Foreign Exchange Management Act

The Foreign Exchange Management Act(FEMA) was an act passed in the winter session of Parliament in 1999 which replaced Foreign Exchange Regulation Act. This act seeks to make offenses related to foreign exchange civil offenses. It extends to the whole of India. FEMA, which replaced Foreign Exchange Regulation Act(FERA), had become the need of the hour since FERA had become incompatible with the pro-liberalisation policies of the Government of India. FEMA has brought a new management regime of Foreign Exchange consistent with the emerging framework of the World Trade Organisation (WTO). It is another matter that the enactment of FEMA also brought with it the Prevention of Money Laundering Act 2002, which came into effect from 1 July 2005. Unlike other laws where everything is permitted unless specifically prohibited, under this act everything was prohibited unless specifically permitted. Hence the tenor and tone of the Act was very drastic. It required imprisonment even for minor offences. Under FERA a person was presumed guilty unless he proved himself innocent, whereas under other laws a person is presumed innocent unless he is proven guilty.

Switch from FERA The introduction of Foreign Exchange Regulation Act was done in 1974, a period when India’s foreign exchange reserve position wasn’t at its best. A new control in place to improve this position was the need of the hour. FERA did not succeed in restricting activities, especially the expansion of TNCs (Transnational Corporations). The concessions made to FERA in 1991-1993 showed that FERA was on the verge of becoming redundant.[1] After the amendment of FERA in 1993, it was decided that the act would become the FEMA. This was done in order to relax the controls on foreign exchange in India, as a result of economic liberalization. FEMA served to make transactions for external trade (exports and imports) easier – transactions involving current account for external trade no longer required RBI’s permission. The deals in Foreign Exchange were to be ‘managed’ instead of ‘regulated’. The switch to FEMA shows the change on the part of the government in terms of foreign capital. [2]

Need for its management
The buying and selling of foreign currency and other debt instruments by businesses, individuals and governments happens in the foreign exchange market. Apart from being very competitive, this market is also the largest and most liquid market in the world as well as in India. [3] . It constantly undergoes changes and innovations, which can either be beneficial to a country or expose them to greater risks. The management of foreign exchange market becomes necessary in order to mitigate and avoid the risks. Central banks would work towards an orderly functioning of the transactions which can also develop their foreign exchange market. [4]

Although selling or drawing of foreign exchange is done through an authorised person. Hindi: प्रवासी भारतीय Pravāsī BhāratīyaTamil: வெளிநாட்டுொழ் இந்தியர் Velinattuvazh Indhiyar{{Bengali{ }} Probashi Bharotiyo ) is an Indian citizen who has migrated to another country. To ensure that the transactions are carried out properly. . . a person of Indian origin who is born outside India. or when it was inherited to him/her by someone living outside India. Other terms with the same meaning are overseas Indian and expatriate Indian.Exporters are needed to furnish their export details to RBI. or a person of Indian origin who resides permanently outside India. RBI may ask the exporters to comply to its necessary requirements.Whether under FERA or FEMA’s control. this often includes Indian-born individuals (and also people of other nations with Indian ancestry) who have taken the citizenship of other countries.Without general or specific permission of the Reserve Bank of India. By maintaining sufficient reserves. based on public interest. security or property was owned or acquired when he/she was living outside India. In common usage. . . foreign security or who own or hold immovable property abroad. along with the deals in foreign exchange and foreign security is restricted. . India’s foreign exchange policy marked a shift from Import Substitution to Export Promotion. FEMA restricts the transactions involving foreign exchange or foreign security and payments from outside the country to India – the transactions should be made only through an authorised person. It is FEMA that gives the central government the power to impose the restrictions. . the RBI is empowered by this Act to subject the capital account transactions to a number of restrictions.Deals in foreign exchange under the current account by an authorised person can be restricted by the Central Government. especially when India has to go in for imports of certain goods.Restrictions are imposed on people living in India who carry out transactions in foreign exchange. the need for the management of foreign exchange is important. [5] Main Features . It is necessary to keep adequate amount of foreign exchange reserves.Activities such as payments made to any person outside India or receipts from them. . [6] NRI : A Non-Resident Indian (NRI. foreign security or to own or hold immovable property abroad if the currency.People living in India will be permitted to carry out transactions in foreign exchange.

This requirement applies to all individuals. PIO Cards exempt holders from many restrictions applying to foreign nationals. but only those who possess Indian citizenship but do not meet the requirement of residence are treated as NonResident Indians. I planned to write down one article explaining the details about the NRI bank accounts. Likewise. the Pravasi Bharatiya Divas (Non-resident India Day) sponsored by Ministry of Overseas Indian Affairs. The PIO Card scheme is expected to be phased out in coming years in favour of OCI. under Income Tax Act of 1961 has not resided in India for the purposes of the Income Tax Act (under Section 6). Different Types of NRI Bank Accounts Introduction In this article I will be writing about the different types of Non-Resident Indian(NRI) bank accounts and services. 72% work in other Asian countries.000 in 2007. India has the largest diaspora in the world. besides being one of the largest "sending" nations in Asia. The NRI and PIO population across the world is estimated at over 30 million. as per UNESCO Institute for Statistics the number of Indian students abroad tripled from 51. with an emigration rate of 0.. Also. It is the most common query which I receive from our readers. This latter category includes foreign spouses of Indian nationals. So. is being celebrated on January 9 each year in India.e. along with certain other economic limitations. estimated at 25 million.8%. obviously a non-resident of India. making India second after China among the world’s largest sending countries for tertiary students.[5] The Indian government has introduced the "Overseas Citizenship of India (OCI)" scheme to allow a limited form of dual citizenship to Indians. for the purposes of the Indian Income Tax Act requires stay in India of at least 182 days in a given calendar year or 365 days spread out over four consecutive years. the Indian government considers anyone of Indian origin up to four generations removed to be a PIO. History It must be pointed out that strictly speaking "non-resident Indian" refers only to the tax status of a person.[3] Since 2003. Residence in India. out of which. I hope this article will be . As per a UNDP's 2010 report. i.[4] As of January 2006. and during three-day convention held around the day.[2] Spouses of people entitled to a PIO card in their own right can also carry PIO cards.A Person of Indian Origin (PIO) is usually a person of Indian origin who is not a citizen of India. to "mark the contribution of Overseas Indian community in the development of India". is. but is a citizen of India nonetheless. regardless of ethnic origin.000 in 1999 to over 153. For the purposes of issuing a PIO Card. in that a person with non-Indian citizenship can also be "resident in India" for the purposes of the Act. a forum for issues concerning the Indian Diaspora is held and the annual Pravasi Bharatiya Samman Awards are given away. anyone who is not a resident of India according to the Act. NRIs and PIOs for the first time since independence in 1947. The day commemorate the arrival of Mahatama Gandhi in India from South Africa. but a resident Indian would only be one who meets the above requirement and possesses Indian citizenship. such as visa and work permit requirements. after China. someone who.

here I will be explaining only the most widely used and offered by the leading banks in India. Cannot open Joint account with Indian Resident . Currency maintained in this account is Indian Rupee. Can not deposit Indian Currency in to this account. Nomination is allowed in NRE Accounts. The following are the three types of NRI bank accounts offered by most of the bank across India:    NRE Savings/Fixed Deposit Account NRO Savings Fixed Deposit Account FCNR Fixed Deposit Account In the following section I will look into the features and benefits of the each account in details. That the above tax exemptions are available only for an NRE Account held by an individual and not for those maintained by OCBs (Overseas Company Bodies) The currency maintained in this account is Indian Rupee. You can use this account to pay any bill and expenses in India.         NRE account can be opened as Savings and Fixed deposit accounts. Can deposit Indian Currency in to this account. If you have any doubts please post it in the comments section.         NRO account can be opened as the Savings or Fixed Deposit account. Can open this account with any Indian Resident. NRO Savings Fixed Deposit Account The following are the key points on NRO account. You can easily transfer money to India. . NRE Savings/Fixed Deposit Account The Non Resident External (NRE) Savings Account is meant for Indians residing abroad. It is applicable for both savings and fixed deposit accounts. Subscribe to our future articles here. If I miss out any thing.The following are the few important points regarding the NRE account. Types of NRI Bank accounts There are many types of NRI banks accounts available. Interest earned in this account is 30% taxable and surcharge and education cess will be included.useful for who want to open the NRI accounts. Also there is no wealth tax. But. Can open Joint account with any Non-Resident Indian. It allows you to transfer foreign earnings easily to India. Enjoy the convenience of banking at any of our branches in India. There is no tax on interest earned from these accounts. Nomination is allowed in NRO Accounts. please post it in the comments section.

savings. (iii) Foreign Currency (Non Resident) Account (FCNR A/C) FCNR A/C is maintained only in term deposit.FCNR Fixed Deposit Account The following are the key points for Foreign Currency Non-Resident (FCNR) Fixed Deposit bank account:        Earn Indian Interest Rates on your Foreign Currency deposits with our Foreign Currency NonResident Fixed Deposit. Minimum 1 year and maximum 5 years is allowed. this account can be again designated as a resident account. keep reading our articles. NRIs may also open this account jointly with residents. please post it in the comments section. I will coming up with many NRI related articles. It can be maintained in the nature of current. Please post your experience and thoughts on the NRI accounts. (ii) Non Resident (External) Rupee Accounts (NRE A/C) NRE account may be opened without any approval if the funds for this account are transferred in freely convertible foreign currency. NRIs may jointly open this account with another NRI. What types of Bank accounts can an NRI open in India? The various types of Bank Accounts an NRI can open are : (i) Ordinary Non-Resident Rupee (NRO) Account : NRIs can open NRO account for transactions in rupees without any approval. The entire deposit (principal and interest) is exempt from tax Open the deposit jointly with any other NRI Get an overdraft on your Savings / Current account against your FCNR Fixed Deposit Nomination Facility available Joint accounts with Indian Residents not allowed. Summary I hope this article will be more useful who are interested in opening the NRI bank accounts. recurring or fixed deposit account. After the person returns to India permanently. Following currencies are allowed in this account: o o o o o o   US Dollars Pounds Sterling Euro Japanese Yen Australian Dollars Canadian Dollars Can not deposit Indian Currency in this account.The account can be maintained only in . This account can be maintained in the form of saving or current or recurring or fixed deposit account. Thank you for reading this article. Balances held in this account and any interest earned on this account are exempt from tax. Soon. I know many of our readers are NRI and they already hold the NRI bank account. If I have missed out any of the important aspect of the topic.

Under this scheme NRIs who were resident outside India for a continuous period of at least one year and have become resident after returning back to India are permitted to maintain this account in any freely convertible foreign currency for depositing his income earned outside India . (iii) Rent etc. The balances and the interest on this account are exempt from tax .he can retain his income outside India . This account is however. Deutsche Mark and Japanese Yen. any NRI returning to India can deposit his income earned outside India in the Resident Foreign Currency Account (RFC A/C). The deposits can be for a period ranging from 6 months to 3 years. Yes. (iv) Non Resident (Non Repatriable) Rupee Deposit Scheme -NR-NR-RD Scheme: NRIs can invest through this scheme in term deposit maintained out of the funds transferred in India in freely convertible foreign currency through proper banking channels. earned from Immovable property outside India. NRIs returning from abroad after a continuos stay of at least one year can maintain their bank accounts abroad.It may be noted that normally this account is used for depositing the local funds/incomes of NRI.Pound Sterling. U. although if the NRI decides. (ii) Dividend. #top Can an NRI returning to India keep his money in Bank accounts abroad ? A. Remittance from abroad is to be made in the foreign currency in which the account is desired to be maintained. profit earned on investment in foreign currency in the form of shares or securities. The deposit is accepted for a period not below six months and not above three years.Any fresh credit to such account can be made only if it is out of foreign currency acquired from the above mentioned sources. interest. #top Can an NRI returning to India deposit his income earned outside India in the Bank ? Yes. only the funds received from abroad can be repatriated. (iii) The balances held in NR-NR-RD a/c cannot be repatriated abroad but the interest accrued on this account is permitted to be repatriated. They can deposit all income earned abroad while they were resident there.(For details see relevant question above) The following amounts can be deposited in the RFC A/C (i) Balances in Bank accounts outside India and interest thereon. maintained in Indian rupees. However. dollar. Also any income earned on any asset (immovable or not ) acquired while staying abroad can be deposited in this account. the balances lying in the following accounts can be repatriated anytime outside India: (i) NRE account holders can not only repatriate the account held in this account but also the interest accrued on this account. Moreover. (ii)Balances in NRO account can be remitted abroad with the permission of RBI. #top Are there any provision of repatriating the money held in the bank accounts in India ? Yes. any pension received by such person from the erstwhile employers can also be deposited in this account.S. .

The investment can be done with full repatriation benefits for a period of three years. Housing & Real Estate development and Air Taxi operation . No separate permission is required.the specified percentage is 100% The amount invested and interest on that amount can be repatriated if the required conditions are fulfilled. including exporters. Q 1. thereby minimizing the transaction costs. #top Can an NRI place deposits with the companies ? Yes. NRIs/OCBs can place funds in fixed deposits with public limited companies in India. Exchange Earners' Foreign Currency Account (EEFC) is an account maintained in foreign currency with an Authorised Dealer i.(iv) Foreign exchange earning through employment . they can also invest in Money Market Mutual Funds (MMMFs) floated by commercial banks and other financial institutions . NRIs/OCBs can invest in domestic mutual funds on repatriation basis. a bank dealing in foreign exchange. Similarly.Different percentages are specified for companies engaged in different areas : (i) For Hospitals & Hotels . NRIs/OCBs can also invest in Mutual funds floated by public and private sector mutual funds on non repatriation basis by giving a separate application in RBI . . so that the account holders do not have to convert foreign exchange into Rupees and vice versa. No separate approval for the same is required .the specified percentage is 24%. NRIs can invest in the new issue of shares and debentures of Indian companies. What is an EEFC Account and what are its benefits? Ans. Moreover. (iii)For industries engaged in export trading activities. They can also purchase shares of Public Sector Enterprise (PSE) #top Can NRIs invest in the Mutual funds schemes ? Yes. leasing etc. NRIs can subscribe to new issue of equity/preference shares/debentures under different percentage schemes approved by RBI .e.As per the percentage scheme the total percentage of issue to NRIs/OCBs should not exceed the specified limit . to credit 100 per cent of their foreign exchange earnings to the account. NRIs can also purchase both old and new shares of sick industrial units for its revival.specified percentage is 40 % (ii)For companies engaged in hire purchase. #top Can NRI invest in shares and debentures of an Indian Companies? YES. . It is a facility provided to the foreign exchange earners. it is not necessary for the investor to take separate permission. If the permission to accept deposit from non residents is already being taken by Indian company. business or vocation outside India which was taken up while stay abroad.

All categories of foreign exchange earners. subject to permissible credits and debits. who are resident in India. Q 3. Q 6. SEZ Units cannot open EEFC Accounts. However. may open EEFC accounts. Who can open an EEFC account? Ans. What are the different types of EEFC accounts? Can interest be paid on these accounts? Ans. Q 4. Is there any Cheque facility available? Ans. Q 5. Yes. No interest is payable on EEFC accounts. SEZ Developers can open EEFC Accounts. such as individuals. One can credit up to 100 per cent of his/ her foreign exchange earnings into the EEFC account. companies. Cheque facility is available for operation of the EEFC account. No. Whether EEFC Account can be opened by Special Economic Zone (SEZ) Units? Ans. a unit located in a Special Economic Zone can open a Foreign Currency Account with an authorised dealer in India subject to certain conditions. An EEFC account can be held only in the form of a current account. . How much of one’s foreign exchange earnings can be credited into an EEFC account? Ans.Q 2. etc.

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