What Is FEMA and Why It Matters for NRIs

FEMA, or the Foreign Exchange Management Act, regulates all cross border financial transactions. FEMA decides how you can receive income in India, which investments you can make, how you can repatriate money and what property you are allowed to own.

Every major financial action you take as an NRI has a FEMA implication. Whether you receive rent, invest in mutual funds, sell property or send money abroad, FEMA rules apply.

A Brief History of FEMA

FEMA was introduced in 1999 to replace the older FERA law. FERA was strict and treated violations as criminal offences. FEMA shifted the approach to a management based system, making cross border transactions smoother while still maintaining regulatory oversight. The Reserve Bank of India manages and updates FEMA regulations.

How FEMA Shapes Your Financial Life

Once you become an NRI, FEMA impacts everything from the bank accounts you operate to the documents you must maintain. It governs remittances, investments, property ownership and repatriation. Every bank, investment platform and property registrar follows FEMA rules to verify your status.

FEMA Definition of NRI

Under FEMA, you are considered an NRI if you stay outside India for more than 182 days in a financial year. This is not the same as the Income Tax Act which has multiple tests. Once your FEMA status changes, you must convert resident accounts into NRE or NRO accounts.

You can read a detailed explanation in the guide on Who Is an NRI.

Bank Accounts You Can Use Under FEMA

FEMA permits NRIs to operate only three types of accounts in India. Each account has different repatriation rules and tax treatments.

NRE Account

An NRE account is meant for your foreign income. You deposit money earned abroad which is converted into Indian rupees. The entire balance, including interest, is fully repatriable. Interest is tax free in India. NRE accounts are ideal for salary earned abroad, foreign savings and long term investments.

NRO Account

An NRO account is used to manage your income from India. This includes rent, dividends, pension and any other India based income. Interest earned on an NRO account is taxable. Repatriation from NRO accounts is allowed up to one million dollars per financial year after paying applicable taxes and filing Form 15CA and Form 15CB.

FCNR Account

An FCNR account is a fixed deposit held in a foreign currency such as USD, GBP or EUR. The deposit remains in foreign currency which protects you from rupee depreciation. Both principal and interest are fully repatriable and interest is tax free.

To understand the differences in detail, you can refer to NRE vs NRO vs FCNR.

How Much You Can Remit Under FEMA Rules

FEMA defines clear limits for sending money from India to abroad and vice versa.

Outward Remittances from India

If you remit money from an NRE or FCNR account, there is no repatriation limit. You can transfer any amount. If you remit from an NRO account, the repatriation limit is one million dollars per financial year. This limit applies to rental income, dividends, property sale proceeds and other India based income.

You must submit:

• Form 15CA
• Form 15CB certified by a chartered accountant
• Proof of taxes paid
• Sale deed or supporting documents for asset based remittances

You can read a complete guide on repatriation here: NRI Repatriation of Funds.

Inward Remittances to India

There is no upper limit for sending money to India for most purposes. Banks require a purpose code for record keeping. If you return to India and become a resident, your remittances fall under the Liberalised Remittance Scheme with a limit of 250,000 dollars per year.

TCS on Remittances

Tax Collected at Source applies only on resident outward remittances above Rs. 7 lakhs. As long as you remain an NRI, TCS usually does not apply to you. If you become a resident again, TCS applies based on the purpose of the remittance.

To understand taxes clearly, refer to How to File NRI Tax.

Investments Allowed Under FEMA

FEMA clearly defines which investments you can and cannot make in India.

Permitted Investments for NRIs

You can invest in:

• Indian stocks through the Portfolio Investment Scheme
• Mutual funds in both repatriable and non repatriable mode
• Government bonds and corporate bonds
• Residential and commercial properties
• Business investments through foreign direct investment routes

You can explore a full list in NRI Investment Options in India.

If you want to start investing in mutual funds as an NRI, refer to - How NRIs Can Invest in Indian Mutual Funds.

Restricted and Prohibited Investments

You cannot invest in:

• Public Provident Fund for new accounts
• National Savings Certificates
• Kisan Vikas Patra
• Post office schemes
• Chit funds and Nidhi companies
• Agricultural or plantation land

Investment Limits and Approvals

In listed companies, you can hold up to 5 percent of the paid up capital. All NRIs combined can hold up to 10 percent which can be increased to 24 percent with company approval. Certain sectors require government approval before you invest.

Property Rules for NRIs Under FEMA

Property ownership is one of the most important areas governed by FEMA. These rules help you understand what you can buy and how you can repatriate money when you sell.

You can read more about  How NRIs can Buy and Sell Property in India.

Properties You Can Purchase

You can purchase:

• Any number of residential properties
• Any number of commercial properties
• Plots for construction
• Property jointly with another NRI or a resident Indian

Properties You Cannot Purchase

You are not allowed to buy:

• Agricultural land
• Plantation properties
• Farmhouses

However, you may inherit these types of properties or receive them as gifts. A detailed explanation is available in - Can NRIs Buy Agricultural Land in India.

Funding a Property Purchase

You can fund property purchases using:

• NRE account
• NRO account
• FCNR account
• Direct remittance from abroad
• Home loans from Indian banks

Cash payments and foreign currency notes are not allowed.

Selling Property and Repatriating Money

You can repatriate sale proceeds of up to two residential properties. The repatriation amount cannot exceed the original foreign currency investment in that property. If the funds are routed through an NRO account, the one million dollar annual limit applies.

To understand capital gains taxes, you can refer to - Tax on Capital Gains for NRIs.

Gifts and Inheritances Under FEMA

Gifts and inheritances follow specific FEMA and tax rules for NRIs.

Receiving Gifts

If you receive a gift from a relative, it is tax free regardless of the amount. Gifts from non relatives are tax free up to Rs. 50,000. Gifts received on marriage are fully exempt.

Giving Gifts

You can gift up to 250,000 dollars per financial year under the Liberalised Remittance Scheme. You cannot give cash gifts above Rs. 2 lakhs. You can gift property or securities to eligible family members.

Inheritances

You can inherit any type of property including agricultural land. There is no repatriation limit for inherited financial assets. Property related inheritances may require tax clearance and supporting documentation.

Penalties for FEMA Violations

FEMA violations can lead to significant penalties. You should stay compliant to avoid unnecessary issues.

How Penalties Are Calculated

Penalties include:

• Up to three times the amount involved in quantifiable violations
• Up to Rs. 2 lakhs for non quantifiable violations
• Rs. 5,000 per day for continuing violations

Common violations include:

• Continuing to use a resident savings account
• Buying prohibited property
• Exceeding repatriation limits
• Missing documentation for transactions

Compounding FEMA Violations

Compounding allows you to settle violations by paying a fee. It avoids prosecution and is usually quicker than adjudication. Compounding fees generally range between 15 percent and 25 percent based on the nature of the violation.

Difference Between NRI, PIO and OCI Under FEMA

The terms NRI, PIO and OCI often create confusion, but FEMA defines how each category can own property and invest.

NRI

An NRI is an Indian citizen who stays outside India for more than 182 days in a financial year. NRIs can buy residential and commercial properties but cannot buy agricultural land.

PIO

Remains valid historically, but PIO status has merged with OCI since 2015. Existing PIO cards must be converted to OCI before December 31, 2025.

OCI

OCI cardholders have similar property and investment rights as NRIs except agricultural land restrictions. They also do not have voting rights.

For clarity, refer to - Who Is an NRI.

How You Can Stay Compliant With FEMA

Staying compliant is easy if you take the right actions on time.

Actions to Take Within 90 Days of Becoming an NRI

• Convert your resident savings accounts to NRE or NRO
• Update KYC with your overseas address
• Update your PAN and bank records
• Inform mutual fund and stock broker platforms
• Close resident only investment accounts if required

Documents You Should Maintain

• Updated bank statements
• Proof of taxes paid
• Copies of Form 15CA and Form 15CB
• Property purchase and sale paperwork
• Chartered accountant certificates for large remittances
• Source of funds records for high value deposits

Annual Compliance Checks

• File your income tax return even if your income is below the taxable limit
• Review repatriation utilisation
• Update nominations
• Verify TDS deductions
• Maintain records of gifts and inheritances

If you need help with tax filing, refer - How to File NRI Tax.

Red Flags That Trigger Scrutiny

• Large unexplained deposits
• Multiple small transfers that look structured
• Using resident accounts after becoming NRI
• Round trip transfers between India and abroad

Missing KYC updates

Conclusion

FEMA compliance is essential if you want to manage your Indian finances confidently. Convert your accounts once you become an NRI, use NRE for foreign income and NRO for Indian income, maintain documentation and stay within repatriation limits. Regular reviews help you avoid penalties and stay fully compliant. If you want a simpler way to track all your NRI investments, you can manage everything securely with InvestMates.