Repatriation

An NRI can invest in India easily enough. Getting the money back out again is the part that needs planning.

That taking-out is repatriation. The workbook calls it the key issue in NRI investment.

The rule turns on one question, and it is not about the investment. It is about where the money came from in the first place.

If the source of funds was foreign currency, the proceeds can be freely taken outside the country. They are repatriable.

If the source was Indian rupees, they are not. The reason the workbook gives is that the rupee is not fully convertible on the capital account, so RBI norms do not permit rupee investments to be freely converted and taken out in foreign currency.

Because the answer depends on the source, the source has to be identified when the investment is made, not when the money is wanted. The bank account the investment was routed through is what decides it.

One more rule follows from all this. Investments made from the two sources cannot be clubbed together. They have to be kept apart from the beginning.

The principle (section 17.5). Repatriation norms vary depending upon the source of the funds from which the original investment was made. An NRI can earn income in rupees from India, or in foreign currency from another country.

• Source is foreign currency — the proceeds can be freely taken outside the country, that is, they are repatriable.
• Source is Indian rupees — the proceeds are non-repatriable.
• Investments made from these two sources cannot be clubbed together.

Why. Because the rupee is not fully convertible on the capital account, RBI norms do not permit investment in Indian rupees to be freely converted to other world currencies and taken out in foreign currency.

How the source is identified. The bank account through which the investment is routed is used to determine the source of funds, so the source has to be identified at the time of making the investment. NRI investors have to give a declaration in the application form about the type of account the investment was made from, and indicate whether it is on a repatriation basis.

The account-by-account position.

Two categories that escape the source test entirely.

1. Income. All incomes earned in India on investments are freely repatriable, irrespective of the source of funds used to make the investments, provided taxes as per Indian laws have been paid. The workbook's list of such income: interest on bonds and bank accounts, rental income, dividends from shares and mutual funds.
2. Sale proceeds of capital assets. Income in the form of sale proceeds of capital assets such as property, land, shares, bonds and mutual funds held in India is repatriable to the extent of funds remitted from abroad for buying those capital assets.

Read those two together and the structure becomes clear. What you earn comes out freely once taxed. What you invested comes out only to the extent it went in as foreign currency.

Who can modify the rules. The workbook notes that the rules and regulations pertaining to repatriation can be modified by the Reserve Bank of India.

Where repatriability is recorded operationally. An NRI must open separate demat accounts for holding repatriable and non-repatriable securities, and must mention the type as NRI and the sub-type as Repatriable or Non-Repatriable in the account opening form. For joint demat accounts, ownership of the holding is determined by the first holder, so even where other joint holders reside in India, sale proceeds can be repatriated if the first holder is permitted to repatriate funds. On the PINS side an NRI may hold one NRE (PIS) account for investment on repatriation basis and one NRO (PIS) account for investment on non-repatriation basis at a given point of time.

Mr Menon is an NRI in Dubai. Over a year he makes two investments of Rs 30,00,000 each.

Investment 1 is funded by remitting dirhams into his NRE account and buying equity mutual funds.

Investment 2 is funded from his NRO account, out of rent he collects on a flat in Kochi.

Four years later both are worth Rs 48,00,000, a gain of Rs 18,00,000 each. He wants to take everything to Dubai.

So the Rs 48,00,000 from investment 1 goes out in full. The Rs 48,00,000 from investment 2 is well inside USD 1 million — at assumed Rs 83 to the dollar that cap is about Rs 8.3 crore — so it goes out too, but it consumes about Rs 48 lakh of his annual NRO allowance and the cap is per financial year across all such remittances.

Now the trap the workbook warns about. Suppose he had held both in a single folio and a single demat account, contributing from whichever account had a balance. He could not now show which rupees came from where. Investments made from the two sources cannot be clubbed together, and the bank account routing the investment is what determines the source. The remedy is not available after the fact; it had to be two folios and, as the workbook requires, two demat accounts — one repatriable and one non-repatriable.

And the income limb. Separately, the Kochi flat earns Rs 3,60,000 of rent a year and his bond portfolio pays Rs 1,20,000 of interest. Both are income earned in India, so both are freely repatriable irrespective of the source of funds, provided Indian taxes have been paid. He does not need an NRE account to send his rent abroad. He needs a tax receipt.

The capital asset limb. He also sells the Kochi flat for Rs 1,10,00,000. He had remitted Rs 45,00,000 from Dubai to buy it. Sale proceeds of a capital asset are repatriable to the extent of funds remitted from abroad for buying it — so Rs 45,00,000 rides on that limb, and the balance falls back to the USD 1 million NRO route.

Chapter 17 (Operational Aspects of Investment Management), section 17.5 (Account Opening Process for Non-Residents), which the workbook opens by calling repatriation of investment proceeds the key issue in NRI investment. Expect the USD 1 Million per financial year NRO limit as a direct recall question, a question on which account gives unlimited repatriation — NRE, FCNR or a draft on a foreign bank with an FIRC — and a conceptual question on why rupee investments are non-repatriable, where the answer is that the rupee is not fully convertible on the capital account.

• USD 1 Million per financial year is the NRO limit, and it is the figure most often asked. NRE, FCNR and a foreign-bank draft with an FIRC have no limit.
• The source of funds decides repatriability, not the investment. The same mutual fund is repatriable from one account and not from another.
• Income is different from capital. All income earned in India on investments is freely repatriable irrespective of the source, provided Indian taxes are paid.
• Sale proceeds of capital assets are repatriable only to the extent of funds remitted from abroad to buy them — not the whole sale value, and not the gain.
• The two sources cannot be clubbed. Separate folios and separate demat accounts for repatriable and non-repatriable holdings.
• The source must be identified when the investment is made, through the bank account it is routed from and a declaration in the application form. It cannot be decided later.
• For a joint demat account, the first holder governs. Proceeds can be repatriated where the first holder is permitted to, even if a joint holder resides in India.
• RBI can change these rules. An option presenting the limits as statutory and fixed is wrong.
• Non-repatriable does not mean blocked. The money is available in India; what is restricted is converting it and taking it out.