has been detailed herein below:

1. Maintenance of Bank accounts in India:

NRIs are permitted to open bank accounts in India with such banks specially authorised by RBI in this regard. There are mainly the following 3 types of non-resident accounts which can be opened:

·          Non-Resident (External) Rupee Account (“NRE Account”);

·          Foreign Currency Non-Resident (Bank) Account (“FCNR (B) Account”);

·          Non-Resident (Ordinary) Deposit Account (“NRO Account”).

a. Key Features of NRE Account:

NRE Accounts are rupee-denominated accounts which can be maintained in the form of savings, current, recurring or fixed deposit accounts.

The deposits can be used for all local disbursements, remittance outside India and investments in India. Transfer to NRE/FCNR account of the account-holder or any other NRI is permitted. The balance in the account (principal plus interest) is freely repatriable. Interest lying to the credit of NRE accounts is exempt from tax in the hands of the NRI.

Returning NRI should take steps to re-designate the NRE Account as resident account or funds should be transferred to Resident Foreign Currency (“RFC Account”) immediately upon return to India for taking up employment or on change in the residential status.

b. Key Features of FCNR (B) Account:

FCNR (B) Accounts are deposits designated in such foreign currency as may be specified by RBI. The account is maintained in foreign currency in the form of fixed deposits for a period not less than 1 year and not more than 5 years. The account can be opened for inward remittance from outside India, interest accruing on the account, interest on investment, transfer from other NRE/ FCNR(B) accounts, maturity proceeds of investments (if such investments were made from this account or through inward remittance).

The balance in the account (principal plus interest) is freely repatriable. Interest lying to the credit of FCNR accounts is exempt from tax in the hands of the NRI. This amount lying in this account can be used for local disbursements, investment in shares/securities of an Indian company or any other transaction if covered under general or special permission granted by the Reserve Bank of India.

Returning NRI can continue to maintain the FCNR account until maturity. Upon maturity, the account should get converted into resident rupee deposit accounts or RFC account (if the depositor is eligible to open RFC account), at the option of the account holder.

c. Key Features of NRO Account:

These are Rupee denominated non-repatriable accounts and can be in the form of savings, current, recurring or fixed deposits. When some Indian National leaves for taking up employment, etc. outside the country, other than Nepal or Bhutan, his bank account in India gets designated as NRO account. The accounts are not convertible / non-repatriable and are maintained in Indian rupees in the form of savings, current and recurring or fixed deposit accounts.

The deposits can be used to make all legitimate payments in rupees. Interest income from NRO accounts is taxable. Interest income, net of taxes is repatriable. Balance amount may be repatriated up to the US $1 million, per financial year.

Returning NRI is required to re-designate the NRO account as resident account immediately upon return.

D. INVESTMENT IN SHARES/SECURITIES OF INDIAN COMPANIES:

Reserve Bank has granted general permission to NRIs, for undertaking investments in Indian companies under the automatic route, purchase of shares under PIS (defined hereinafter) and investment in proprietorship/partnership concerns on non-repatriation basis.

Therefore, NRI can directly invest in India in any of the following manners:

·        Investment in shares/convertible debentures of Indian companies on repatriation basis;

·        Investment without repatriation benefits;

·        Investment under Portfolio Investment Scheme (“PIS”);

·        Other investments with or without repatriation benefits;

·        Investment in partnership/proprietorship firms.

1. Investment in shares/convertible securities of Indian companies on repatriation basis:

NRI is permitted to freely invest in shares and/or convertible debentures of Indian companies carrying on almost every kind of business in India under automatic route except for few sectors (for eg, Real estate business, agriculture, plantation business, etc.,) wherein prior approval of the Reserve Bank of India is necessary or where the investment can be made only up to a certain percentage of paid-up capital of the Indian company or wherein the investment is prohibited. The investment can be made from NRE or FCNR account or from foreign exchange remitted from abroad. The sale proceeds (after payment of taxes) can be repatriated out of India or credited to NRE / FCNR/ NRO account if the shares are purchased on a repatriation basis.

2. Investment without repatriation benefits:

NRIs have been granted general permission to subscribe to the shares/convertible debentures of an Indian company on non-repatriation basis, and general permission is also available to an Indian company to issue shares or convertible debentures by way of new/rights/bonus issue to NRIs on the non-repatriation basis provided that the investee company is not engaged in sectors which are prohibited or require government approval. If the shares are purchased on a non-repatriation basis, the amount of consideration shall be paid by way of inward remittance through normal banking channels from abroad or out of funds held in NRE/FCNR /NRO/NRSR/NRNR account and the sale proceeds (after payment of taxes) can only be credited to the NRSR account when purchased through funds held in such account or NRO/NRSR account when purchased out of funds from inward remittance or funds held in NRE/FCNR/NRO/NRNR account.

3. Investment under the Portfolio Investment Scheme:

NRIs can purchase or sell FDI compliant instruments of Indian companies on the Stock Exchanges under the Portfolio Investment Scheme. For this purpose, the NRI has to apply to a designated branch of a bank, which deals in Portfolio Investment. All sale/ purchase transactions are to be routed through the designated branch.

An NRI can purchase shares up to 5 per cent of the paid-up capital of an Indian company on a fully diluted basis. All NRIs taken together cannot purchase more than 10 per cent of the paid-up value of the company. The aggregate limit of 10 per cent can be increased by the Indian company concerned up to 24 per cent, with the approval of its Board of Directors and its General Body through a resolution and a special resolution, respectively.

4. Other investments with or without repatriation benefits:

NRIs can also invest in the following securities:

With repatriation benefits:

·          Government dated securities,

·          Treasury bills,

·          Units of domestic mutual funds,

·          Bonds issued by Public sector undertaking bonds (PSU)

·          Shares of public sector enterprise under the dis-investment programme

Without repatriation benefits:

·          Government dated securities,

·          Treasury bills,

·          Units of domestic mutual funds;

·          National Plan/Savings Certificate.

5. Investment by NRI in Partnership/proprietorship firms:

NRIs can also invest by way of capital contribution in any proprietary or partnership concern in India provided the firm or the proprietary concern is not engaged in any agricultural/plantation activities or real estate business i.e. dealing in land and immovable property with a view to earning profit or earning income therefrom, on the non-repatriation basis provided that the amount is invested by inward remittance or out of NRE/FCNR/NRO account maintained with Authorised Dealer. Investment in sole proprietorship concerns/ partnership firms with repatriation benefits can only be done with prior approval of the Government of India.

E. INVESTMENT IN IMMOVABLE PROPERTIES IN INDIA:

An NRI can acquire by way of purchase any immovable property (other than agricultural land/ plantation property/farm house) in India. The purchase price ought to be paid can be paid out of funds received from abroad through normal banking channels or balance held in an NRE/FCNR/NRO account maintained with a bank in India. NRIs can avail housing loan in Rupees from an authorized dealer or housing finance Institution in India subject to conditions.

An NRI may transfer any immovable property in India to a person resident in India. An NRI also does not require any permission to transfer any immovable property other than agricultural or plantation property or farmhouse, to a person who is an NRI.

Citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Macau or Hong Kong cannot, without prior permission of the Reserve Bank, acquire or transfer immovable property in India, other than lease, not exceeding five years.

F. BORROWINGS FROM NRI:

A person resident in India/companies may borrow in Indian currency from NRIs in the following manner:

  • Borrowing in INR by a resident, other than companies in India;
  • Borrowing in INR by companies in India.

1. Borrowing by Resident, not being a company:

A resident may borrow in INR from NRIs after satisfying the following terms and conditions:

i.              Borrowing shall be only on a non-repatriation basis;

ii.            The amount of loan should be received either by inward remittance from outside India or by debit to NRE/NRO/FCNR(B)/NRNR/NRSR account;

iii.          Period of the loan shall not exceed 3 years;

iv.          Rate of interest on the loan shall not be more than two per cent above the bank rate prevailing on the date of availing of the loan;

v.            Payment of interest and repayment of principal shall be made only to the NRO account of the NRI.

2. Borrowing by a company:

An Indian company may borrow on repatriation or non-repatriation basis, from NRIs after satisfying the following terms and conditions:

i.              Indian company does not and shall not carry on agricultural/plantation/real estate business, or trade-in transferable development rights, or act as Nidhi or chit fund company.

ii.            Borrowing is by the issuance of non-convertible debentures (NCDs) made by public offer;

iii.          The rate of interest is not more than the PLR of SBI as on the date on which the resolution approving the issue is passed by the shareholders of the company plus three per cent;

iv.          Period of the loan shall not be less than three years;

v.            If the borrowing is on repatriation basis then the percentage of NCDs issued to NRIs to the total paid-up value of all NCDs issued shall not exceed the ceiling prescribed for issue of equity shares/convertible debentures for foreign direct investment in India. Further, the funds towards borrowing should be received through inward remittance from outside India or by debit to NRE/FCNR (B) account of the NRI;

vi.          If the borrowing is on non-repatriation basis then the amount of loan should be received either by inward remittance from outside India or by debit to NRE/NRO/FCNR(B)/NRNR account of NRI. Payment of interest and repayment of principal shall be made only to the NRO account of the NRI. 

G. RETURNING NRI:

India remains one of the fastest-growing economies in the world. For those who are planning to return and settle in India and wish to build a focussed investment portfolio, there's no better time. However, adequate care must be taken to ensure that your hard-earned wealth is properly diversified to minimise risk, is tax-efficient and is compliant in all ways with the extant legal framework.

If you have returned to India with the intention to stay back, inform your bank for a change in your residential status in their records and re-designate your existing NRO account to resident Savings account. Also, your existing NRI Demat account under the PIS cannot be continued anymore and a separate resident Demat account should be opened and shares/units in that account should be transferred to the new account. Your FCNR deposits can run till maturity but your earnings in NRE savings account will have to be transferred to a resident savings account, or you have an option to transfer it to RFC account.

The account is a safe way to park your foreign exchange earnings in India. As per the extant RBI regulations, you can open an RFC account and credit your foreign exchange earnings. Interest is taxable and there is a penalty on early foreclosure of RFC deposit. Repatriation is allowed and both funds and interest thereon is free from all restrictions and can be transferred to NRE/FCNR accounts or investment outside India.

As per the Indian income tax law, the moment you become a resident Indian (which given the income tax rules generally happens a couple of years after you're back in India), you start getting taxed on your 'global income'. Of course, the benefit of Double Taxation Avoidance Agreements, or DTAA, may be availed if the overseas income is also getting taxed locally. One good way you can hold the global tax liability as stated above is to plan your stay in India in such a way as to try to maintain Resident and Not Ordinary Resident (RNOR) status for the maximum possible time. In such a scenario, except for some incomes, rest of your foreign incomes will remain exempt from tax.

As per RBI norms, you are free to hold, own, transfer assets outside India if such assets were acquired by such person when he was resident outside India or inherited from a person resident outside India. However, note that if you plan to sell those assets after becoming a resident Indian, there might be a capital gains tax liability under the Indian tax laws. To avoid that, it's wiser to explore the possibility of disposing off those assets before you earn Indian resident status. Also, note that the Supreme Court has clarified in the case of Keshav Mills Ltd. v. CIT [1953] 23 ITR 230 that income received outside India and remitted to India will not be considered 'receipt' and shall not be taxed in India.

H. FREQUENTLY ASKED QUESTIONS:

a)        What are the major accounts that can be opened in India by a non-resident?

1.            NRE Account;

2.            FCNR (B) Account; and

3.            NRO Account.

b)        Is an NRI permitted to acquire shares on a stock exchange?

Yes, NRI can acquire shares on the stock exchange under the Portfolio Investment Scheme.

c)         How payments could be made by NRIs for shares purchased on a stock exchange?

Payment for purchase of shares and/or debentures on repatriation basis has to be made by way of inward remittance of foreign exchange through normal banking channels or out of funds held in NRE/FCNR(B) account maintained in India. If the shares are purchased on non-repatriation basis, the NRIs can also utilize their funds in NRO account in addition to the above.

d)        How NRIs can remit Sale proceeds?

If the shares sold were held on repatriation basis, the sale proceeds (net of taxes) may be credited to his NRE /FCNR(B)/NRO accounts of the NRI, whereas sale proceeds of non-repatriable investment can be credited only to NRO accounts

e)         Are the investments and profits earned in India repatriable?

All foreign investments are repatriable (net of applicable taxes) except in cases where the investment is made or held on a non-repatriation basis or where the sectoral condition specifically mentions non-repatriation. Further, dividends/ profits (net of applicable taxes), on foreign investments, being current income can be remitted outside India through an Authorised Dealer bank.

f)         What are the regulations regarding Portfolio Investments by NRIs?

NRIs can purchase or sell FDI compliant instruments of Indian companies on the Stock Exchanges under the Portfolio Investment Scheme. For this purpose, the NRI has to apply to a designated branch of a bank, which deals in Portfolio Investment. All sale/ purchase transactions are to be routed through the designated branch.

g)        Are there any ceiling for purchase of shares by an NRI of an Indian Company?

An NRI can purchase shares up to 5 per cent of the paid-up capital of an Indian company on a fully diluted basis. All NRIs taken together cannot purchase more than 10 per cent of the paid-up value of the company. The aggregate limit of 10 per cent can be increased by the Indian company concerned up to 24 per cent, with the approval of its Board of Directors and its shareholders through a board resolution and a special resolution, respectively.

h)        What are the other securities in which the NRIs may invest?

A Non-resident Indian may without limit, purchase on repatriation basis government dated securities (other than bearer securities) or treasury bills or units of domestic mutual funds or bonds issued by a public sector undertaking(PSU) 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 bid NRIs, may invest in other securities like without limit, on non-repatriation basis in dated Government securities (other than bearer securities), treasury bills, units of domestic mutual funds, units of Money Market Mutual Funds in India, or National Plan/Savings Certificates.

i)          Can an NRI set up a partnership/ proprietorship concern in India?

NRIs are allowed to set up partnership/ proprietorship concerns in India on non-repatriation basis.

j)       Can a non-resident repatriate the sale proceeds of immovable property in India?

NRIs can remit the sale proceeds of immovable property (other than agricultural land/ farmhouse

/ plantation property) in India subject to the following conditions:

  1. The immovable property was acquired in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him;
  2. the amount to be repatriated does not exceed the amount paid for acquisition of the immovable property received through normal banking channels or out of funds held in FCNR(B) account or NRE account;
  3. in the case of residential property, the repatriation of sale proceeds is restricted to not more than two such properties.

k)         Can a resident continue to hold immovable property outside India which was acquired by him when he was a non-resident?

A person resident in India can hold, own, transfer or invest in any immovable property situated outside India if such property was acquired, held or owned by him/ her when he/ she was resident outside India or inherited from a person resident outside India.

Author: Prashant Jain, Co-Founder & Partner.

Disclaimer: The content of this article is intended to provide a general guide on the subject matter. Specialist advice should be sought about your specific circumstances. For any queries, the author can be reached at prashant@samistilegal.in.

References:

a)     https://rbi.org.in/scripts/FAQView.aspx?Id=117#Q5

b)     https://www.rbi.org.in/scripts/FAQView.aspx?Id=52

c)     https://www.rbi.org.in/scripts/FAQView.aspx?Id=26

d)     http://dipp.nic.in/sites/default/files/pn7_2015.pdf

Updates as on July 24, 2018

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