Dubai: The flow of remittances from migrant workers to their families in their home countries is an important source of income in many economies.
The total value of remittances has grown steadily over the past decade and is now the main source of external finance in most countries, accounting for up to a third of global economic growth.
Whether you want to send funds abroad to your loved ones, pay for your child’s school fees or repatriate your funds as an NRI, you can do it all easily via an outward funds transfer.
NRI rules for outward fund transfers
Taking place on a secure banking network, this funds transfer service is a safe way to send money abroad. However, before handing over your money, there are several rules attached to the outward transfer that you should know to avoid any mishaps or misunderstandings.
In India, all laws relating to inbound and outbound remittances fall under the jurisdiction of the Foreign Exchange Management Act (FEMA). In addition to ensuring that money sent overseas is used only for lawful purposes, this law helps the Reserve Bank of India (RBI) to stabilize local currency markets.
All Indian residents are allowed to repatriate funds abroad or spend abroad under the Liberalized Remittance Scheme (LRS) up to $250,000 (Dh 918,262) per year. Non-Resident Indians (NRIs) or Overseas Indian Citizens (OCIs) are allowed to repatriate up to $1 million (3.67 million dirhams) per year.
How can you define the relevant funds transfer system (LRS)?
Before carrying out an international transaction, the currency must be converted for the purpose of investing or spending abroad. The rules governing these transactions fall under the Liberalized Remittance Scheme (LRS).
As the name suggests, LRS relates to remittances (outbound investments) that a resident is allowed to make in India. However, in addition to remittances, one can also benefit from currency exchange facility (medical or travel expenses), which is also within the purview of the LRS.
Rules vary for NRIs and Indian residents
Procedures for both categories – remittances overseas under the Liberalized Remittance Scheme (LRS) and remittances by Non-Resident Indians (NRIs) or Overseas Indian Citizens (OCIs) – vary.
FEMA’s Liberalized Remittance Scheme (LRS) allows all Indian residents to send money overseas without special permission, provided the purpose of the transfer falls under one of these conditions:
• Expenses for study or stay abroad for students abroad
• Tourism and travel expenses, including business trips
• Financing of medical care
• Buy property or shares abroad
• Support family members abroad
• Sending gifts or donations
• Participation in international conferences etc.
If you’re an NRI or OCI, you also need a statement that the total remittances you make have not exceeded the limit set by the foreign exchange laws. As an NRI/OCI, there will be no applicable tax on your remittance since the remittance is not made under LRS.
How are taxes applied to NRI remittances?
Banks insist on another requirement in the case of NRI/OCI remittances, even if these remittances are made by them to their own overseas bank accounts.
Banks usually insist that for these remittances, a certificate from a chartered accountant and a notification to the income tax department (both filed online) must also be provided. These forms are not requested by the banks when the payment is made under LRS by a resident.
These forms are income tax forms. Tax must be withheld at source on the payment to a non-resident of any taxable income, and these forms must be provided whether or not such payment is taxable.
Income tax rules provide an exemption from providing such forms if the payment is not taxable as the recipient’s income and is covered by the LRS. There is no specific exemption provided for remittances by NRIs/OICs.
What happens if NRIs transfer money between bank accounts?
However, if the NRI/OCI transfers funds from his Indian bank account to his own overseas bank account, he does not make any payments to anyone. A payment would mean that the handover is made to another person. You can’t afford anything yourself.
Is such a form really necessary in case of payments by NRIs/OCBs to their bank accounts abroad? All income paid to NRIs/OCIs is subject to tax (withholding tax or TDS) at rates of 20% to 30%, which more than covers all NRIs/OCI tax obligations.
When the TDS (deducted at each payment, as opposed to the TCS at the time of collection) has already been deducted from all income, where does the question arise of the payment of any additional taxes at the time of payment?
RBI has not yet advised banks that these forms are only required where tax law requires the provision of such forms, and that the forms are not required where the payer is transferring funds to themselves. This will ensure that unnecessary procedures will not bog down those who wish to transfer their funds out of India.
How and when does the remittance tax reduction apply?
Since October 1, 2020, foreign exchange transactions up to Rs 700,000 (Dh 33,103) in a financial year are exempt from tax. An amount above Rs 700,000 is subject to TCS (withholding tax) in the hands of the individual at 5% and 0.5% if it is a student loan repayment.
TDS is deducted each time a payment is made, while TCS (Tax collected at source) is collected by the receiver upon receipt of payment. The TDS must be deducted by the person (or company) making the payment. The TCS must be collected by the person (or company) collecting the payment.
For Indian residents, when it comes to sending funds as gifts to NRI, as per gift taxation rules since July 2019, TDS is applicable if the value of gifts exceeds Rs50,000 (Dh2 364) during an exercise. NRIs will be required to disclose these donations and pay the tax according to tax rules.
NRI: Know these key forex regulations before depositing money
As anyone with overseas business connections or who has traveled abroad can attest, as mentioned above, the Foreign Exchange Management Act (FEMA) is a law enacted by the Government of India to control the flow of foreign currencies across Indian borders.
It is important that Indians working overseas understand the FEMA rules for NRIs very carefully, as it may affect how they can send and receive funds from India. Let’s look at five forex regulations that NRIs must follow:
• Opening of bank accounts mandated by the NRI
This is one of the most crucial FEMA rules for NRIs. Once you have changed your residency status to Non-Resident Indian or NRI i.e. living outside India but still a citizen of that country, you need to complete certain formalities regarding savings accounts that you are holding.
FEMA rules for NRIs do not allow holding a savings bank account. NRIs must establish an NRO (Non-Resident Ordinary Rupee Account) or NRE (Non-Resident External) Account as stipulated by the Reserve Bank of India (RBI).
What is the difference between NRO and NRE accounts?
The NRO account is a bank account opened in India in the name of an NRI, to manage the income he earns in India. It is an ordinary rupee account and can be held jointly by two or more NRIs.
Proceeds of remittances received in any permitted currency from outside India through normal banking channels or any permitted currency offered by the account holder during his temporary visit to India or transfers from rupee accounts of non-resident banks can be credited to this account.
The funds remitted are therefore not repatriable (transferable) to another country. An NRE is a non-resident (external) rupee account. It allows money transfer services from outside India, and the entire account amount is also repatriable to the country where the NRI is currently located.
An NRE account is a bank account opened in India in the name of an NRI, to park his foreign income; while income earned in this account is tax exempt.
The FCNR is a foreign currency (non-resident) account and NRIs can deposit any foreign currency in it. It is a fixed or term deposit in foreign currency available for a period of one to five years. There are no tax implications on this type of account, and the funds are fully repatriable at maturity.
• Limitations of NRI investments
NRIs are entitled to an unlimited number of investment options through repatriable and non-repatriable transactions. However, under FEMA rules for NRIs, they cannot invest in small government savings or public provident funds (PPF) schemes.
NRIs can buy residential or commercial property in India. However, the purchase of agricultural properties, plantations, farm land, etc. is not authorised. NRIs may also receive real estate as gifts from relatives or through inheritance.
NRIs are permitted to send foreign currency back to India on repatriable foreign assets such as rent received on real estate held overseas. According to the FEMA guidelines for NRIs, proceeds from the sale of these assets are not repatriable outside India without the approval of the RBI.
Repatriation of up to $1 million (3.67 million dirhams) per fiscal year is allowed if you inherited the property or retired in India.
Students going to study abroad are treated as NRIs and are eligible for all facilities available to NRIs under FEMA. They are entitled to receive installments of up to $1 million per year from their NRE or NRO accounts or profits on the property.