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Do’s & Don’ts under FEMA for NRIs 29 th January, 2011 WIRC of the Institute of Chartered WIRC of the Institute of Chartered Accountants of India Presented by CA Natwar G. Thakrar

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Page 1: 0 Dos and Donts Under Fema for Nris

Do’s & Don’ts under FEMA

for NRIs

29th January, 2011

WIRC of the Institute of Chartered WIRC of the Institute of Chartered

Accountants of India

Presented by

CA Natwar G. Thakrar

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• Overview of FEMA

• Dos and don’ts - General

• Meaning of NRI/PIO and determination of Residential Status

• Classification of transactions

AGENDA

• Classification of transactions

• Entry Strategy and avenues for investment

• Bank Accounts in India by NRI/PIO

• Borrowings & Lending from/ to NRI/PIO

• Miscellaneous

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Overview of FEMA Provisions

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Transition from FERA to FEMA

FERA FEMA

Regulation Management

Foreign Exchange-Government’s asset

Foreign Exchange-Earner’s assetGovernment’s asset asset

Considered as a Criminal Act- Imprisonment

Considered as a Civil Act-Monetary Penalty

Enforcement Directorate had major role to play.

RBI plays a larger role.

Stringent Business friendly

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Extraterritorial Jurisdiction

• FEMA extends to the whole of India. Thus, any person who is present in India at the time of transaction has to comply with the provisions of FEMA

• It also applies to the branches, offices and agencies outside India owned or controlled by a person resident in India and also to any contraventions there under committed outside India by any person to whom the Act applies.

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Dos and Don’ts - General

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Dos for NRIs• Distinguish between PRII & PROI

• Distinguish current account transactions from capital account transactions

• Inform respective persons of the change in residential status

• Plan ahead- keep a track of investments made from rupee funds in India and funds remitted from abroad

• Understand repatriability of sale proceeds of assets located in India

• Comply with statutory guidelines for filing documents / reporting requirements for different transactions

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Don’ts for NRIs

• Executing Capital Account transactions which are prohibited/ not covered by a general permission

• Effecting current account transactions • Effecting current account transactions which are prohibited/ restricted

• Instructing residents to make onward payments on their behalf

• “Netting off” of transactions with residents

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Meaning of NRI/ PIO and determination of Residential Status

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Non Resident Indian (NRI)• The term NRI has not been defined in FEMA, 1999. Section 2(w)

defines a “person resident outside India” as a person who is notresident in India.

• However, NRI has been defined under FEMA Regulation 2(vi) of theFEMA-21 (Acquisition & Transfer of Immovable Property in India)Regulations 2000 as follows:

“An NRI is a person resident outside India who is a citizen of India or isa Person of Indian Origin (PIO)”

• It is possible you may be an NRI under FEMA, yet may be aresident under the Income tax laws.

• NRI could mean differently due to difference in PIO definitionunder different Notifications

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Person of Indian Origin (PIO)

• PIO also has been defined differently under severalNotifications

• Regulation 2 of Notification 5 defines “Person of Indian Origin (PIO)” as follows:

– a citizen of any country other than Bangladesh or Pakistan, if

(a) he at any time held Indian passport; or

(b) he or either of his parents or any of his grand-parents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 or

(c) the person is a spouse of an Indian citizen or a person referred to in sub-clause (a) or (b) above.

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Person Resident in IndiaSection 2(v) ;

A person (being an individual) residing in India for more than 182 daysduring the course of the preceding financial year but does not include:—

(A) A person who has gone out of India or who stays outside India, in either case—(a) for or on taking up employment outside India, or(b) for carrying on outside India a business or vocation outside India, or(c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;

(B) A person who has come to or stays in India, in either case, otherwise than—(a) for or on taking up employment in India, or(b) for carrying on in India a business or vocation in India, or (c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;

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Individual coming to India: Conditions for residence

1. Did he reside in India for more than 182 days duringthe preceding financial year ?

Or

2. Purpose for coming to India:

• employment• employment

• business/vocation

• any other purpose indicating his intention to stay inIndia for uncertain period ,

• -----------------------------------------------------

If answer of any of the above is yes, then heis a resident for the year.

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Individual leaving India: Conditions for residence

1. Did he reside in India for more than 182 days during the preceding financial year ?

Or

2. Purpose for leaving India is otherwise than:

• employment • employment

• business/vocation

• any other purpose indicating his intention to stay outside India for uncertain period,

--------------------------------------------------

If answer of 1 or 2 above is yes, then he is a resident for the year or else Non resident.

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Residential Status: Illustrations

1. Person leaving India: -

� Mr. Reddy has boarded the flight to New Zealand on 25th December 2009 for taking up employment as Software Engineer. This is his first visit abroad.

� His residential status for the financial year 2009 – 2010 is � His residential status for the financial year 2009 – 2010 is as under:� Mr. Reddy resided in India for more than 182 days during the

financial year 2009 –2010. Though he satisfied the basic threshold condition, the first exception in clause A [S. 2(v)(i)(A)] would be applicable since he is leaving India for taking up employment.

� Accordingly, Mr. Reddy will be a person resident outside India from 25th December, 2009.

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ILLUSTRATION – contd.2. Person coming to India:-• Mr. John , a citizen of the USA, came for the first time to India on

10th April 2008 and got religiously involved and stayed inPuttaparthi, Andhra Pradesh till 7th March 2009.

• He left for USA on 8th March 2009 and again came to India tovisit Saibaba at Puttaparthi on 23rd August 2009. Mr. Johnstayed in India till 31st March 2010.

• What is the Residential Status of Mr. John for the financial year• What is the Residential Status of Mr. John for the financial year2008 – 2009 and 2009 – 2010?

• Reply:-i) Financial year 2008 – 2009:-

He has not satisfied the basic threshold condition of physicallyresiding in India for more than 182 days during preceding financialyear (i.e. 01.04.2008 to 31.03.2009). Hence, Mr. John will be a“person resident outside India “ for the financial year 2008 – 2009.

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ILLUSTRATION – contd.

ii ) Financial year 2009 – 2010:-

Mr. John satisfied the basic threshold condition ofphysically residing in India for more than 182 daysduring preceding financial year (i.e. 01.04.2009 to31.03.2010)

However, the exception in Clause B [S.2(v)(i)(B)]would be applicable to Mr. John’s case since he hasnot come to India on 23rd August 2009 for any of thethree purposes mentioned therein.

Accordingly, Mr. John would be a person resident

outside India for the financial year 2009 – 2010.

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Change in Residential Status

From Non Resident to Resident – Section 6(4):

• A person resident in India may hold, own, transfer or invest inforeign currency, foreign security or any immovable propertysituated outside India if such currency, security or property wasacquired, held or owned by such person when he was residentoutside India or inherited from a person who was resident outsideoutside India or inherited from a person who was resident outsideIndia

From Resident to Non –Resident Section 6(5)

• A person resident outside India may hold, own, transfer or invest inIndian currency, security or any immovable property situated in Indiaif such currency, security or property was acquired, held or ownedby such person when he was resident in India or inherited from aperson who was resident in India

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Emigrating Indians

• An emigrant’s dilemma– Do I need to inform anyone of change in residential status from

R to NRI?– Will there be any benefits of doing so?– Are there any risks of not informing relevant parties?

• Typical stakes• Typical stakes– Bank accounts, Fixed Deposit receipts, Credit cards– Investment in partnership/ proprietorship business– Directorship in private / public companies– Immovable properties– Investment in securities in India– Loans taken from / given to a residents in India– Housing loans

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Classification of Transactions

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Current Account Capital Account

Classification of Transactions

2121

Trade Invisibles

Exports Imports

Tour

Travel

Remittance

Gift

Profit/Div/Int

FDI Portfolio

Foreign Indian

Source Source

(FII)

(GDR/ADR)

Loan

(Govt/

Pvt (ECB)

Fcy A/C

RI &

NRI

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Current Account Transactions

Section 2(j)

• “A transaction other than Capital Account Transaction and without prejudice to the generality of the foregoing, such transaction includes –– Payments due in connection with foreign trade, other current

business, services and other short term banking credit facilities in the ordinary course of business,business, services and other short term banking credit facilities in the ordinary course of business,

– Payments due as interest on loans and as net of income from investments,

– Remittances for living expenses of parents, spouse and children residing abroad,

– Expenses in connection with foreign travel, education and medical care of parents, spouse and children”

•• Fully delegated to ADsFully delegated to ADs

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Current Account Transactions

• Section 5 - Central Government authorized to put reasonable restrictions on current account transactions

• Central Government vide Notification No. GSR 381E has prohibited drawal of Foreign Exchange for – Schedule I transactions– Travel to Nepal and / or Bhutan– Transactions with a person resident in Nepal or Bhutan– Transactions with a person resident in Nepal or Bhutan

• Schedule II transactions can not be undertaken without prior approval of the Government of India

• Schedule III transactions are freely permitted up to the prescribed limits without any specific approvals

• All other type of current account transactions are freely permissible

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Capital Account Transactions

Section 2(e)

• “Capital account transactions mean a transaction which alters the assets or liabilities, including contingent liabilities outside India of a person resident in India or the assets or liabilities in India of a person resident outside India and includes transactions referred to in sub-section (3) of section 6”India and includes transactions referred to in sub-section (3) of section 6”

• Regulation 4(a) of Notification prohibits all capital account transactions unless permitted through general or specific approval by the RBI

•• Examples Examples -- borrowing, lending & investment borrowing, lending & investment –– FDI , FII, FDI , FII, ECBs , NRI deposits , Overseas Investments ECBs , NRI deposits , Overseas Investments ––expanding convertibilityexpanding convertibility

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Capital Account Transactions –Don’ts for NRIs

Regulation 4(b) of Notification 1

• No person Resident outside India can invest in in India , in any form, in any company or partnership firm or proprietary concern or any entity, whether incorporated or not, which is engaged or proposes to engage –– in the business of chit fund, or – as Nidhi Company , or – as Nidhi Company , or – in agricultural or plantation activities or – in real estate business, or construction of farm houses or – in trading in Transferable Development Rights (TDRs).

• Similarly FDI in following activities is prohibited -� Retail Trading � Atomic Energy � Lottery Business � Gambling and Betting

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Entry Strategy & Avenues for Investment

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Foreign Company Indian Company Non Corporate Entity

Entry Strategy for NRIs

Investment As

Foreign Company Indian Company Non Corporate Entity

through through through

-Liaison Office -Joint Venture - Partnership Firm

-Project Office -Wholly Owned Subsidiary - Proprietorship

-Branch Office

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Avenues of Investments• FDI scheme

• Two Routes – Automatic & Approval

• Portfolio investment scheme (only for NRIs)

• An NRI can purchase upto 5% shareholding in a listed company

• restriction on ‘non-delivery’ based transaction

• One account only can be opened under PIS Scheme / Route all

purchase/sale transactions through this account only.

• Investment in Partnership/ Proprietorship

• agricultural/plantation activity or real estate business, i.e. dealing in land and

immovable property with a view to earning profit or earning income prohibited

• Non-repatriable investment scheme (only for NRIs)

• No cap on investment in a listed or unlisted company

• No restriction on ‘non-delivery’ based transaction

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• Investment scheme for securities other than shares / debentures (for

NRIs)

Investments on repatriation basis Investments on non-repatriation

basis

� Government securities (other than bearer securities)

� Government securities (other than bearer securities)

…Avenues of Investments…

bearer securities) � Treasury bills � Units of domestic mutual funds � Bonds issued by PSUs � Shares in PSUs being disinvested

by the Government of India

bearer securities) � Treasury bills � Units of money market mutual funds � National Plan / Savings Certificates

• NRIs can invest in exchange traded derivative contracts

• Investment only through rupee funds in India and on non-

repatriation basis

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…Avenues of Investments

• Investment in Real Estate

– FDI & for own use

– in real estate business, or construction of farm houses or in trading in TDRs prohibited.houses or in trading in TDRs prohibited.

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FDI in Real Estate Development by NRIs/PIOs

• 100% FDI under Automatic Route (Press Note 4 (2006Series- S. No. 11)

• Types of Projects Covered– Development of Serviced plots and construction of built-up residential

premises– Investment in real estate covering construction of residential and

commercial premises including business centers & offices– Development of Townships– Development of Townships– City & Regional level urban infrastructure facilities including Roads &

bridges– Manufacture of Building materials

– Participatory ventures in above

– Housing Finance Institutions

• Special Exemptions from conditions of PN 2/2005 for NRIs/PIOs – Minimum Area, Minimum capital, 6 Month Capitalisation Period,

Condition for 50% project development within 5 years and repatriation of profits

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Immovable Properties by NRIs

• Dos for NRIs/PIOs -– Can acquire property for holding/self-use.

– Can sell the property & repatriate sale proceeds abroad, most of the times.

– Can give the property on rent & repatriate funds abroad after payment of taxes.abroad after payment of taxes.

• Don’ts for NRIs/PIOs -– Can not buy agricultural property, plantations & farm

houses.

– Can not do Real Estate Trading, or trade in Transferable Development Rights.

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Transfer of Immovable Properties by NRIs

• Dos for Indian Citizens (NRIs) - can transfer immovable property without any approval except as under:- Non-Agricultural property can be sold or gifted away to Indian

residents & NRIs. (Not to foreigners who are non-residents.)- Agricultural Property can be sold or gifted, only to Indianresidents. (even if they are foreign citizens.)residents. (even if they are foreign citizens.)

• Dos for PIO - can transfer immovable property without any approval except as under:– They can sell or gift non-agricultural property to an Indian

resident or NRI, without any approval.– They can sell or gift agricultural property only to an Indian

citizen & Indian resident.

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Renting of Immovable Property

• NRIs can rent their property.

• Excessive Properties/renting may tantamount to business in Real estate and become prohibited activity.

• Rent can be repatriated abroad after payment of taxes

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Immovable Property & Change of Residential Status

• Resident who becomes NR – can continue to hold property in India.

• Agricultural activities cannot be done in case of agricultural properties.case of agricultural properties.

• People who acquire foreign citizenship –can continue to hold property in India.

• Non-resident who become resident – cancontinue to hold property. Repatriability islost.

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Investment in Real Estate by NRIs/PIOs (Other than FDI)

Reg NRIs Reg PIOs Reg Others

Acquire 5 Branch

In accordance with applicable law

Remittances from abroad

Form IPI has to be 90

Agricultural Land, Plantation, Farm House

3(a) No except Inheritance from PROI/PRII. Restriction on use/ repatriation possible

4(c) No except Inheritance from PROI/PRII

Restriction on use/ repatriation possible

Other Land 3(a) Yes 4(a)

4(c)

4(b)

Purchase

Inheritance

Gift from NRIs, PIOs & 5(a) filed with RBI within 90 days

Diplomatic offices of

Foreign Government

Remittances from abroad

Approval from Ministry of External Affairs

Repatriation

Allowed

4(b) Gift from NRIs, PIOs & PRII

5(a)

Transfer

Agricultural Land 3(b) Sale or Gift to PRII only

4(e) Sale & gift to PRII who is Citizen of India

Other Land Gift, Sale or inheritance to NRIs, PIOs & PRII

4(d)

4(f)

Sale to PRII

Gift to NRIs, PIOs & PRII

Repatriation 6(a) &(b)

Up to Original Investment in FC and for Residential Property- maximum for 2 houses

Balance under US $ 1 Million Scheme

Up to Original Investment in FC and for Residential Property- maximum for 2 houses

Balance under US $ 1 Million Scheme

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Bank Accounts/ Deposit by NRI/PIO

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Bank AccountsType of Accounts

• Non-Resident (External) Rupee (NRE) Accounts – Savings, Current & Recurring, Fixed deposits– Rent, Dividend, Interest, Pensions, etc. subject to payment of tax– Principal/ Interest repatriable– Joint account with a Resident not permitted– POA can not open the account– POA can not open the account

• Foreign Currency (Non-Resident) Account (Banks) Scheme (FCNR(B) Account– Only Term Deposits of minimum duration of one year and in designated

currencies i.e. US Dollar, Pound Sterling, EURO, Japanese Yen, Australian Dollar and Canadian Dollar

– Principal/ Interest repatriable– Joint account with a Resident not permitted– POA can not open the account

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Bank Accounts

• NRO Accounts –– Type of Accounts - Savings, Current & Recurring, Fixed deposits

– Credits- Rent, Dividends, Interest, Pensions, etc

– Current earnings are repatriable

– Can also be opened jointly with a Resident

– POA can not open the account

– Can remit an amount up to USD 1 million per financial year, out of the balances held in his NRO account/sale proceeds of assets (inclusive of assets acquired by way of inheritance or settlement) for all bona fide purposes, to the satisfaction of the AD bank,

• On production of an undertaking by the remitter

• Certificate by CA in the formats prescribed by CBDT vide circular No.10/2002 dated October 09, 2002.

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Bank Accounts

• Any individual cannot hold both the status i.e. Non-resident as well as resident at the same time. Therefore, if the individual is an NRI, he needs to close normal saving account and open NRE/NRO or both accounts. The monies lying in NRE/NRO or both accounts. The monies lying in resident saving account can be transferred to NRO account.

• If the individual is resident Indian, then he needs to have a resident saving account and close NRE/NRO accounts.

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Status of NRI Bank Accounts in India on Return

(a) Ordinary Non-Resident AccountsThese have to be converted to resident accounts by banks on returnof the account holders to India and consequently becoming residentin India.

(b) Non-resident (External) Rupee Accounts:(b) Non-resident (External) Rupee Accounts:These can be converted to resident rupee accounts or RFC (ResidentForeign Currency) accounts on becoming resident in India. In case ofNR(E) fixed deposits, the accounts can continue till maturity, evenafter being converted to resident account.

(c) FCNR (Banks) Account:These deposits can be converted to resident rupee account or RFCaccount on maturity at the option of the account holder on hisbecoming resident in India.

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Borrowing & Lending

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Lending by NRI/ PIONon-residents can lend to residents either in foreign exchange or in rupees

either on repatriable basis or non-repatriable basis.(1) Repatriable Basis:

(a) Lending in Foreign exchange to resident individual.(b) Lending in rupees to Indian companies by issue of Non-Convertible

Debentures.

(2) Non-Repatriable Basis:(2) Non-Repatriable Basis:

(a) Lending in rupees to residents.(b) Lending in rupees to Indian companies by issue of Non-Convertible

Debentures.Lending by NRIs on Repatriable Basis.Lending in foreign exchange to resident individual.

Non-residents can lend money to resident close relatives (as defined under section 6 of the Companies Act, 1956) in foreign exchange up to us $ 2,50,000 or its equivalents subject to the following conditions:

(1) Loan is interest-free.(2) Minimum maturity period of loan is one year.

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Lending to NRI/ PIO• ADs are allowed to grant loans against permissible security (other

than agricultural or plantation property or farm house)

Banks are prohibited from granting fresh loans or renewing existing loans in excess of Rs.100 lakhs against NR(E)RE and FCNR(B) deposits either to the depositors or to third parties.

• Conditions on end use• Conditions on end use• Loan only for personal / or for own business purposes. • The loan shall not be utilised for the business of chit fund, Nidhi Company,

Agricultural or plantation activities, Real estate business, construction of farm houses; or Trading in TDRs.

• Directives from the Reserve Bank should be duly complied with.• The loan can not be credited to NRE/FCNR account or remitted outside

India.• The repayment of loan shall be out of remittances from outside India / debit

to NRO/NRE/FCNR account / sale proceeds of shares or securities or immovable property against which such loan is granted.

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Miscellaneous

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Remittance of Assets…

• Remittance of Rent, Dividend, Pension, Interest etc. of NRI/PIO (even those who do not maintain an NRO account) is freely allowed on the basis of

– appropriate certification by a CA that the amount proposedto be remitted is eligible for remittance

– and that applicable taxes have been paid/provided for.– and that applicable taxes have been paid/provided for.

• NRI/PIO have the option to credit the current incometo their NRE (rupee) account provided

– the AD is satisfied that the credit represents current incomeof the Non resident account holder and income tax thereonhas been deducted / provided for.

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…Remittance of Assets…• Remit an amount up to USD 1 million per financial year, out of the

balances held in his NRO account/sale proceeds of assets (inclusive of assets acquired by way of inheritance or settlement) for all bona fide purposes, to the satisfaction of the AD bank, – On production of an undertaking by the remitter

– Certificate by CA in the formats prescribed by CBDT vide circularNo.10/2002 dated October 09, 2002.No.10/2002 dated October 09, 2002.

• Remit sale proceeds immovable property purchased out of Rupeefunds (as a person resident in India) without any lock in periodsubject to-– submit documentary evidence in support of purchase, inheritance or

legacy of assets

– An undertaking by the remitter

– Certificate by CA in the prescribed format

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…Remittance of Assets

• The remittance facility in respect of sale proceeds of immovable property is not available to citizens of -

– Pakistan, Bangladesh, Sri Lanka, China, Afghanistan,Iran, Nepal and Bhutan

• The facility of remittance of sale proceeds of other financial assets is not available to citizens of

– Pakistan, Bangladesh, Nepal and Bhutan

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NRI/ PIO on visit to IndiaCan bring in with themCan bring in with them--

1. In Indian Rupees1. In Indian Rupees--(a)(a) upup toto RsRs.. 55,,000000 fromfrom anyany countrycountry otherother thanthan NepalNepal oror Bhutan,Bhutan, andand

(b)(b) anyany amountamount inin denominationdenomination notnot exceedingexceeding RsRs..100100 fromfrom NepalNepal oror BhutanBhutan..

22.. ForeignForeign ExchangeExchange--cancan bringbring withoutwithout anyany limitlimit providedprovided ifif --1.1. thethe valuevalue ofof foreignforeign currencycurrency exceedsexceeds USDUSD 55,,000000//-- oror itsits equivalent,equivalent,2.2. thethe aggregateaggregate valuevalue ofof thethe foreignforeign exchangeexchange inin thethe formform ofof currencycurrency notes,notes,

bankbank notesnotes oror TCsTCs broughtbrought inin exceedsexceeds USDUSD 1010,,000000//-- oror itsits equivalentequivalent and/orand/or

ToTo bebe declareddeclared toto thethe CustomsCustoms AuthoritiesAuthorities atat thethe AirportAirport inin thethe CurrencyCurrencyDeclarationDeclaration FormForm (CDF)(CDF) onon arrivalarrival inin IndiaIndia..