Back To India? Your Essential Tax & FEMA Compliance Guide For A Smooth Transitio

1. Back To India? Your Essential Tax & FEMA Compliance Guide For A Smooth Transition Returning to India after years abroad is both an emotional and financial transition. One of the most critical aspects of this move is understanding how your income, assets, investments, and foreign holdings will be taxed once you move back to your native land. India’s taxation framework for returning NRIs is governed primarily by two key legislations – the Income Tax Act and the Foreign Exchange Management Act. Whether you have foreign investments, overseas bank accounts, property abroad, or global income streams, navigating these laws is essential to ensuring compliance and minimizing tax liabilities. This blog brings together a clear and professional understanding of both frameworks to help you have smooth transitions. Understanding Income Tax for returning NRIs Income tax is a direct tax and is levied on the personal income. It is the key source of revenue that the government uses to fund its activities and serve the public. The highest income tax rate was in 1973-74 @ 97.75%. The latest marginal rate is less than half the highest rate now at 39%, since FY 2023-24. The structure and governance of Income Tax in India

2. The levy is governed by the Indian Income Tax Act, 1961 and is being amended every year through the Finance Act (after approval of the annual budget). The Income Tax rules, Central Board of Direct Taxes (CBDT) circulars and notifications as well as various court decisions also affect the income tax laws in India. The CBDT provides essential inputs for policy making and planning for direct tax and is also responsible for the administration of the act through the department. The Income Tax Department is also responsible for enforcing Double Taxation Avoidance Agreements (DTAA) and deals with various aspects of international taxation including Transfer Pricing. The new Income Tax Bill 2025 A new Income Tax Bill 2025 is currently introduced in the Parliament that will replace the old act. While there may not be any major changes in the new Act, it simplifies the language and has better organization of the sections. For returning NRIs, this structural change aims to make tax interpretation easier, particularly in the areas of residency rules, foreign income reporting, taxability of overseas assets, and disclosure requirements. Clarity of language means greater transparency while planning your post-return financial life. FEMA and its role in Return to India Taxation The Foreign Exchange Management Act (FEMA) is India’s key framework governing foreign exchange transactions. It aims to simplify, regulate, and ensure smooth functioning of India’s external trade and payment systems. The scope and applicability of FEMA FEMA is an Act by the Parliament of India "to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India". FEMA was passed in the winter session of the Parliament in 1999 and was made effective from June 01, 2000 replacing FERA (Foreign Exchange Regulation Act). FEMA is a civil law, whose emphasis is on the management of foreign exchange and any violation is dealt through civil procedures. Here, the burden of proof is on the enforcement agency and not on the implicated person. FEMA extends to the whole of India. And, any transaction denominated in foreign currency by residents or any transaction in India by non- residents (whether in Indian rupees or in foreign currency) is within the purview of FEMA. The Act also applies to all branches, offices and agencies outside India

3. owned or controlled by a person resident in India. FEMA also applies to Indian branches or offices of foreign companies. The structure and administration of FEMA The overall structure of FEMA is covered by legislations, rules and regulations. While FEMA has only 49 sections, it empowers other ministries and/or regulating agencies to make rules, issue circulars or notifications. The FEMA includes, FEMA Act, Rules, notifications, circulars and directions issued by the Central Government, RBI, Enforcement Directorate as well as FDI Policy. FEMA envisages that RBI shall have a controlling role in the management of foreign exchange. Since RBI cannot directly handle foreign exchange transactions, it authorizes “Authorized Persons” to deal in foreign exchange as per the directions issued by RBI. Who are the Authorized Persons (APs) under FEMA? An Authorized Person (AP) means any person who is authorized by RBI to deal in foreign exchange or foreign securities and include an authorized dealer, money changer, off-shore banking unit or any other person. RBI issues directions to such authorized persons through AP (DIR) circulars. In simple terms, an Authorized Dealer means a bank or a bank branch. Three categories of authorized dealers and permitted activities for respective dealers are as follows: 1.Category I AD: All current and capital account transactions as per RBI directions 2.Category II AD: Specified non-trade related current account transactions and activities permitted to Full Fledged Money Changer 3.Category III AD: Transactions incidental to the foreign exchange While all nationalized, private and foreign banks are appointed as a Category I Authorized Dealer, all branches of the banks may not be Category I Authorized Dealers. It is important to know the category of the bank branch as it gives a good indication of the knowledge and experience of its employees in dealing with foreign exchange. For returning NRIs, this becomes crucial when converting NRE/NRO/FCNR accounts, repatriating assets abroad, managing remittances, or investing in India or abroad after return. Current vs capital account rules for returning NRIs FEMA manages foreign exchange based on whether a transaction is a capital account transaction or a current account transaction.

4. 1.Capital Account Transactions: A capital account transaction means a transaction involving foreign exchange for altering the assets or liabilities, transferring or issuing of securities, borrowing or lending, acquisition and/or transfer of immovable properties, and guarantees. These are significant for NRIs returning to India since most cross-border investments, property holdings, and loans fall under this category. 2.Current Account Transactions: A current account transaction means a transaction other than a capital account transaction, which specifically includes any payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business. It may also include payments due as interest on loans or net income from investments, expenses related to foreign travel/education/medical care, as well as remittances for living expenses of parents/spouse/children. 3.Key differences returning NRIs must understand: The definition of current and capital account transactions, while it is similar in both accounting and FEMA, the perspective is different. For example, Mr. Krishna from India imports machinery from Germany for $1,000,000 by making a payment. Thus, for Mr. Krishna it is a capital account transaction as it changes the assets of his company. However, under FEMA, it is a current account transaction as the payment in foreign exchange is already made and it does not create any foreign exchange asset or liability. However, if the purchase is financed by a foreign currency loan, it is considered as a capital account transaction under FEMA as the transaction creates a foreign exchange liability for making loan repayments in future. 4.Difference in permission rules: Current account transactions are generally permitted, unless specifically prohibited or require prior approval. In contrast, capital account transactions are generally prohibited, unless specifically permitted. For example, if Mr. Ram, an NRI from the USA wants to spend his money for traveling in India, it is a current account transaction and is allowed as it is not prohibited. However, if he wants to take a loan for a personal purpose, accepting a loan is a capital account transaction and is allowed because it is a specifically permitted transaction under FEMA. Debt and non-debt instruments The Ministry of Finance, Government of India has classified instruments issued under FEMA as debt and non-debt instruments and has notified the rules/

5. regulations in this regard on October 9, 2020 which supersedes earlier regulations. As a result, RBI becomes governing body for debt transactions like investment in government bonds, corporate bonds, borrowings by Indian firms through loans, etc. And, the central government becomes governing body for non-debt transactions like investment in equity of incorporated entities, capital participation in LLPs, acquisition and dealing immovable properties, contribution to trusts, investment in units of Alternative Investment Funds (AIFs) & equity oriented mutual funds, etc. RBI still holds the responsibility of monitoring the foreign exchange related to non-debt instruments. Income Tax vs FEMA: Which applies to returning NRIs? For returning Indians, understanding which act to use – Income Tax Act or FEMA is crucial, because both apply simultaneously but regulate different aspects of their financial lives. The Income Tax Act determines how your income is taxed in India and abroad, using the 182-day rule and residential categories such as Resident, Non-Resident, and Resident but Not Ordinarily Resident. It also mandates reporting of overseas assets through Schedule FA and influences NRE/NRO/FCNR accounts indirectly through tax treatment, while its investment rules focus on how earnings, gains, and losses are taxed. FEMA, on the other hand, regulates the movement and management of foreign exchange. It does not tax income but governs what a person resident in India can hold, send, bring, or invest across borders. FEMA directly controls NRE/NRO/FCNR accounts, sets eligibility and limits for foreign investments, defines strict residency rules, and requires RBI compliance for overseas assets. In essence, the Income Tax Act guides taxation, while FEMA governs permissible cross-border financial activities. Returning NRIs often face confusion because residency status under Income Tax and FEMA differs, leading to different rules for taxation, investments, bank accounts, and asset ownership. Understanding which law applies to which activity is essential for smooth financial planning and compliance. If you want expert help in managing your finances as you move back, ExpertNRI’s return to India tax consultants specialize in navigating both Income Tax and FEMA. Their tailored guidance ensures full compliance while helping you optimize taxes, manage foreign assets, and transition your financial life into India smoothly. With the right guidance, your move back to India can be financially seamless, compliant, and strategically planned!

6. Resource: Back To India? Your Essential Tax & FEMA Compliance Guide For A Smooth Transition