Which statute actually decides whether an Indian passport holder living in Dubai may keep a savings account in Chennai, buy an apartment in Pune, or wire rental income back to the Gulf? Almost every Indian professional abroad assumes the answer is the income tax law, and almost every one of them is wrong about the part that carries the sharper consequences. Tax law decides what you owe. The Foreign Exchange Management Act, 1999 decides what you are permitted to do at all, and it reaches into bank accounts, property registration, share purchases, gifts to parents, loans to siblings and the mechanics of sending money out of the country.
The FEMA rules for NRI transactions were written to be enabling rather than punitive, yet contraventions still attract a penalty of up to three times the sum involved, and the most common breaches happen quietly, through an account nobody remembered to redesignate or a property purchase nobody thought to question.
Who Is an NRI Under FEMA and Why the Definition Differs From Tax Law
Two separate statutes use two separate tests, and conflating them is the single most frequent error in this area.
Under Section 2(v) of the Foreign Exchange Management Act, 1999, a person resident in India is one who resided in India for more than 182 days during the preceding financial year, subject to an overriding test of intention. A person who leaves India for employment outside India, for carrying on a business outside India, or for any other purpose indicating an intention to stay outside India for an uncertain period becomes a person resident outside India immediately on departure. The day count is not the operative trigger. Purpose is.
The Foreign Exchange Management (Deposit) Regulations, 2016 and the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 then define a Non Resident Indian as a person resident outside India who is a citizen of India. An Overseas Citizen of India cardholder is defined separately and is treated on par with an NRI for most FEMA purposes, including bank accounts, property and portfolio investment.
Residential status under the tax law works on an entirely different logic. Section 6 of the Income-tax Act, 2025, which repealed and replaced the Income Tax Act, 1961 for tax years beginning on and after 1 April 2026, applies a 182 day test, a 60 day plus 365 day test, and a 120 day threshold for Indian citizens and persons of Indian origin whose Indian sourced income exceeds INR 15 lakh. A deemed residence provision continues to treat an Indian citizen with Indian income above that threshold as resident where no tax is payable in any other country by reason of domicile or residence.
A person can be non resident under FEMA on the day of departure and still be resident under the tax law for that entire financial year. The FEMA guidelines for NRI banking apply from the moment of departure. The tax consequences follow the financial year. Both are correct at the same time.
The Structure of the Act and Why It Matters Before Any Transaction
The Foreign Exchange Management Act, 1999 replaced the Foreign Exchange Regulation Act, 1973 with effect from 1 June 2000 and reversed the philosophy of the earlier statute. FERA presumed prohibition and treated contravention as a criminal offence. FEMA presumes permission and treats contravention as a civil wrong.
Three provisions carry most of the weight.
Section 3 bars dealing in foreign exchange or making payment to a person resident outside India except through an authorised person. This is the provision that makes informal hawala style transfers unlawful regardless of purpose.
Section 5 permits current account transactions freely, subject only to reasonable restrictions imposed by the Foreign Exchange Management (Current Account Transactions) Rules, 2000. Schedule I of those Rules prohibits certain remittances outright, Schedule II requires prior approval of the Central Government, and Schedule III sets thresholds beyond which approval of the Reserve Bank is needed.
Section 6 governs capital account transactions, meaning those that alter assets or liabilities outside India of a person resident in India, or assets or liabilities in India of a person resident outside India. Property purchase, share acquisition, deposits and borrowing all fall here, and each is governed by a dedicated set of rules or regulations.
Two sub sections of Section 6 protect people who move.
Section 6(4) permits a person resident in India to hold, own, transfer or invest in foreign currency, foreign security or immovable property situated outside India if that asset was acquired when the person was resident outside India, or was inherited from a person resident outside India. The Reserve Bank clarified the full reach of this provision through A.P. (DIR Series) Circular No. 90 dated 9 January 2014, confirming that income and sale proceeds of such assets may also be retained abroad.
Section 6(5) is the mirror image and permits a person resident outside India to hold, own, transfer or invest in Indian assets acquired while that person was resident in India or inherited from a person resident in India. Nobody is forced to liquidate on emigration.
Bank Accounts and the Redesignation Nobody Remembers
The first obligation on becoming an NRI is not an investment decision. It is a housekeeping one, and neglecting it is a technical contravention that runs from the day of departure.
A resident savings account cannot continue once its holder becomes a person resident outside India. Under the Foreign Exchange Management (Deposit) Regulations, 2016, the account must be redesignated as a Non Resident Ordinary account or closed. Banks are required to act on intimation from the customer, which means the customer must give it.
Non Resident External account
Held in Indian rupees, funded only from foreign earnings, freely repatriable as to both principal and interest. Interest is exempt from Indian income tax under the exemption preserved for interest on NRE deposits. The account carries exchange rate risk because the underlying funds are converted into rupees.
Non Resident Ordinary account
Held in Indian rupees and used for income arising in India such as rent, dividends, pension and share of profits. Interest is taxable in India and suffers withholding at the rate applicable to non residents. Repatriation from this account is permitted but capped.
Foreign Currency Non-Resident (Bank) account
A term deposit maintained in a permitted foreign currency, which removes exchange rate risk on the principal, is freely repatriable, and earns interest exempt from Indian income tax.
An NRE or FCNR(B) account may be held jointly with another NRI, and with a resident close relative on a former or survivor basis. An NRO account may be held jointly with a resident without that restriction.
Resident demat accounts, Public Provident Fund accounts, small savings schemes and resident mutual fund folios each have their own treatment on change of status, and several cannot be continued in resident form.
Repatriation of Funds and the USD 1 Million Route
How much money can an NRI actually send out of India in a year? The answer depends entirely on which account the money sits in.
Funds in an NRE or FCNR(B) account are freely repatriable without limit, because those balances represent foreign earnings that were brought in through banking channels in the first place.
Balances in an NRO account are subject to the ceiling set by the Foreign Exchange Management (Remittance of Assets) Regulations, 2016. An NRI or OCI may remit up to USD 1 million per financial year out of balances in an NRO account, including sale proceeds of assets and assets acquired by way of inheritance, legacy or settlement. Current income such as rent, dividend, pension and interest is treated separately and is repatriable without counting against the ceiling, provided the bank is satisfied that the amount represents current income net of applicable taxes.
The Liberalised Remittance Scheme is frequently and incorrectly cited in this context. That scheme permits a resident individual to remit up to USD 250,000 per financial year. It is not available to an NRI, and an NRI does not need it, because the USD 1 million route under the Remittance of Assets Regulations serves the equivalent function with a far higher ceiling.
Every outward remittance of a taxable sum requires tax documentation before the bank will process it. Form 15CA is a declaration filed electronically by the remitter. Form 15CB is a certificate from a chartered accountant confirming the taxability and the rate applied, required where the remittance is taxable and exceeds the prescribed threshold. Withholding on payments to non residents operates independently of these forms, and a treaty rate can be claimed only with a valid Tax Residency Certificate and Form 10F.
Immovable Property Under the FEMA Guidelines for NRI Buyers
Property generates more litigation than any other head under this statute, and the rules are narrower than most buyers assume.
The Foreign Exchange Management (Non-debt Instruments) Rules, 2019, notified by the Central Government on 17 October 2019, now govern acquisition and transfer of immovable property in India by persons resident outside India. These Rules replaced the earlier property regulations and consolidated the position.
What an NRI or OCI may acquire?
Any immovable property in India other than agricultural land, a farm house or plantation property. There is no numerical limit on the number of residential or commercial properties.
What an NRI or OCI may not purchase?
Agricultural land, plantation property and farm houses cannot be bought, and a purported purchase does not become valid through registration by a state authority that failed to check status.
Inheritance is treated differently from purchase
Agricultural land, plantation property and a farm house may be acquired by way of inheritance from a person resident in India. The bar operates on acquisition by purchase, not on succession.
Payment channel matters
Consideration must be paid out of funds received in India through banking channels by way of inward remittance, or out of balances in an NRE, NRO or FCNR(B) account. Payment by traveller’s cheque or foreign currency notes is not permitted.
Transfer
An NRI or OCI may transfer any immovable property in India to a person resident in India. Transfer to another NRI or OCI is permitted for property other than agricultural land, plantation property and farm houses. Agricultural land may be transferred only to a person resident in India who is a citizen of India.
The Supreme Court has confirmed that permission requirements in this field are mandatory rather than directory. In Asha John Divianathan v. Vikram Malhotra, 2021 INSC 121, decided on 26 February 2021, a three judge bench held that the requirement of previous permission of the Reserve Bank under Section 31 of the Foreign Exchange Regulation Act, 1973 for transfer of immovable property in India by a person who is not a citizen of India was mandatory, and that a transfer made without it was unenforceable. Although the case arose under the repealed FERA, its reasoning on the character of statutory permission continues to inform how courts read the present regime. A transaction that offends the FEMA rules for NRI property acquisition is not cured by the passage of time or by a registered deed.
Repatriation of sale proceeds carries its own condition. Where the property was acquired in accordance with the foreign exchange law in force at the time of acquisition, and the consideration was paid through the prescribed channels, sale proceeds of up to two residential properties may be repatriated. Proceeds beyond that ride on the USD 1 million route.
Investment in Shares, Funds and Government Securities
Portfolio investment by individuals resident outside India was materially liberalised in June 2026, and any guide written before that date is now out of step.
- Repatriation basis under Schedule III
The Foreign Exchange Management (Non-debt Instruments) (Third Amendment) Rules, 2026 replaced the expression restricting Schedule III to an NRI or OCI with a reference to an individual, opening the listed equity route on repatriation basis to any individual resident outside India. The individual ceiling moved to less than 10 percent of the paid up equity capital of a listed Indian company on a fully diluted basis, and the aggregate ceiling for all individual foreign investors moved to 24 percent. The corresponding amendment to the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, notified by the Reserve Bank in June 2026, requires the investor to designate a repatriable rupee account used exclusively for these investments. Funds may be placed there by inward remittance or by transfer from an existing repatriable account, and sale proceeds may be remitted abroad or credited back to that account net of taxes.
- Non repatriation basis under Schedule IV
Investment by an NRI or OCI on non repatriation basis is treated as domestic investment on par with investment by residents, which places it outside the sectoral caps and entry conditions that apply to foreign direct investment. Proceeds remain in the NRO account and exit through the USD 1 million route.
- What remains closed
An NRI or OCI cannot invest in a Nidhi company, in a company engaged in agricultural or plantation activity, in real estate business, in construction of farm houses, or in transfer of development rights. Investment in a chit fund requires prior approval.
- Other instruments
Government securities, treasury bills and listed non convertible debentures are open on both repatriation and non repatriation basis. Mutual funds are open subject to the fund’s own acceptance of subscriptions from the investor’s country of residence. Subscription to the National Pension System remains available to NRIs and OCIs through inward remittance, a repatriable foreign currency or rupee account, or an NRO account.
Gifts, Loans and Transactions Within the Family
Money moving between family members across borders is a current account transaction and is governed by the Foreign Exchange Management (Current Account Transactions) Rules, 2000 read with the deposit and borrowing regulations.
A resident may gift to an NRI relative within the annual limit applicable to residents under the Liberalised Remittance Scheme. An NRI may receive gifts in India by credit to an NRO account without limit, and may gift Indian assets to a resident relative freely.
Borrowing and lending are more constrained. A resident individual may borrow in rupees from an NRI close relative on a non repatriable basis, subject to conditions on tenure, absence of interest and receipt through banking channels. An NRI may lend to an Indian company only through instruments permitted under the external commercial borrowing framework or the deposit regulations, and an ordinary rupee loan between unconnected parties is not permitted.
Rent, dividends and interest earned in India must be credited to an NRO account. Routing Indian source income into an NRE account is a contravention even where the sum is small and the intention innocent, because the NRE account is defined by the source of its funding.
Returning to India and the Reversal of Status
Status under this statute reverses the moment intention reverses. A person who returns to India for employment, business or an indefinite stay becomes a person resident in India on arrival, and the FEMA guidelines for NRI accounts stop applying from that date.
NRE and FCNR(B) accounts must be redesignated as resident rupee accounts, or the balances transferred to a Resident Foreign Currency account. The RFC account is the instrument that allows a returning Indian to retain foreign currency without conversion, and it remains freely repatriable if the person leaves again.
Assets held abroad may be retained under Section 6(4), as may the income they generate. The tax treatment then turns on whether the returning person qualifies as not ordinarily resident, a status that ordinarily shields foreign source income for two financial years and makes the timing of a return financially significant.
Contraventions, Penalties and Compounding
What happens when a rule is missed? The statute answers directly and the answer is expensive.
Section 13 of the Foreign Exchange Management Act, 1999 provides for a penalty of up to three times the sum involved in the contravention where that sum is quantifiable, and up to INR 2 lakh where it is not. A continuing contravention attracts a further penalty of up to INR 5,000 for every day the contravention continues.
Section 15 permits compounding, meaning voluntary admission and settlement of the contravention on payment of a sum determined by the compounding authority. The procedure is now governed by the Foreign Exchange (Compounding Proceedings) Rules, 2024, notified on 12 September 2024, which replaced the 2000 Rules. The reformed procedure raised the monetary jurisdiction of Reserve Bank officers, permitted a compounding application to be filed even where an appeal is pending under Section 17 or Section 19, introduced electronic filing and payment, and required the compounding order to be passed within 180 days of receipt of a complete application.
Not everything can be compounded. A contravention where the sum involved is not quantifiable, a case where the Directorate of Enforcement considers the conduct serious with indications of money laundering or financing of terrorism, and a matter already the subject of an adjudication order fall outside the scheme.
Voluntary disclosure is the rational response to a discovered breach. Compounding converts an open ended exposure into a known figure, and the calculation applied in practice treats reporting delays far more leniently than substantive violations.
Conclusion
The direction of travel in Indian exchange control is now unmistakable, and it points away from status based permission toward account based tracking. The June 2026 amendment that opened the repatriable listed equity route to any individual resident outside India, while simultaneously requiring a designated account through which those investments must pass, tells you what the next decade will look like. Categories will keep loosening. Traceability will keep tightening. For anyone holding assets across the India boundary, the compliance advantage will belong not to those who memorise the categories but to those who keep their money in the correctly labelled channel from the first rupee, because the regulator has stopped asking who you are and started reading where the funds moved.
FAQs
Can an NRI keep a resident savings account in India?
Once a person becomes a person resident outside India under Section 2(v) of the Foreign Exchange Management Act, 1999, the resident account must be redesignated as an NRO account or closed. Continuing to operate it is a contravention that runs from the date of departure, not from the date the bank notices.
How much money can an NRI repatriate from India each year?
Balances in NRE and FCNR(B) accounts are freely repatriable without any ceiling. From an NRO account, the limit is USD 1 million per financial year under the Foreign Exchange Management (Remittance of Assets) Regulations, 2016. Current income such as rent and dividends, net of tax, sits outside that ceiling.
Can an NRI buy agricultural land in India?
No. Purchase of agricultural land, plantation property and farm houses is barred under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019. Such property can, however, be acquired by inheritance from a person resident in India, and may then be transferred to a resident Indian citizen.
Is an NRI eligible for the Liberalised Remittance Scheme?
No. That scheme applies to resident individuals. An NRI relies instead on free repatriation from NRE and FCNR(B) accounts and on the USD 1 million route from an NRO account.
What are the penalties for breaching the FEMA guidelines for NRI transactions?
Section 13 permits a penalty of up to three times the sum involved where quantifiable, up to INR 2 lakh where it is not, and up to INR 5,000 per day for a continuing contravention. Most inadvertent breaches are settled through compounding under the Foreign Exchange (Compounding Proceedings) Rules, 2024.
Does an NRI need to file an income tax return in India?
Filing is required where Indian sourced income exceeds the basic exemption threshold, where a refund of withheld tax is claimed, or where specified transactions have been undertaken. Residential status for tax purposes is determined under Section 6 of the Income-tax Act, 2025 for tax years beginning on and after 1 April 2026, and is a separate question from status under the foreign exchange law.
Can an OCI cardholder do everything an NRI can do?
For bank accounts, immovable property other than agricultural land, and portfolio investment, an OCI cardholder is treated on par with an NRI under the present rules. Differences persist in areas outside this statute, including certain professional registrations and access to some government schemes.