What is the Regulation of FEMA?

The resident/non-resident classification under FEMA is particularly important.

FEMA has its own definitions and rules, so I wouldn't automatically use your income-tax residential status to determine your FEMA status.

The Act also regulates dealing in foreign exchange and foreign securities through authorised persons, subject to the Act, rules, regulations and RBI permissions.

For an NRI, the relevant FEMA regulation can therefore depend on what you're actually doing.

For example, the rules for:

• opening or operating NRE/NRO accounts,
• buying residential property,
• receiving money from abroad,
• transferring money from India,
• investing in securities, and
• repatriating funds

are not necessarily the same.

I would check the applicable RBI/FEMA regulation for the specific transaction rather than relying on a general statement such as "FEMA allows NRIs to do this."

One thing worth keeping separate is FEMA versus income tax.

FEMA does not determine whether your Indian rental income, interest, or capital gains are taxable in the same way as the Income Tax Act does. Instead, FEMA is concerned with whether a foreign-exchange transaction or transfer is permitted and how it has to be carried out.

For example, an NRI selling property in India may have both tax questions and FEMA/repatriation questions. Paying the applicable tax does not automatically mean every foreign-exchange transaction is permitted without checking FEMA rules.

The RBI has specific FEMA regulations covering transactions involving immovable property. Its guidance explains that FEMA empowers the RBI to regulate acquisition and transfer of immovable property in India by certain persons resident outside India.

So I usually look at it as two separate checks:

Income Tax: Is the income or gain taxable?

FEMA: Is the transaction, payment, investment, or repatriation permitted for this person's residential status?

Both may need to be considered for an NRI transaction.

I had similar confusion when I started dealing with NRE and NRO accounts.

The way I understand it now is that FEMA is much broader than just sending money abroad. The Foreign Exchange Management Act, 1999, is the main law governing foreign exchange and certain cross-border transactions in India. Its stated objective is to facilitate external trade and payments and promote the orderly development and maintenance of the foreign exchange market.

For NRIs, FEMA can come up in areas such as:

• NRE, NRO and FCNR accounts
• remittances to and from India
• investment in India
• purchase and transfer of certain property
• foreign securities
• repatriation of funds
• gifts and transfers involving residents and non-residents

The exact rule depends on the transaction and whether the person is resident or non-resident under FEMA.

I found that RBI issues many of the regulations under the authority provided by FEMA. For example, RBI has regulations dealing with the manner of receiving and making payments in foreign exchange.

NRIs can repatriate funds up to 1 million USD in a financial year, and it is allowed even if you are retired from employment or have inherited the property. According to the FEMA rules sale of the proceeds of such assets is non-repatriable outside India, and they can repatriate assets, like rents earned from the immovable property owned overseas.

NRIs can buy residential and commercial properties in India and receive immovable property gifts from their inheritance or relatives. However, they are not allowed to buy any plantation or agricultural lands in India.