Basic Compliance of Foreign Exchange Laws

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Basic Compliance of Foreign Exchange Laws

Residential status and nature of transaction i.e. capital account transaction (e.g. purchase/ sale of shares, property, etc.) or current account transaction (e.g. remittance of income on shares, property, etc.) are the cornerstones of Foreign Exchange Management Act (FEMA).

Residential Status:

Residential status under FEMA is the basis of applicability of FEMA i.e. transactions of a resident even outside India are covered by FEMA. The determination of residential status under FEMA is substantially different as compared to that under the Income Tax Act. Under the Income Tax Act, residential status is determined based on only the no. of days of stay in India. Under FEMA, residential status is determined based on primarily the intention of the person.

'A' would be a non-resident under FEMA as soon as he goes out of India for taking up employment outside India irrespective of the duration of his stay in India. Accordingly, 'A' would be outside the ambit of FEMA as far his transactions outside India are concerned (e.g. he can freely invest or carry on business abroad out of his earnings abroad).

Nature of Transactions:

The golden rule of FEMA is, "All capital account transactions other than those permitted are prohibited while all current account transactions other than those prohibited are permitted".

Under FEMA, certain types of transactions do not require RBI permission while others either require prior approval of RBI/ Government or it is mandatory to inform RBI of the same. Although total capital account convertibility does not exist under FEMA, there is full convertibility to the extent of USD 1 million per calendar year for NRIs.

Basic Compliances:

Non Residents are not permitted to hold Resident Bank accounts and hence the banker should be intimated about change of residential status. The bank will immediately designate resident bank account as "Non-Resident Ordinary" (NRO) account. The account could be in any form Saving, Current, Fixed Deposit or Recurring Deposit. The account holder is now permitted to repatriate up to USD 1 million per calendar year out of NRO account for any bona-fide purpose.

Non Residents should also ensure correcting reporting of their transactions to RBI or obtain necessary permission wherever required.

In case you need any further information, write to our FEMA expert on tax@kdpaccountants.com

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