FEMA Guidelines on Foreign Currency Accounts

Varun Hariharan

19 Jan, 2021

A resident Indian is allowed to maintain foreign exchange outside India. An individual must maintain foreign funds in a bank account. For this purpose, an individual is allowed to maintain different types of foreign currency accounts.

There are specific norms that an individual would have to comply with for maintaining foreign currency accounts. Non-compliance with the rules would attract strict penalties for not maintaining foreign currency accounts as per the requirement of the specific authority.

Regulation for Foreign Currency Accounts in India

The primary authority for foreign exchange transactions in India is the Reserve Bank of India (RBI). Apart from this, the Government of India (GOI) assists the RBI in bringing out new regulations for foreign exchange in India. The primary law governing foreign exchange in India is the Foreign Exchange Management Act, 1999. From time to time, the RBI brings out notifications and circulars amending foreign exchange regulations in India.

The GOI and RBI allow making laws on opening, holding, and maintaining foreign currency accounts by an individual in India.  The RBI and Government of India brought out the Foreign Exchange Management (Foreign Currency Account by a person in India) Regulations, 2000.  (2000 Regulations)

As per these regulations, an Individual is allowed to maintain foreign currency accounts in India. The latest amendment in the above regulation is the Foreign Exchange Management (Foreign Currency Account by a person in India^[1]) Regulations, 2015. (2015 Regulations)

Process of Carrying out Foreign Exchange Transactions

Under section 10 of the Foreign Exchange Management Act, 1999 the RBI provides guidelines to authorized dealers to carry out transactions related to foreign exchange in the country. Authorized dealers can carry out foreign exchange transactions on behalf of resident Indians.

What are Foreign Currency Accounts?

The RBI has allowed maintaining and opening foreign currency accounts as per the FEMA law. Foreign currency accounts operate like regular bank accounts. However, foreign currencies are maintained in these accounts. As per the 2015 regulations, any form of foreign currency can be held in the foreign currency account. However, currencies of Nepal and Bhutan cannot be maintained in this account.

Operation of Foreign Currency Account Regulations

As per the regulations, no individual can open and maintain foreign currency accounts. This is the general provision related to maintaining foreign currency accounts. However, an individual can maintain a foreign currency account if permission is taken from the RBI.

An individual has to make an application to the RBI for maintaining foreign currency accounts outside India. With the application, the individual has to provide the requisite documentation. After scrutinizing the application, the RBI will provide permission to open a foreign currency account. If the RBI refuses to open the bank account, they will provide reasons for refusal.

Opening an Exchange Earners Foreign Currency Account (EEFC)

Section 4 of the 2015 regulations allows an individual to open an Exchange Earners Foreign Currency Account (EEFC). This is allowed for a resident Indian. A resident Indian can open, hold, and maintain this form of account with an authorized dealer/authorized bank in India. An EEFC account permits the individual to hold multiple types of foreign currencies. This account is opened as per the EEFC Account Scheme.

Maintaining Foreign Currency Accounts such as the Resident Foreign Currency Account (RFC)

According to the requirements, a resident is allowed to open the resident foreign currency account. An individual can operate this form of account for maintaining foreign currencies in the account.

The following foreign exchange is allowed in this form of account:

• Any Foreign exchange received as a pension or any other form of superannuation from a foreign country. This will also include monetary benefits from the employer outside India. For example, if a person is working with a foreign bank, then he is entitled to receive a pension from the foreign bank, which would form part of the RFC account.
• Any form of foreign exchange realized from the conversion of any form of foreign assets, which is included under section 6(4) of the FEMA^[2]. The following assets would be covered under section 6(4) of the FEMA:
  • Investment or transfer in foreign currency;
  • Security or any form of property. This can include movable property and immovable property; and
  • Security or any form of immovable property which is acquired by the person when he is outside India.
• This would also apply to any form of gift or inheritance from a person outside India.
• Any form of foreign exchange or investment referred to under section 9(c) of the FEMA Act. This can be acquired as a gift or any form of investment. The following would come under section 9(c) of the FEMA Act:
  • The foreign exchange which is acquired by the individual before 08 July 1947.
  • Any form of income accruing outside India.

The above funds would be subject to approval from the RBI. The funds held outside India for the Resident Foreign Currency Account (RFC) should be free from any form of regulation and encumbrances. The investor is also allowed to invest outside India with the proceeds of the above funds.

Applicability of Foreign Currency Accounts for Shipping / Logistics and Airline Companies

As per section 6 of the regulation, a shipping or airline company can open a foreign currency account outside India. This would be required for business dealings within India and outside India. Either the airline or shipping company can open an account in India or its representative agent or officer is permitted to open foreign currency accounts.

The accounts opened by airline/ logistics companies are permitted if the company adheres to the following conditions:

• These accounts are meant to meet local administration expenses in India and outside India.
• All permissible credits go for the transaction related to the airline company.
• Any remittance which occurs inside India should happen through normal banking channels.

Foreign Currency Account: General Purposes

Foreign Currency Accounts can be opened and maintained under the following circumstances:

• Authorized Dealer/ Authorised Bank (Category-I)- Authorised Dealers/ Authorised Banks are allowed to open and maintain foreign currency accounts on behalf of the following:
  • Branch Office;
  • Representative Office; and
  • Correspondent Office.

These accounts are opened to carry out transactions that occur outside India. Such transactions are incidental for the bank.

• Banking company- A bank is allowed to open foreign currency accounts outside India. However, all transactions must happen through normal banking channels within the bank.
• Insurance Company- Insurance companies are allowed to open bank accounts outside India to conduct business outside India. Life Insurance Corporation and General Insurance Corporation have foreign accounts outside India. Permissible credits related to the policy amount would be allowed to be carried out through the foreign currency account. Apart from this, the insurance company would utilize this account to carry out daily business activities.
• Construction and Turnkey Projects- Companies and individuals that receive contracts related to construction are allowed to open foreign bank accounts. Companies and individuals under this scheme would be allowed to source engineering services outside India. For this purpose, a foreign account is allowed to be opened.
• Studying Abroad- An individual going outside India for studying is allowed to carry foreign exchange. Similarly, he is permitted to open a foreign currency account in a foreign bank. No approval would be required from the RBI to carry out this. However, the individual would have to repatriate the funds back to India on the completion of his studies.
• Fairs/ Exhibitions- An individual is allowed to open a bank account with a foreign bank if he intends to go on an exhibition or fair outside India. All the funds received from the sale of artifacts in the fair have to be repatriated to India within a month of completing the exhibition.

There is no permissible limit mentioned by the RBI for holding foreign currencies for the above purposes. Any amount can be held in the foreign currency account. However, the amount has to be allowed by the host countries governing laws.

Types of Foreign Currency Accounts

Foreign Currency Accounts are divided into the following:

The above three accounts are permissible, where the account holder is an individual. In all other cases, the current account or term deposit account is used for a foreign currency account.
 An individual can open a foreign currency account. Apart from this, a joint account can also be opened by two or more parties.

Can a foreign currency account be maintained after the death of the account holder?

A foreign currency account can be maintained in unforeseen circumstances, such as the account holder’s death. The account holder would have to nominate another individual outside India for this purpose. The funds will be transferred from the Authorised Dealer to the nominee as per the share or the entitlement of the nominee.

If the nominee is a resident Indian, he can use the funds in the account to meet the liabilities outside India. However, prior permission is required from the RBI for carrying out this procedure.

Duties of Authorised Banks / Authorised Dealers

Authorized Banks/ Authorised Dealers have the following duties to carry out for a foreign currency account:

• Remittances must be carried out through normal banking channels to meet the requirements.
• Authorized Banks have to comply with the directions issued by the RBI.
• Authorized Banks are required to submit a periodic return or statement regarding the compliance of the norms.

What are the permissible credits for a foreign currency account?

The following are permissible credits for a foreign currency account:

• Any form of foreign exchange earned from exports;
• Advance remittance received by the exporter for the export of such goods outside India;
• Any form of loan provided to foreign institutions;
• Proceeds of Divestment of American Depository Receipts and Global Depository Receipts;
• Any form of earnings that are calculated and measured as directors fees, consultancy fees, honorarium;
• Professional fee earned by a person in his respective individual capacity;
• Any form of interest earned from the account; and
• Any form of payment received by an Indian Start-up for the sale of software and start-up services to overseas subsidiaries.

What are the permissible debits for a foreign currency account?

The following are permissible debits for a foreign currency account:

• Any form of capital and current account transactions. These transactions must not have any regulatory requirements or approval from the RBI.
• Foreign Exchange Amount which is used for payment of customs duty.
• Payment for any form of goods purchases
• For any form of trade-related loans or advances

Resident individuals can open foreign accounts. The permissible accounts which can be opened by a resident individual are the EEFC account and the resident foreign currency account (RFC). The regulatory requirements for these accounts are different. Even the permissible debits and credits carried out for these forms of account are not similar.

Hence before opening any foreign currency account, the resident individual has to weigh the advantages and disadvantages for a particular account and choose the most beneficial account.

Conclusion

Also, read: Guide to the Types of NRI Bank Accounts in India.