Section 6(4) and 6(5) of FEMA, 1999: Guidelines on Holding and Investment in Foreign Assets

The Foreign Exchange Management Act, 1999 (FEMA) regulates how Indian residents and non-residents deal with foreign exchange, overseas investments, and assets located outside India. While FEMA is generally compliance-driven, it also recognises genuine situations where individuals lawfully acquire assets overseas and later return to India.

Sections 6(4) and 6(5) of FEMA are particularly relevant here. These provisions allow people living in India to keep hold of & deal with foreign assets that they picked up while they were living abroad, subject to specific conditions.

Unfortunately, these sections of FEMA are often misunderstood or overlooked, which can lead to all sorts of unnecessary worries about following the rules. In this article, we'll have a closer look at these sections & try to make them a bit more accessible.

Section 6(4) of FEMA: What the Law Permits

Legal position:

Section 6(4) of FEMA says a person who is living in India is allowed to hold, own, sell, or invest in foreign money, foreign shares or bits of companies, or property situated outside India, provided those assets were either:

• Acquired or held when the person was living abroad.
• Passed on to them from a person who was living abroad.

In short, just because someone moves back to India, this doesn't mean they have to sell, get rid of, or bring back their foreign assets.

Practical meaning:

If someone earned some money, made an investment, or bought some property while they were working or living abroad, FEMA says those assets can stay with them even if they move back to India. FEMA recognises that these are completely legitimate assets & lets them just carry on as normal.

What Constitutes Foreign Assets under Section 6(4)?

Foreign assets include:

• Property, whether it’s a house or shop, located outside India.
• Shares, mutual funds, or other securities of foreign companies.
• Bank balances or deposits maintained abroad.
• Assets acquired through employment benefits, such as ESOPs.
• Any foreign assets they inherited from someone who was living outside India.

The critical factor explains that the asset either has to have been picked up while they were living outside India, or they have to have inherited it from someone who was living outside India.

Who Can Rely on Section 6(4)?

This section applies to people who:

• are currently living in India, or
• had legally acquired foreign assets while they were non-resident, or
• or they inherited them from someone who was living outside India

Once someone's covered by this section, they can just carry on holding, selling, or investing in those foreign assets as usual.

Investment Using Existing Foreign Assets, Compliance Position:

One of the most important aspects of Section 6(4) is that:

• If someone living in India invests in something outside India using money or the proceeds from some foreign assets that are covered by Section 6(4),
• Such investment does not require ODI reporting, since no funds are being remitted from India.

This exemption is frequently misunderstood. The compliance trigger under FEMA generally arises when money is being sent out of India, not when money is being moved around outside India.

Common Practical Situations:

Return to India after overseas employment:
An individual who purchased property or made an investment abroad during overseas employment may continue to hold or dispose of them without FEMA restrictions.

Foreign shares or ESOPs:
Shares received while working abroad can be retained or reinvested overseas using sale proceeds, without ODI filing, provided Indian funds are not involved.

Inheritance of overseas assets:
Assets inherited from a non-resident can be freely held and transferred under Section 6(4).

Key Points:

• FEMA does not mandate liquidation of foreign assets upon becoming a resident in India.
• The source of funds used for acquiring or maintaining foreign assets is critical for determining compliance.
• Use of Indian-sourced funds may trigger Liberalised Remittance Scheme (LRS) or Overseas Direct Investment (ODI) obligations.
• It is essential to maintain proper documentation supporting the period and mode of acquisition, which should be preserved.
• Section 6(4) of FEMA is a legal right, not a benefit.

Conclusion:

Sections 6(4) and 6(5) of FEMA provide clarity and comfort to individuals with legitimate overseas assets. When it is applied correctly, these provisions prevent unnecessary compliance burdens while ensuring regulatory discipline. However, each case must be evaluated carefully, as incorrect assumptions, particularly around the source of funds, can result in unintended FEMA violations.

At KDP Accountants, we can help returning NRIs and resident individuals by determining their foreign assets, FEMA applicability, and ensuring compliance with sections and ODI regulations. Reach out to us at enquire@kdpaccountants.com , and our practical approach will help clients remain compliant while managing their foreign assets.