The possession and retention of foreign currency in India are regulated under the Foreign Exchange Management Act (FEMA), 1999, and the Reserve Bank of India (RBI) guidelines. The purpose of these regulations is to monitor and manage the inflow and outflow of foreign currency in the country to ensure stability in the financial system and maintain a healthy foreign exchange market.

1. Possession of Foreign Currency by Residents in India

Under FEMA and the RBI’s regulations, Indian residents are allowed to hold foreign currency in certain circumstances. Here’s how it works:

1. Foreign Currency Notes:
   • Residents in India (Indian citizens or entities) are generally not permitted to hold or possess foreign currency notes beyond a certain limit.
   • As per the current RBI guidelines, Indian residents can hold foreign currency notes for personal use up to an aggregate value of USD 2,500 (or its equivalent in other currencies).
   • This limit applies to foreign currency notes, coins, and currency notes brought into India by travelers or acquired through banking channels.
2. Foreign Currency Accounts:
   • Residents are not allowed to open foreign currency accounts, except in certain circumstances.
   • Foreign currency accounts (such as foreign currency savings accounts or current accounts) are generally only allowed for non-residents (i.e., individuals or entities that are resident outside India).
3. Acceptance of Foreign Currency:
   • Indian residents may accept foreign currency for specific transactions, such as foreign remittances or foreign currency payments for goods and services.
   • Authorized Dealers (ADs), such as banks or financial institutions authorized by the RBI, are permitted to accept foreign currency payments for exports, imports, and foreign investments.

2. Retention of Foreign Currency by Residents in India

The retention of foreign currency by residents is subject to regulations that govern the movement of money across borders. Indian residents can retain foreign currency under specific conditions:

1. Tourist Remittances:
   • Residents who travel abroad for personal purposes (tourists) can carry foreign currency for their trip. Upon returning, they can retain the foreign currency up to the limit of USD 2,500. The excess foreign currency must be surrendered to an authorized dealer or bank.
2. Gifts from Foreign Nationals:
   • Indian residents may retain foreign currency if they have received it as a gift from a non-resident (subject to the RBI’s guidelines).
   • Such foreign currency gifts should comply with the conditions laid out under FEMA, and the resident must declare it if it exceeds certain limits.
3. Foreign Currency in NRO/NRE Accounts:
   • Non-Resident Indians (NRIs) are permitted to hold and retain foreign currency in their Non-Resident Ordinary (NRO) and Non-Resident External (NRE) accounts in India.
   • Funds held in such accounts can be in the form of foreign currency and can be retained without any restriction on the source of funds (for NRO) or repatriation (for NRE).
4. Earnings from Foreign Sources:
   • Indian residents who have income from foreign sources (such as overseas employment or business earnings) can hold and retain foreign currency in India.
   • However, residents must ensure that the foreign currency earned is converted to INR through authorized dealers or banks, unless it is kept in foreign currency accounts (NRE or NRO) for NRIs.

3. Restrictions on Possession and Retention of Foreign Currency

While Indian residents can possess and retain foreign currency under certain conditions, there are restrictions that apply to ensure that such transactions comply with FEMA and prevent money laundering, tax evasion, and other illegal activities:

1. Excessive Foreign Currency:
   • Indian residents are prohibited from possessing foreign currency exceeding the limit of USD 2,500 unless the excess amount is declared to the customs authorities upon arrival in India. The foreign currency should then be deposited with a bank or an authorized dealer.
2. Hoarding Foreign Currency:
   • The act of hoarding foreign currency, especially by converting significant amounts of Indian rupees into foreign currency without a valid reason, is illegal. Such transactions must be done only through authorized banks and foreign exchange dealers.
3. Income Tax and Reporting Requirements:
   • Any substantial foreign currency receipts or earnings (such as from remittances or business transactions) must be reported to the relevant authorities, such as Income Tax Department or RBI.
   • Residents must comply with the Income Tax Act of India by reporting any foreign earnings as foreign income, which may be subject to tax.
4. Foreign Currency in Personal Transactions:
   • While holding and using foreign currency for personal use is permitted, any foreign currency transactions outside the permitted limits or for activities that violate FEMA (such as illegal trading, or foreign exchange market manipulation) are prohibited.

4. Use of Foreign Currency in India

In India, foreign currency can be used for certain types of transactions, but Indian Rupees (INR) are the only legal tender for most domestic transactions. However, foreign currency can be used or exchanged in the following situations:

1. Foreign Currency for International Transactions:
   • For international trade, exports, imports, and travel, Indian residents and entities can use foreign currency or open foreign currency accounts for transactions.
2. Exchange of Foreign Currency:
   • Authorized Dealers (such as commercial banks, exchange bureaus) allow Indian residents to exchange foreign currency for Indian Rupees (INR), provided they meet the RBI regulations.
   • Indian residents can purchase foreign currency for travel or for remittance purposes from banks or authorized dealers.

5. Foreign Currency for Non-Residents in India

Non-Resident Indians (NRIs) and Foreign Nationals residing in India have more relaxed rules regarding the possession and retention of foreign currency:

1. Foreign Currency Accounts:
   • NRI Accounts: NRIs can open NRE (Non-Resident External) or NRO (Non-Resident Ordinary) accounts in foreign currency or INR. Foreign currency held in such accounts is freely transferable between India and abroad.
   • FCNR (B) Accounts: NRIs can hold foreign currency in a Foreign Currency Non-Resident (FCNR) Account, which allows deposits in foreign currency, offering better returns than regular savings accounts.
2. Repatriation of Funds:
   • Non-residents are permitted to repatriate funds held in foreign currency in NRE accounts back to their home country. The funds are not subject to taxes when repatriated.

Conclusion

In summary, Indian residents can hold foreign currency for specific purposes under regulated conditions. The limits are generally set at USD 2,500 for personal use. However, they are not allowed to hold foreign currency beyond the permitted limits or engage in foreign currency transactions outside the authorized channels. Non-residents, on the other hand, enjoy more flexibility with holding and retaining foreign currency through NRI accounts, FCNR accounts, and the repatriation of funds. It is crucial for both residents and non-residents to comply with the FEMA guidelines to avoid any penalties or legal issues.