NRIs – Transactions Restricted & Permitted | FEMA & IT Act

NRIs Transactions Restricted & Permitted under FEMA & Income Tax Act

Introduction

Which are the NRIs transactions restricted & permitted to NRIs under the Foreign Exchange Management Act (FEMA), 1999 and Income Tax Act, 1961? Let us understand the purpose of these two Acts and the transactions allowable under these Acts.

In our earlier NRI-related articles, we have discussed – How to determine Residential Status of NRIs and NRI Status under Income Tax Act & FEMA.

NRIs – Transactions Restricted & Permitted under FEMA & Income Tax Act

Difference between Income Tax Act, 1961 and FEMA, 1999

Categorization of the Financial Transactions of NRIs

1. Prohibited Transactions
2. Transactions that can be carried out after permission
3. Transactions that can be carried out without permission

Let us discuss each one in detail in this article.

1. Prohibited Transactions for NRIs under FEMA, 1999

1. Agricultural Activities
   • NRI cannot buy an agricultural land India or build a farmhouse.
   • Also, NRI is not permitted to cultivate an agricultural land, either by himself or outsourcing of cultivation. Ultimately, NRI is not permitted to earn agricultural income.
2. Real Estate Activities
   • NRI is not permitted to consider any real estate activity as his business activity.
   • He can purchase and sell his property owned by him as an investment, like acquisition of the inherited property or purchase of a land/building as an investment. Similarly, he cannot deal in TDR.
3. Nidhi Companies
   • NRI is not allowed to form and run a Nidhi Company.

Prohibited Transactions for NRIs under Income Tax Act, 1961

• Opening a PPF Account
  • NRI cannot open a new PPF account. If an individual had opened a PPF account while having a residential status as ‘Resident’ and later it changed to ‘NRI’, then he can maintain the PPF account without making further contribution to it.
• Investment in Government Linked Saving Schemes
  • NRI cannot invest in Government linked investment schemes like PPF, NSC, SCSS, National Pension Scheme, etc.
• Age Based Exemption
  • Basic Exemption limit for NRI is Rs. 2,50,000 under Income Tax Act, 1961 irrespective of his age.
  • For Resident Senior Citizens and Resident Super Senior Citizens the basic exemption limit is Rs. 3,00,000 and Rs. 5,00,000 respectively.
• Deductions under Chapter VIA
  • Section 80DD and Section 80DDB
    • NRI is not permitted to avail the deduction under section 80DD for medical expenditure for specified diseases.
  • Section 80TTB
    • NRI Senior Citizen cannot avail deduction up to Rs. 50,000 under section 80TTB for interest on savings/RD/FD/Bonds/Debentures, etc.

Transactions Permitted with Approvals

1. To buy a residential and Commercial property
2. To avail deduction of repayment of interest and principal of housing loan under section 24(b) and Section 80C of Income Tax Act, 1961
3. To let out immovable property like land or building or both.
4. To claim standard deduction of flat 30% on income from house property under section 24(a) of Income Tax Act, 1961
5. To gift money to the residential relatives.
6. To make credit card transactions.
7. To gift foreign securities to a resident Indian.
8. To handover the property to Resident Indian through a will.
9. To earn tax-free interest on NRE savings Account in India.
10. To hold the equity shares and mutual fund investments in India
11. To invest in Equity shares and Mutual funds under Portfolio Investment Scheme (PIS)
12. To hold NRE Account singly or jointly. (Joint account can be held with another NRI Only)
13. To hold NRO Account (Joint account can be held with Resident or NRI both)
14. To transfer the amount from NRE Account to another NRE account or NRO Account.
15. To transfer the amount of NRO account to another NRO Account. (Transfer from NRO account to NRE Account is not permissible)
16. To remit the amount up to $10,00,000. (Residents are permitted to remit only up to $2,50,000)

Summary

• While entering into the transactions, NRI must check whether the transaction is allowed or not. If it is permissible, then is he required to obtain an approval before entering into the transaction.
• As RBI is governing the FEMA, 1999, there are heavy penalties for offences mentioned under FEMA, 1999.