Borrowing and lending transactions between NRIs (non-resident Indians) and residents are subject to regulations under the Foreign Exchange Management Act (FEMA). These regulations strictly govern such financial dealings to ensure compliance with the law. Any violation of these regulations could result in penalties that may go up to three times the amount involved in the violation.
In this article, I address frequently asked questions (FAQs) regarding the rules and restrictions governing borrowing and lending between residents and non-residents.
1. Can an NRI or OCI borrow in INR from a resident Indian?
An Indian-resident individual is allowed to lend money in INR to an NRI or OCI relative. "Relative" in this context refers to the spouse, parents, son, son's wife, daughter, daughter's husband, brother, and sister of the resident. However, it is important to note that residents cannot lend money to NRIs or OCIs who are not relatives, as this would be considered a violation of FEMA regulations.
2. Can a person who is not an NRI or OCI borrow money from a resident?
According to FEMA regulations, only NRIs and OCIs are allowed to borrow money from residents. As a result, individuals who are not NRIs or OCIs are not eligible to borrow money from residents.
3. What is the mode of lending money to NRI or OCI relatives?
The permissible mode of lending money to an NRI or OCI relative is through a crossed check or electronic transfer. Cash transactions are not allowed. The loan amount should be credited to the NRO (non-resident ordinary) account of the NRI or OCI relative.
4. What is the maximum amount of the loan?
The maximum amount of the loan that can be given to an NRI or OCI relative should fall within the overall limit under the Liberalized Remittance Scheme (LRS) of USD 250,000 per financial year available for a resident individual. It is essential for the lender to ensure that the loan amount, along with other permissible remittances under LRS, remains within the LRS limit during the financial year.
5. Can he collect interest on this loan given to an NRI or OCI relative?
No, interest cannot be charged on the loan given to an NRI or OCI relative. The loan should be interest-free and have a minimum maturity period of one year. Early repayment of the loan within one year is not allowed.
6. What are the restrictions for the utilization of loans by NRIs and OCIs?
The NRI or OCI who receives the loan must ensure that it is not utilized for any activities in which investment by NRIs or OCIs is prohibited. Such prohibited activities include engaging in chit fund businesses, nidhi companies, agricultural and plantation activities, and real estate activities (mere trading in property). The term real estate excludes the construction of residential and commercial premises, roads, and bridges.
7. How can NRI repay the loan to the resident?
The NRI can repay the loan to the resident through the following methods:
- Inward remittances: Repayments can be made through normal banking channels from a country outside India.
- From NRO/NRE/FCNR account: The NRI can use funds from their NRO (Non-Resident Ordinary), NRE (Non-Resident External), or FCNR (Foreign Currency Non-Resident) accounts to repay the loan.
- Sale proceeds: The NRI can use the sale proceeds of shares, securities, or immovable properties against which the loan was initially granted.
It is important to note that the NRI should not explore any other methods or ways to repay the loan and should strictly adhere to these approved repayment channels.
8. Can the NRI/OCI repatriate the loan outside India?
The NRI/OCI is not permitted to repatriate the borrowed money outside India. The loan amount must be utilized only within India and cannot be taken outside the country.
9. Can a resident lend money to an NRI or OCI relative in foreign currency by remitting money outside India under LRS?
No, a resident individual cannot lend money in foreign currency to any NRI or OCI, whether they are relatives or not, by remitting money outside India under the Liberalized Remittance Scheme (LRS). The lending should be done only in Indian rupees and not in foreign currency.
Borrowing from NRI/OCI by the residents
10. Can a resident borrow money from NRI or OCI relatives?
According to the current regulations, an individual resident in India may be allowed to borrow money from NRI or OCI relatives, subject to the terms and conditions specified by the Reserve Bank of India (RBI). However, as of now, the RBI has not prescribed any specific terms and conditions for such borrowing transactions. Due to the absence of clear guidelines, it becomes challenging to determine definitively whether borrowing from NRI or OCI relatives is permissible or not.
11. Can a resident borrow money from an NRI or OCI who is not a relative to such a resident?
A resident individual cannot borrow money from an NRI or OCI who is not a relative to them. The borrowing is only permissible from NRI or OCI relatives, as defined under the applicable regulations. Transactions involving borrowing from non-relatives would be considered a violation of FEMA regulations and are not allowed.
12. Can a resident borrow money from a person who is not a NRI or OCI?
A resident individual cannot borrow money from a person who is not an NRI or OCI. FEMA regulations restrict borrowing from non-resident individuals who are not classified as NRIs or OCIs. Therefore, borrowing from such individuals is not permitted under the current rules.
13. Can a business entity in India borrow money from an NRI or OCI?
Business entities in India, such as partnership firms and LLPs, are not allowed to borrow money from NRIs or OCIs. However, an Indian company can borrow money from NRI/OCI individuals who are foreign equity holders, meaning those who hold a direct equity stake of at least 25% in the company. The company cannot borrow money from any other NRIs or OCIs who do not meet these criteria of being foreign equity holders.
Continuation of the loan in the event of a change in the residential status:
15. In the event that a loan is granted by a resident individual to another resident individual and the lender subsequently becomes a non-resident, how can he repay the loan?
If a loan was initially granted by a resident individual to another resident individual, and later the lender becomes a non-resident, the repayment of the loan by the resident borrower should be made by crediting the amount to the Non-Resident Ordinary (NRO) account of the non-resident lender. This allows for a seamless and compliant repayment process, ensuring that the loan is settled in accordance with the relevant regulations.
Conclusion
In conclusion, borrowing and lending transactions between residents and non-residents are subject to strict regulations under the Foreign Exchange Management Act (FEMA). It is essential for individuals and business entities to be well-informed about the specific provisions and restrictions outlined by the Reserve Bank of India (RBI) to ensure compliance with the law. Any violation of these regulations may lead to penalties, emphasizing the importance of adhering to the prescribed rules. Being aware of the FEMA guidelines will facilitate smooth and lawful borrowing and lending practices between residents and non-residents, fostering financial integrity and compliance within the framework of India's foreign exchange regulations.
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