The Foreign Exchange Management Act of 1999 establishes the legal basis for the administration of foreign exchange transactions in India. For the purposes of applying relevant regulations, each transaction must be classified as either a capital account transaction or a current account transaction under the Foreign Exchange Management Act (‘FEMA’). The term ‘Capital Account Transaction’ is defined in Section 2(e) of the FEMA as a transaction that alters a person’s assets or liabilities, including contingent liabilities, outside India or assets or liabilities in India of persons resident outside India, and includes a transaction referred to in sub-section (3) of section 6. All capital account transactions are forbidden unless specifically approved, according to section 6(4) of FEMA 1999. A current account transaction is defined in Section 2 (j) of the FEMA as the one that is “not a capital account transaction.” Since the terms including “assets,” “liabilities,” and “contingent liabilities” have not been defined in the FEMA, determining whether a transaction is in fact a capital account transaction is challenging.
The Foreign Exchange Management Act of 1999 empowers the Reserve Bank of India to enact legislation in order to prevent, limit, or control acquisition or transfer of immovable property in India by Non – Resident Indian (NRI). The Foreign Exchange Management Act (FEMA) oversees the purchase of assets by Non-Resident Indians (NRI), Persons of Indian Origin (PIO), and Foreign Nationals/Citizens. Section 3 of the FEMA states that “all foreign exchange transactions require clearance from the Reserve Bank of India, either general or specific.” FEMA laws stipulate that no person who is a citizen of China, Pakistan, Nepal, Bangladesh, Sri Lanka, Afghanistan, Iran, or Bhutan shall acquire or transfer immovable property in India other than lease, not exceeding five years without the prior permission of Reserve Bank of India.
According to Section 4 of the Income Tax Act, 1961, tax is to be levied on a person’s previous year’s income at the rate specified in the Annual Finance Act for the assessment year immediately following the previous year. A person’s tax liability is decided by his or her previous year’s residence in India. The assessee’s residence status may vary from year to year. The income tax legislation categories persons into three groups based on their duration of residence in India: Resident (ROR), Resident but Not Ordinarily Resident (RNOR), and Non-Resident (NR). If an individual is a resident of India, his worldwide income is taxable in India. If an individual is not a resident of India, just his Indian income is taxable. Outside India, income earned and received is not taxable in India.
According to FEMA, a person’s residential status influences the type of investment that person can make in India or abroad. Rather than the number of days spent in India or abroad, FEMA considers the purpose of the stay in India or abroad when determining an individual’s residence status under FEMA. FEMA enables residents to undertake a variety of investments in India. If a person is classified as a non-resident under FEMA, he or she may open Non-resident External (NRE) and Non-resident Ordinary (NRO) accounts.
A person’s residential status for a specific fiscal year may differ according to FEMA and Income Tax; i.e., a person may be a “resident” in India under the Act and a “resident” outside India under FEMA, or vice versa. The difference in residential status of an individual is due to a significant discrepancy between Income Tax and FEMA provisions: in Income Tax; the reason for the stay in India or overseas is irrelevant; only the period of the stay is.
According to Section 2(v) (i) of the FEMA, a person is considered a resident of India if he spends more than 182 days in the preceding fiscal year in India. Additionally, FEMA specifies a maximum stay of 182 days. It should be noted, however, that a person’s residence status is determined mostly by his or her decision to remain in India. There are, however, some exceptions. If a person leaves India for a job, business, or any other reason that indicates his desire to remain outside India for an indefinite duration, he becomes a person residing outside India on the day he departs India for such purpose. The residential status of a person returning to India will be determined as follows: If a person comes to India for employment, business, or any other reason that indicates his intention to remain in India for an indefinite period, he automatically becomes a resident of India on the day he arrives for such purpose.
An NRI (Non-Resident Indian) is a resident of India who retains an Indian passport and has temporarily relocated to another nation for at least six months for job, residence, or any other reason. When an individual resides outside of India and is not an Indian citizen, he is classified as a Foreign National.
Person of Indian Origin
FEMA does not define PIO. However, the Reserve Bank of India has defined PIO in its numerous FEMA notices. In general, a PIO is a citizen of any country (other than those specified) if:(1) he has at any time held an Indian passport or (2) if he or his parents or any of his grandparents were citizens of India under the Indian Constitution or the Citizenship Act, 1955; or the person is the spouse of an Indian citizen or a person referred to in (1) or (2) above.
Additionally, each FEMA notification has particular restrictions on transactions involving PIOs based in certain countries. Several of these constraints include the following: Restriction on Acquiring or Transferring Immovable Property: In accordance with the notification governing the acquisition or transfer of immovable property in India Immovable property cannot be acquired or transferred by citizens of Bangladesh, Pakistan, Sri Lanka, Afghanistan, China, Nepal, Iran, Bhutan, Macau, or Hong Kong. Establishment of a Branch/Liaison/Project office is restricted: Without the prior authorization of the RBI, no entity or individual who is a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, or Macau may open a branch / liaison / project office or any other place of business in India.
Overseas Citizens of India
The Indian Constitution prohibits dual citizenship, i.e. holding both Indian and foreign citizenship concurrently.
A foreign national may register for Overseas Citizens of India a) who was eligible to become a citizen of India on 26.01.1950** or b) who was a citizen of India on or after 26.01.1950 or c) who was a resident of a territory that became part of India after 15.08.1947, as well as his children and grandchildren, are eligible for registration as an OCI, provided his country of citizenship permits dual citizenship in some form or another under local law.
Children under the age of 18 of such a person are likewise eligible for OCI. However, if the candidate was ever a Pakistani or Bangladeshi citizen, he would be ineligible for OCI.
FEMA is a regulatory statute. Under FEMA law, there are regulations for conducting transactions with non-residents or any cross-border transaction, such as inbound or outbound investments, capital account or current account transactions, and so on. The regulation specifies certain restrictions and approval procedures that a non-resident must follow when engaging in any such transaction. As a result, knowing the residential status according to FEMA on any given day is essential.