5 FEMA Regulations Every NRI Must Know

Introduction

Every Non-Resident Indian (NRI) dealing with income, property, or investments in India operates within a well-defined legal framework known as the Foreign Exchange Management Act (FEMA).

This regulation ensures that all cross-border transactions, whether inward or outward, are transparent, authorised, and fully compliant with Indian law.

For NRIs, FEMA is not just a legal formality, but the foundation that enables smooth management of funds across countries.

At Kotak Mahindra Bank, we understand the value of compliant financial planning. This guide explains the five essential FEMA regulations every NRI should know, simplifying a complex law into actionable insights you can rely on.

Table of Contents

1. What is FEMA and Its Objectives
2. 5 Key FEMA Regulations for NRIs
   a. Repatriation of Funds
   b. Property Purchase and Sale
   c. Investment Rules
   d. Gifts and Inheritance
   e. Taxation and Reporting
3. Documents and Compliance Requirements
4. Conclusion
5. FAQs

What is FEMA and Its Objectives

The FEMA stands for the Foreign Exchange Management Act. Introduced in 1999, FEMA replaced the older Foreign Exchange Regulation Act (FERA) to modernise India’s approach to foreign exchange.

The goal is not control, but management—ensuring the free and fair movement of foreign currency while maintaining economic stability.

Objectives of FEMA:

• To facilitate external trade and payments between India and other countries.
• To promote the orderly development of India’s foreign exchange market.
• To define legal boundaries for cross-border investments, lending, and transfers.
• To prevent misuse of foreign exchange and ensure accountability in financial transactions.

For NRIs, FEMA provides clarity on what can be done freely—such as investing or remitting funds—and what requires approval from the Reserve Bank of India (RBI).

5 Key FEMA Regulations for NRIs

FEMA directly affects how NRIs handle their money, investments, and assets linked to India. Here are five key areas every NRI should understand to ensure compliance.

Repatriation of Funds

Repatriation means transferring money from India to your country of residence and vice versa. While there is no particular restriction on sending money to India (other than investment rules, etc.), there are specific rules regarding sending money abroad. Under FEMA, these regulations are based on the type of account you hold.

• Non-Resident External (NRE) Account: Funds and interest are fully repatriable without restriction. Both principal and earnings can be freely sent abroad.
• Non-Resident Ordinary (NRO) Account: Repatriation is limited to USD 1 million per financial year (April–March), subject to the source of funds and submission of tax documents such as Form 15CA/15CB. Banks may also request a chartered accountant’s certificate confirming tax compliance.
• Foreign Currency Non-Resident (FCNR) Account: Balances and interest are fully repatriable in foreign currency.

Before repatriating funds, NRIs must ensure the source of money is legitimate and all taxes have been paid in India.

Property Purchase and Sale

FEMA permits NRIs to buy, hold, and sell immovable property in India, subject to specific conditions.

• Permitted Purchases: Residential and commercial properties can be bought without RBI approval.
• Restricted Purchases: Agricultural land, plantation property, and farmhouses remain prohibited.
• Payment Channel: All payments must be made in Indian Rupees through normal banking channels. Cash transactions are not permitted.
• Sale Proceeds: If the property was purchased using NRE funds, the sale proceeds can be repatriated, provided applicable taxes are cleared.
• Inheritance: Inherited property can be sold, but repatriation is limited to the value received in India and within FEMA’s annual ceiling of USD 1 million.

For joint ownership with a resident Indian, the transaction must comply with both FEMA and income tax provisions to avoid delays in repatriation.

Investment Rules

FEMA categorises NRI investments as repatriable or non-repatriable, depending on the type of account used.

Permitted Investments:

• Portfolio Investment Scheme (PIS): Allows NRIs to invest directly in Indian equities and convertible debentures listed on recognised stock exchanges.
• Mutual Funds: NRIs can invest in Indian mutual funds, exchange-traded funds (ETFs), and bonds through NRE or NRO accounts
• Government Securities: Certain government-backed schemes are open to NRIs under specific terms.

Investments in chit funds, agricultural businesses and PPF are among the prohibited options. To know more on which investments are permitted, and which are not, click here

All investments must be routed through authorised dealers (banks) and reported to the RBI under prescribed formats. Compliance ensures that capital gains, dividends, or repatriated profits are properly recorded for tax purposes.

Gifts and Inheritance

FEMA regulates the giving and receiving of gifts between NRIs and Indian residents to prevent unaccounted money movement.

• Gifting: NRIs can gift:
  • Funds to other NRIs or Resident Indians through authorised banking channels. The gift must be made in Indian Rupees and should not involve direct foreign currency transfers.
  • Immovable property to Resident Indians. NRIs can also gift immovable property to other NRIs/PIOs, provided the property is not agricultural land/plantation property/farmhouse
  • Shares to other NRIs. They can also gift shares to Resident Indians, without RBI approval if the shares were purchased from an NRO account/inherited, with RBI approval if shares were purchased from an NRE account.
• Inheritance: NRIs can inherit property or deposits in India.

These rules help protect both the sender and recipient from compliance issues and ensure the legitimacy of all cross-border transfers.

Please note: The article is meant to provide general knowledge. Please consult a tax expert for detailed information, relevant for individual cases.

Taxation and Reporting

FEMA is closely linked with India’s tax and reporting systems.

• Tax Filing: NRIs must file returns in India if their taxable income exceeds INR 2.5 lakh under the old tax regime, or INR 4 lakh under the new (default tax regime).
• FATCA (Foreign Account Tax Compliance Act) and CRS (Common Reporting Standard) declarations: Banks are required to obtain information on your tax residency and foreign assets to comply with international agreements.
• Repatriation Reporting: Outward remittances from NRO accounts require submission of Form 15CA (by the remitter) and Form 15CB (certified by a chartered accountant).

You can avoid paying taxes on the same income twice (in India and your country of residence) if your country of residence has an existing DTAA (Double Taxation Avoidance Agreement) signed with India.

Documents and Compliance Requirements

NRIs should maintain key documents that support their financial transactions under FEMA. These include:

• Copy of valid passport and visa.
• Permanent Account Number (PAN) card.
• Proof of overseas and Indian addresses.
• Tax Residency Certificate (TRC) from your resident country or any equivalent document
• Form 15CA and 15CB for repatriation, or a chartered accountant’s certificate confirming tax compliance along with proof of source of funds (for outward remittance from NRO account)

Conclusion

The Foreign Exchange Management Act (FEMA) serves as the legal backbone for all foreign exchange transactions involving NRIs.

Whether you are buying property, investing in Indian assets, or repatriating funds, understanding FEMA ensures that every step aligns with regulatory norms.

By following these five key regulations, you not only remain compliant but also build a secure and transparent financial relationship with India.

If you require guidance in structuring your accounts or transactions, Kotak Mahindra Bank’s NRI Banking Services can assist you in managing your finances efficiently within FEMA’s framework.