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RFC account of a Returning NRI and Investment Abroad

1. Introduction - RFC Account Of A Returning NRI And Investment Abroad

An NRI returning to India permanently at some time and becoming a resident in India is interested in knowing the types of Foreign Currency Accounts which he can maintain in India. Similarly, he will also be interested in knowing Regulations regarding direct investment in foreign currency securities other than by way of direct investment. The first types of Regulations are contained in Foreign Exchange Management (Foreign Currency Accounts by a person Resident in India) Regulations, 2000. The other set of Regulations regarding an investment by a returning NRI in India becoming a resident or any other resident person abroad are contained in Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2000. Both these Regulations came into force from 1.6.2000. The salient features of both these Regulations are analysed in this chapter. (For the latest Regulations please refer to the RBI.)

2. Opening, Holding And Maintaining A Resident Foreign Currency (RFC) Account

A person resident in India as per Regulation No. 5 of Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations, 2000, may open, hold, and maintain with an authorised dealer in India, a Foreign Currency Account, to be known as a Resident Foreign Currency (RFC) Account, out of foreign exchange—

  1. received as pension or any other superannuation or other monetary benefits from his employer outside India; or

  2. realised on conversion of the assets referred to in Section 6(4) of FEMA, and repatriated to India; or

  3. received or acquired as gift or inheritance from person resident outside India as referred in Section 6(4) of FEMA; or

  4. acquired as gift or inheritance from a person referred to in Section 9(c) of FEMA.

  5. received as proceeds of life insurance policy claims, etc. in foreign currency (w.e.f. 1-1-2004).

The funds in a RFC Account opened or held or maintained would be free from all restrictions regarding utilisation of foreign currency balances including any restriction on investment in any form, by whatever name, called, outside India. In some cases, a foreign currency account is also allowed to be maintained outside India by LIC or a shipping or airline company, etc.

NRI Tax Planning & Tax Saving

RFC Scheme came into force with effect from 7.9.1992. Citizens of India or persons of Indian origin who having been residents outside for a continuous period of less than one year and who become persons residents in India or on or after 18th April, 1992 are eligible for opening RFC accounts. Persons holding RIFEE permits or reconversion facility opting to open the RFC account are also eligible. The eligible assets which can be credited to the RFC account are foreign exchange assets acquired or held otherwise than in contravention of the FERA and FEMA by an eligible person, while he was the resident outside India (Non-resident) in the form of deposits in banks outside India, investments in foreign currency shares or securities or immovable properties situated outside India or investments in business, etc. outside India and include foreign exchange earnings through employment, through business or vocation, outside India taken up or commenced by such person while he was resident outside India. Any eligible person can open the RFC account with an authorised dealer. The application for this purpose has to be made in Form RFC and must be accompanied with the following documents:

  1. An attested copy of relevant pages of passport, giving the passport particulars, date of arrival in India and particulars of residence outside India;

  2. Documentary evidence to show the funds proposed to be credited to the account are eligible for the purpose, The RFC account can be opened in any permitted foreign currency.

All types of accounts, namely, current, saving, and fixed deposits, in joint accounts can be opened under this scheme. The rate of interest on the deposits under the scheme is left to the discretion of the authorised dealer. Normally, no loan or overdraft would be allowed either directly or indirectly against balances in RFC account.

3. Tax Haven For Returning Indians Via RFC Account

Resident Foreign Currency A/c is the best solution for all those NRIs who are now permanently coming back to India. The FCNR A/c as also NRE A/c of the Non-Resident Indian while coming back to India permanently should be immediately converted into Resident Foreign Currency A/c (RFC) to achieve the best investment planning.
As per para 5A a resident individual may open, hold and maintain a Resident Foreign Currency (Domestic) A/c regarding certain receipts and shall not bear any interest.

4. Exchange Earner’s Foreign Currency (EEFC) Account

It is provided by Regulation No. 4 of Foreign Exchange Management (Foreign Currency Account by a Person Resident in India) Regulations. 2000, that a person resident in India may open, hold and maintain with an authorised agent in India, a Foreign Currency Account to be known as Exchange Earner’s Foreign Currency (EEFC) Account, subject to the terms and conditions of this Scheme specified in the Schedule.

Thus, the earners of foreign exchange are allowed to retain upto 25% of the inward remittance in foreign currency in such EEFC accounts. However, in the case of hundred percent export-oriented units and units in export processing zones, software technology parks or electronic hardware technology parks, upto 100 per cent of foreign exchange is allowed to be credited to the EEFC accounts. Any other person resident in India is allowed to credit 50% to EEFC A/c out of the foreign exchange earnings. The exporters who are allowed by the RBI to open foreign currency account abroad, are not allowed to open EEFC accounts. Thus, the NRIs returning to India in particular and the other residents in India in general who are exporters, should remember the provisions regarding the EEFC and take advantage of the same. The interest earned by a resident on EEFC account balances is, however, not exempt from income tax.

5. Direct Investment Outside India By A Returning NRI Or A Resident In India

Under the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2000 notified by Reserve Bank of India vide Notification No.FEMA 19/2000-RB dated 3.5.2000, various Regulations have been made to regulate acquisition and transfer of a foreign security by a person resident in India. These have been amended from time. Thus, an NRI returning to India and becoming a resident in India in particular should know the regulations regarding investment in Overseas Joint Ventures and Wholly Owned Subsidiaries as also investment in shares and securities issued outside India. As mentioned in Chapter 16, topic 3 an NRE account has to be converted to RFC account by a returning NRI. Hence, this account plays an important role in addition what is mentioned in RFC account above. It has also been mentioned in Regulation No.4 about the general permission being granted to the residents including the returning NRIs for purchase/acquisition of securities out of funds held in RFC accounts; issued as bonus shares on existing holding of foreign currency shares and sale of shares/securities so acquired. Likewise, general permission has been granted to a person resident in India for purchase of securities out of their foreign currency resources outside India as also for sale of securities so acquired. For this purpose, the Regulations have been divided into two parts, namely Part I dealing with direct investment outside India and Part II dealing with investment in foreign securities other than by way of direct investment. Part I of these Regulations contains various limits for direct investment abroad. Part II contains various regulations regarding investment in foreign securities other than by way of direct investment upto various limits as given in said regulations in detail. It has also been laid down in th regulations in Part 2 that the Reserve Bank would consider application from residents for acquisition of foreign securities in various cases like acquisition of qualification shares for becoming a director of a company outside India, purchase of foreign securities under ADRs/GDRs Stock Option Scheme, by resident employees of Indian Software Companies including working directors provided purchase consideration does not exceed US Dollars 50,000 or its equivalent in a block of five calendar years. The Reserve Bank vide its Circular No.3 (A.P DIR Series) dated 22nd June, 2000 issued guidelines regarding Indian Direct Investment by Joint Ventures JV/Wholly owned Subsidiaries (WOS) outside India. Reference may also be made to A.P. (Dir series)(2002-2003) Circular No. 107 dated 19-6-2003. For the latest provisions and relaxations, please refer to the latest RB! Regulations.

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