FEMA Compliance for Foreign Investments by Indians: 2026 Guide

Written by the AccounTX Editorial Team

India’s relationship with global capital markets has changed fundamentally over the past decade. Investment in foreign shares through platforms like Vested, INDmoney, and Winvesta has grown sharply. Indian employees at multinational companies routinely receive and exercise ESOPs in foreign parent entities. Startup founders incorporate US LLCs or Delaware C-Corporations and hold equity in them as individual shareholders. And a growing class of Indian HNIs diversifies wealth across US equities, Singapore funds, and European instruments.

All of this is legal. All of it is permitted under India’s foreign exchange framework. But none of it is compliance-free.

Every Indian resident who invests in a foreign company – whether by remitting funds to buy shares, exercising ESOPs granted by a foreign employer, receiving inherited foreign shares, or incorporating a foreign entity – is subject to FEMA (the Foreign Exchange Management Act, 1999) and its associated rules, RBI guidelines, and Income Tax reporting requirements. The consequences of getting this wrong are not minor administrative inconveniences. The Black Money Act, 2015 imposes a fixed penalty of Rs. 10 lakh per undisclosed foreign asset per year. Serious FEMA contraventions attract penalties of up to three times the amount involved.

This guide covers the complete FEMA compliance framework for Indian resident individuals investing in foreign companies – the two primary routes (LRS and ODI), the TCS implications updated for FY2026-27, the mandatory Schedule FA disclosure in your ITR, the tax treatment of dividends and capital gains, the special rules for ESOPs and gifted shares, and the penalties that apply when compliance is neglected.

⚠ Important distinction: This guide is for Indian resident individuals investing in foreign companies. If you are an Indian company (corporate entity) making an overseas investment, the relevant framework is different – see our detailed guide on FEMA ODI compliance for Indian companies in 2026.

Table of Contents

The Regulatory Framework: FEMA, RBI, and the Overseas Investment Rules 2022

Three regulatory layers govern foreign investment by Indian residents:

The Foreign Exchange Management Act, 1999 (FEMA)

FEMA is India’s primary law governing all cross-border financial transactions. Unlike its predecessor, FERA (the Foreign Exchange Regulation Act), FEMA treats most foreign exchange transactions as civil matters rather than criminal offences – shifting the framework from prohibitive to permissive with regulation. Under FEMA, capital account transactions (including investments in foreign companies) require either general permission under RBI regulations or specific RBI approval.

RBI Master Directions and Circulars

The Reserve Bank of India issues Master Directions and circulars that specify exactly how FEMA provisions operate in practice – including the LRS framework (RBI Master Direction No. FED 7/2015-16), the ODI framework, and permissible transaction types. The RBI’s Centralised Information Management System (CIMS), operational since January 2026, now tracks PAN-wise aggregate LRS remittances in real time across all Authorised Dealer banks.

FEMA Overseas Investment Rules, 2022

In August 2022, the RBI and Ministry of Finance comprehensively overhauled India’s overseas investment framework through the FEMA (Overseas Investment) Rules, 2022, the FEMA (Overseas Investment) Regulations, 2022, and accompanying Master Directions. These rules replaced the old ODI and OPI frameworks with a cleaner two-track system – Overseas Direct Investment (ODI) and Overseas Portfolio Investment (OPI) – which now clearly defines what type of investment falls into which regulatory category.

Income Tax Act, 2025 (Effective April 1, 2026)

India’s new Income Tax Act 2025, which replaced the Income Tax Act 1961 from April 1, 2026, governs the taxation of income from foreign assets and the TCS (Tax Collected at Source) framework for outward remittances. The core principles remain the same as under the old Act, but section numbers and certain form references have changed. Throughout this guide, references to TCS and income tax provisions reflect the current 2026 position.

Two Routes for Indian Residents Investing in Foreign Companies: LRS vs ODI

Understanding which regulatory route applies to your specific investment is the foundational compliance question. Getting this wrong – attempting to use LRS for an investment that legally requires the ODI route, or vice versa – is itself a FEMA contravention.

Factor	LRS (Liberalised Remittance Scheme)	ODI (Overseas Direct Investment)
Who can use it	All resident individuals including minors (with guardian). NOT available to companies, HUFs, trusts, or partnership firms.	Indian entities for direct investments
Annual limit	USD 250,000 per individual per financial year (all purposes combined)	No fixed cap – but total financial commitment (equity + loans + guarantees) must not exceed 400% of net worth for corporate investors
RBI approval needed	No – general permission. Bank files Form A2 on your behalf.	Automatic Route for most investments – but specific forms and ongoing reporting required
Type of investment	Listed foreign shares, unlisted foreign shares (less than 10% stake), foreign mutual funds, ETFs, debt instruments, property abroad, gifts, education, medical treatment	Setting up a foreign company (WOS or JV), acquiring 10% or more equity in a foreign unlisted company, expanding an existing overseas direct investment
Ongoing reporting	Schedule FA in annual ITR	Annual Performance Report (APR) + Schedule FA in ITR + Form ODI filings through AD bank
Most common use case	Buying Apple/Google shares, investing in US ETFs, remitting initial capital to a foreign company you are founding	Incorporating a US LLC or Delaware C-Corp, acquiring a majority stake in a foreign startup

For most Indian individual investors – those buying listed foreign shares, investing in US index funds, or holding minority stakes in foreign startups – LRS is the applicable route. For Indian entrepreneurs incorporating foreign companies or taking significant equity positions in foreign unlisted entities, the ODI framework applies alongside or instead of LRS.

The Liberalised Remittance Scheme (LRS): Rules, Limits, and Process in 2026

Who Is Eligible for LRS?

LRS is available exclusively to resident individuals as defined under FEMA – persons who have resided in India for more than 182 days during the preceding financial year. This includes:

All Indian citizens who are FEMA residents (regardless of whether they hold an NRI status for income tax purposes)
Foreign nationals residing in India who qualify as FEMA residents
Minors – provided Form A2 is countersigned by their natural guardian

LRS is not available to:

Non-Resident Indians (NRIs) – who use NRE/NRO/FCNR repatriation mechanisms instead
Companies, corporates, and LLPs
Hindu Undivided Families (HUFs)
Trusts and associations
Partnership firms

The USD 250,000 Annual Limit – How It Works

The LRS limit is USD 250,000 per resident individual per financial year (April 1 to March 31). This is a cumulative cap covering ALL permissible LRS purposes combined – investment, travel, education, medical treatment, gifts, and maintenance of relatives abroad. Key operating principles:

All sources combined: Remittances through multiple banks, multiple transactions, and multiple purposes all count towards the same individual’s USD 250,000 annual limit. The RBI’s CIMS system tracks this PAN-wise in real time across all Authorised Dealer banks.
No carry forward: The limit resets on April 1 each year. Any unused portion of the USD 250,000 from a previous financial year expires and cannot be carried forward or added to the next year’s limit.
No limit on number of transactions: You can make any number of LRS remittances during the year, provided the total does not exceed USD 250,000.
Family pooling is restricted: For capital account transactions (investments), clubbing of limits across family members is not permitted unless all family members are co-owners of the investment.

What Can Indian Residents Invest In Under LRS?

The following investment types are permitted under LRS:

Equity shares of foreign listed companies – Buying shares of companies listed on foreign stock exchanges (NYSE, NASDAQ, LSE, etc.) directly or through fractional investment platforms
Equity shares of foreign unlisted companies – Investing in a foreign startup, a joint venture, or any unlisted foreign company –
Foreign mutual funds and ETFs – Including US index funds, international ETFs, and country-specific funds
Foreign debt instruments – Bonds, debentures, and other debt securities issued by foreign entities
Setting up a Wholly Owned Subsidiary (WOS) or Joint Venture (JV) abroad – Using LRS to remit initial share capital when founding a foreign company as an individual, subject to compliance with the ODI framework for the resulting equity position
Foreign real estate – Purchasing property abroad, within the USD 250,000 limit

What Is NOT Permitted Under LRS?

The following are explicitly prohibited under LRS:

Margin trading or speculative trading on foreign exchanges
Purchase of lottery tickets, sweepstakes tickets, or participation in gambling
Investment in companies engaged in real estate trading or agricultural or plantation activities
Remittances to FATF-identified non-cooperative countries or territories
Remittances to individuals or entities identified as terrorism risks by the RBI
Round-tripping: Using LRS to invest in a foreign company that then reinvests the funds back into India as Foreign Direct Investment. This is explicitly prohibited and actively investigated by the Enforcement Directorate.
Proposed from June 2025: The RBI proposed restrictions on using LRS funds for offshore time deposits or lock-in instruments – verify current status with your Authorised Dealer bank before placing foreign fixed deposits

The LRS Process – How to Remit Funds

Choose your Authorised Dealer (AD) bank – Any scheduled commercial bank in India with RBI authorisation to deal in foreign exchange
Submit Form A2 – The standard RBI form declaring the purpose of the remittance, the amount, and the recipient details
Provide PAN – Mandatory for all LRS transactions. No exceptions.
Provide supporting documents – The specific documents required depend on the investment purpose: brokerage account details for foreign shares, company incorporation documents for foreign company equity, etc.
TCS is collected by the bank – The bank deducts TCS at the applicable rate at the time of remittance and deposits it with the Income Tax Department on your behalf
Retain records – Keep copies of Form A2, remittance confirmations, and all supporting documents for a minimum of 7 years

TCS on LRS Remittances: Updated Rules for FY2026-27

Tax Collected at Source (TCS) on LRS remittances has been one of the most actively changing compliance areas. The table below reflects the position for FY2026-27 following Budget 2025 changes:

Category of LRS Remittance	TCS Rate (FY2026-27)	Threshold
All LRS remittances (any purpose) – below threshold	0% (Nil)	First Rs. 10 lakh per financial year
Education remittance – funded through loan from specified financial institution	0% (Nil)	No threshold – exempt regardless of amount
Education remittance – self-funded	2%	Above Rs. 10 lakh
Medical treatment remittance	2%	Above Rs. 10 lakh
Overseas tour packages	2%	Above Rs. 10 lakh
Investment in foreign shares / mutual funds / equity	20%	Above Rs. 10 lakh
Other general LRS purposes	20%	Above Rs. 10 lakh

⚠ Budget 2025 key change: The TCS-free threshold was raised from Rs. 7 lakh to Rs. 10 lakh per financial year, effective FY2026-27. This means no TCS is collected on the first Rs. 10 lakh of LRS remittances in a year, regardless of purpose. The previous 20% TCS rate that applied to certain investment remittances above Rs. 7 lakh has been revised downward. Always confirm the applicable rate with your Authorised Dealer bank before remitting, as specific rates may be updated by RBI notification.

Critical to understand about TCS: TCS is NOT a final tax. It is an advance collection mechanism. The TCS collected by your bank is credited to your PAN and appears in Form 26AS on the Income Tax portal. You can claim this as a credit against your total income tax liability when filing your annual ITR. If the TCS collected exceeds your actual tax liability, you are entitled to a refund. Always account for TCS in your cash flow planning before making large foreign remittances, as it creates a temporary liquidity impact even though it is ultimately creditable.

Need clarity on LRS compliance, TCS planning, or Schedule FA disclosures for your foreign investments?
AccounTX’s International Taxation practice helps Indian residents navigate FEMA compliance, ITR foreign asset reporting, and cross-border tax planning. Book a free consultation with our team today.

Overseas Direct Investment (ODI) for Individuals: When LRS Is Not Enough

When an Indian individual’s foreign investment constitutes a direct investment – typically when you are incorporating a foreign company and becoming its primary owner, or acquiring 10% or more equity in a foreign unlisted company – the investment falls under the Overseas Direct Investment framework rather than (or in addition to) OPI.

When ODI Applies for Individual Investors

You are incorporating a US LLC, Singapore Pte Ltd, or any other foreign company as the sole or majority shareholder
You are investing in a foreign unlisted company and your equity stake is 10% or more of its total paid-up equity capital
You are extending a loan to or providing a guarantee for a foreign company you have a direct investment relationship with
You are investing in a foreign company alongside another Indian promoter (joint venture) with combined stake of 10% or more

How ODI Works for Individuals

Under the FEMA Overseas Investment Rules 2022, most ODI by individuals falls under the Automatic Route – meaning no prior RBI approval is required, but specific procedures must be followed:

Remittance of funds through your Authorised Dealer bank with appropriate forms and purpose declaration
Filing of Form ODI through the AD bank within 30 days of each equity investment
Maintenance of a Register of Overseas Investments
Submission of Annual Performance Report (APR) to the RBI through your AD bank within six months of the overseas entity’s financial year end
Disclosure in Schedule FA of your annual ITR

Important ODI Restrictions for Individuals

You cannot invest in a foreign entity that is engaged in real estate trading or agricultural or plantation activities
Round-tripping structures are explicitly prohibited
The foreign entity in which you invest cannot, in turn, invest back into India in a structure that would circumvent FDI regulations
All remittances for ODI purposes made through LRS are subject to the USD 250,000 annual cap – larger initial investments require seeking specific RBI approval or using the corporate ODI route through an Indian company

For Indian entrepreneurs who have founded a US company, our step-by-step guide on how to register a company in the USA from India covers the practical incorporation process, while this guide covers the India-side FEMA compliance that must run in parallel.

Special Situations: ESOPs, Gifted Shares, and Inherited Foreign Assets

ESOPs from a Foreign Parent Company

Indian resident employees of MNC subsidiaries frequently receive ESOPs (Employee Stock Options) granted by their foreign parent entity. FEMA compliance for ESOPs involves several stages:

At the Time of Grant

No FEMA compliance action is required when ESOPs are merely granted. A grant is a contractual right to purchase shares in future – not a current investment or remittance.

At the Time of Exercise

When you exercise an ESOP, you pay the exercise price to the foreign company and receive shares in return. If the exercise involves an actual cash remittance from India to pay the exercise price, that remittance counts as an LRS transaction and uses up your USD 250,000 limit proportionately. If the exercise price is met through a cashless exercise arrangement (where shares are simultaneously sold to cover the exercise cost and you receive only the net gain), no separate LRS remittance occurs.

The value of the ESOP benefit at exercise (market price minus exercise price at the date of exercise) is taxable as a perquisite under the head “Salary” and must be reflected in your Form 16 by your employer.

Holding the Shares

Once shares are acquired through ESOP exercise, they are foreign assets. They must be disclosed in Schedule FA of your annual ITR for every year you hold them. Any dividends received are taxable as income in India (subject to DTAA relief).

At the Time of Sale

When you sell the foreign ESOP shares, sale proceeds must generally be repatriated to India within 180 days of sale. Capital gains are computed as the difference between the sale price and the fair market value at the date of exercise (the value that was already taxed as salary income). Depending on the holding period from the date of exercise, gains may be classified as short-term or long-term capital gains and taxed at the applicable rates – subject to any applicable DTAA provisions.

Gifted Foreign Shares

If you receive foreign shares as a gift – from a foreign employer, a foreign friend, or a non-resident relative – the receipt itself does not require an LRS remittance. However:

The gift is a foreign asset and must be disclosed in Schedule FA from the year of receipt
If the gift is from an employer, the fair market value of the shares at the date of gift may be taxable as a perquisite
If the gift is from a non-relative and exceeds Rs. 50,000 in a financial year, it is taxable as income under the head “Income from Other Sources”
Gifts from close relatives (as defined under the Income Tax Act) are exempt from gift tax regardless of amount

Inherited Foreign Assets

Indian residents can inherit foreign shares, bank accounts, or property from deceased relatives – including NRI relatives. Inherited foreign assets do not require an LRS remittance and can be held legally. However, they must be disclosed in Schedule FA annually. Proceeds from selling inherited foreign assets should be repatriated to India through normal banking channels. The cost of acquisition for capital gains purposes on inherited assets is the fair market value as of the date of inheritance (or the original cost in certain cases – consult a tax adviser for the specific computation).

Mandatory Reporting Requirements for Foreign Investments

Schedule FA in Your Annual Income Tax Return – Non-Negotiable

Schedule FA (Foreign Assets) is the most critical annual compliance requirement for Indian residents holding any foreign investment. It is a mandatory schedule in the ITR that requires complete disclosure of all foreign assets held at any time during the financial year.

Who must file Schedule FA: Any Indian resident who holds foreign assets – including foreign bank accounts, foreign equity shares (listed or unlisted), foreign mutual funds, interests in foreign entities, foreign real estate, or any other foreign financial asset – must disclose these in Schedule FA of their annual ITR. This applies even if the assets generated no income during the year.

Which ITR form: Schedule FA is included in ITR-2, ITR-3, and ITR-4. If you currently file ITR-1 (Sahaj) and hold foreign assets, you must switch to ITR-2 or the appropriate form.

What must be disclosed in Schedule FA:

Foreign bank accounts – name of bank, account number, country, account opening date, peak balance, closing balance
Foreign equity and debt (shares, debentures, bonds) – name of entity, country, date of acquisition, amount invested, income derived
Foreign mutual funds or similar instruments
Foreign immovable property – location, date of acquisition, total investment
Financial interest in any foreign entity – nature of interest, name and address of entity, total investment
Signing authority in a foreign bank account (even if you are not the account holder)
Trust or beneficial interest in a foreign trust

Penalty for non-disclosure: Under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, failure to disclose a foreign asset in Schedule FA attracts a penalty of Rs. 10 lakh per undisclosed asset per assessment year. This penalty is in addition to any tax and interest that may be due on unreported foreign income. The Rs. 10 lakh penalty applies even if the foreign asset was acquired entirely from legally remitted funds – non-disclosure itself is the violation, regardless of the legitimacy of the underlying investment.

Annual Performance Report (APR) – For ODI Investments

If you have made a direct investment in a foreign company under the ODI route (including incorporating a foreign company), you must submit an Annual Performance Report (APR) to the RBI through your Authorised Dealer bank. The APR covers financial details of the overseas entity for the year ended and must be filed by 31st December of the succeding year. Failure to file APR attracts Late Submission Fees – currently Rs. 7,500 plus 0.025% of the investment amount per year of delay.

Automatic Reporting by Banks to the Income Tax Department

Authorised Dealer banks that process LRS remittances report these transactions to the Income Tax Department through their Statement of Financial Transactions (SFT) filing. This means the Income Tax Department receives information about your foreign remittances directly from your bank – regardless of whether you declare them correctly in your ITR. Mismatches between bank-reported LRS data and ITR disclosures are a common trigger for income tax notices.

Tax Implications in India: Dividends, Capital Gains, and DTAA Relief

Dividends from Foreign Companies

Dividends received from foreign companies are taxable in India as “Income from Other Sources” – at your applicable income tax slab rate. If the foreign company has already withheld tax on the dividend in the source country, you can claim a Foreign Tax Credit (FTC) in India to avoid double taxation, subject to the applicable Double Tax Avoidance Agreement (DTAA) between India and that country.

For US dividends, the India-USA DTAA typically limits US withholding tax to 15-25% depending on the shareholding. You can credit this against your Indian tax liability on the same dividend income. Form 67 must be filed with the Indian Income Tax Department before the due date of your ITR to claim foreign tax credit.

Capital Gains on Foreign Shares

Gains from sale of foreign shares are taxable in India as capital gains. The classification depends on the holding period:

Short-Term Capital Gains (STCG): Foreign shares held for 24 months or less are classified as short-term. STCG is taxable at your applicable income tax slab rate.
Long-Term Capital Gains (LTCG): Foreign shares held for more than 24 months are classified as long-term. LTCG on foreign shares is taxable at 12.5% (without indexation benefit), as per the Finance Act 2024 changes applicable from July 23, 2024 onwards.

Note that the beneficial STCG rate of 20% and LTCG rate of 12.5% that apply to listed Indian equity shares do not extend to foreign shares – foreign shares are treated as unlisted securities for Indian capital gains tax purposes regardless of whether they are listed on a foreign exchange.

Claiming DTAA Relief

India has signed DTAAs with over 90 countries including the USA, UK, Singapore, Australia, and the UAE. If your foreign investment income has been taxed in the source country, you can claim relief under the applicable DTAA to avoid paying the same tax twice.

Key requirements for claiming DTAA relief:

Obtain a Tax Residency Certificate (TRC) confirming you are an Indian tax resident in the relevant year
Obtain documentary evidence of tax paid in the foreign country (tax payment certificate, withholding tax certificate, or equivalent)
File Form 67 with the Indian Income Tax Department claiming the foreign tax credit – this must be filed on or before the due date of your ITR
The foreign tax credit is limited to the Indian tax payable on the same income – you cannot claim a credit exceeding the Indian tax

For those managing US tax compliance alongside Indian obligations, our guide on outsourcing US tax preparation to India covers the US filing requirements for Indian-owned US entities.

TCS Credit Against Tax Liability

The TCS collected by your Authorised Dealer bank on LRS remittances is credited to your PAN and is fully adjustable against your total income tax liability for the year. It appears in Form 26AS on the Income Tax portal. When filing your ITR, enter the TCS amount in the relevant schedule to claim credit. If the TCS credit exceeds your tax liability, it is refunded directly to your bank account – typically processed within 30 to 60 days of ITR filing and verification.

Common FEMA Compliance Mistakes Indian Residents Make When Investing Abroad

Not disclosing foreign assets in Schedule FA – the most common and costly mistake. Many Indian residents who invest in US ETFs through platforms like Vested or INDmoney, or who receive ESOPs from a foreign employer, do not realise that these are foreign assets requiring annual Schedule FA disclosure. The Rs. 10 lakh per asset per year penalty under the Black Money Act applies regardless of the value of the foreign asset and regardless of whether any income was earned from it.
Exceeding the USD 250,000 LRS limit without realising it. Multiple remittances throughout the year – for an overseas property deposit, a foreign investment, a child’s education fees, and family maintenance – can collectively exceed USD 250,000 without any single transaction appearing large. The RBI’s CIMS system now tracks this in real time across all banks. Exceeding the limit is a FEMA contravention attracting civil penalties of up to three times the excess amount.
Round-tripping. Using LRS to invest in a foreign company that then brings the same funds back into India as FDI is one of the most actively investigated FEMA violations. The RBI and Enforcement Directorate specifically scrutinise circular fund flows. Any structure where personal LRS funds go abroad and return to India as FDI will trigger investigation.
Not filing Form 67 to claim foreign tax credit. Indian residents who pay withholding tax on dividends in the USA, UK, or other DTAA countries routinely fail to file Form 67 before their ITR due date, causing them to permanently lose the DTAA credit for that year. Form 67 must be filed before the ITR due date – not after.
Not repatriating ESOP sale proceeds within 180 days. When foreign ESOP shares are sold, proceeds must generally be repatriated to India within 180 days of sale. Retaining proceeds in a foreign brokerage account beyond this period is a FEMA violation.
Treating TCS as a final tax and not claiming the credit. Many taxpayers who remit large sums for foreign investment pay significant TCS amounts and do not claim these as credits in their ITR – effectively overpaying tax that is legally refundable. TCS appears in Form 26AS and is fully creditable.
Not filing Annual Performance Reports (APR) for ODI investments. Indian residents who have incorporated foreign companies – US LLCs, Singapore Pte Ltds, UK Ltds – often file the initial ODI forms but neglect the annual APR obligation. Late APR filings attract Late Submission Fees that accumulate over time and can become substantial.
Filing ITR-1 while holding foreign assets. ITR-1 (Sahaj) does not contain Schedule FA and is not the appropriate form for individuals with foreign assets. Filing ITR-1 when you hold foreign shares, a foreign bank account, or any other foreign asset is not a valid disclosure – it can be treated as non-disclosure under the Black Money Act.

Penalties for Non-Compliance: What Indian Residents Risk

FEMA violations involving foreign investments by individuals attract penalties under two separate legal frameworks – FEMA itself and the Black Money Act, 2015:

Under FEMA (Section 13)

Type of Contravention	Penalty
Any FEMA violation (general)	Up to three times the amount involved, or Rs. 2 lakh where the sum cannot be quantified
Continuing contravention	Additional penalty of up to Rs. 5,000 per day for each day the contravention continues
Exceeding LRS limit	Up to three times the excess amount remitted
Failure to repatriate proceeds	Up to three times the amount not repatriated
Round-tripping	Civil penalty + possible ED investigation and compounding proceedings

Under the Black Money (Undisclosed Foreign Income and Assets) Act, 2015

Violation	Penalty
Failure to disclose foreign asset in Schedule FA	Rs. 10 lakh per asset per assessment year – regardless of asset value
Undisclosed foreign income or asset	Tax at flat 30% + penalty of 90% of the tax = effective 57% of asset/income value
Willful attempt to evade tax on foreign income	Prosecution – imprisonment of 3 to 10 years plus fine

The severity of the Black Money Act penalties – particularly the Rs. 10 lakh fixed penalty per undisclosed asset – means that even a small foreign brokerage account or a handful of ESOP shares not disclosed in Schedule FA can attract penalties vastly disproportionate to the value of the asset itself. Compliance is not optional.

Frequently Asked Questions: FEMA Compliance for Indian Residents Investing in Foreign Companies

Can Indian residents invest in foreign companies?

Yes. Indian residents can legally invest in foreign companies under FEMA through the Liberalised Remittance Scheme (LRS). The LRS allows up to USD 250,000 per financial year per individual for permitted investment and other purposes. Both routes require documentation through an Authorised Dealer bank and mandatory annual disclosure in Schedule FA of the ITR.

What is the LRS limit for investing in foreign companies in 2026?

The LRS limit is USD 250,000 per resident individual per financial year (April to March). This is a cumulative limit covering all LRS purposes combined – including investment, travel, education, gifts, and medical treatment. The limit has not changed since 2015. All LRS transactions across all banks are tracked PAN-wise through the RBI’s CIMS system, which has been operational since January 2026.

What TCS applies on LRS remittances for foreign investment in FY2026-27?

Following Budget 2025 changes effective FY2026-27, the TCS-free threshold increased from Rs. 7 lakh to Rs. 10 lakh. No TCS is collected on the first Rs. 10 lakh of total LRS remittances per year. For investment remittances above Rs. 10 lakh, TCS applies at the applicable rate. TCS is fully creditable against your income tax liability in your annual ITR and is refundable if it exceeds your tax due.

What is Schedule FA in ITR and is it mandatory?

Schedule FA is a mandatory schedule in ITR-2, ITR-3, and ITR-4 requiring Indian residents to disclose all foreign assets held at any time during the financial year – including foreign shares, bank accounts, mutual funds, real estate, and interests in foreign entities. Non-disclosure of any foreign asset attracts a penalty of Rs. 10 lakh per asset per assessment year under the Black Money Act, 2015. Filing ITR-1 when you hold foreign assets is not a valid disclosure.

What is the difference between LRS and ODI for investing in foreign companies?

LRS is the general remittance route for individual residents, covering portfolio investments in foreign listed and unlisted companies, with a USD 250,000 annual cap and no separate RBI filing. ODI applies when the investment constitutes a direct investment – typically setting up a foreign company or acquiring 10% or more equity in a foreign unlisted company – requiring specific ODI forms through your AD bank and annual APR filing. Both require Schedule FA disclosure in the ITR.

Do ESOPs from a foreign parent company require FEMA compliance?

Yes. At exercise, any cash remittance for the exercise price counts as an LRS transaction. The shares acquired are foreign assets requiring Schedule FA disclosure annually. At sale, proceeds must generally be repatriated to India within 180 days. The ESOP benefit at exercise is taxable as a salary perquisite. Capital gains at sale are taxable in India – short-term if held under 24 months, long-term at 12.5% if held longer.

What are the penalties for FEMA non-compliance when investing in foreign companies?

FEMA Section 13 penalties reach up to three times the amount involved in the contravention, plus Rs. 5,000 per day for continuing violations. The Black Money Act, 2015 imposes a fixed Rs. 10 lakh penalty per undisclosed foreign asset per assessment year – independent of the asset’s value. Undisclosed foreign income and assets face a 57% effective charge (30% tax + 90% penalty on the tax). Willful evasion can lead to prosecution and imprisonment of 3 to 10 years.

Is it mandatory to repatriate dividends and sale proceeds from foreign shares to India?

For portfolio investments under LRS, dividend and sale proceeds can generally be retained in the foreign brokerage account. For direct investments under ODI, sale proceeds must generally be repatriated within 90 days of receipt. The income (dividends, capital gains) remains taxable in India regardless of whether proceeds are repatriated, and must be declared in your ITR with applicable DTAA relief claimed through Form 67.

Compliance Is Not Optional – But It Is Manageable

The FEMA compliance framework for Indian residents investing in foreign companies is more comprehensive than most investors realise – and the consequences of neglect are more severe than most expect. The Rs. 10 lakh per asset per year penalty under the Black Money Act has no minimum asset value threshold. A foreign brokerage account with USD 500 in it, not disclosed in Schedule FA, theoretically attracts the same penalty as an undisclosed USD 5 million shareholding.

But none of this should be a deterrent to legitimate foreign investment. Every aspect of FEMA compliance for individual investors is entirely manageable with the right awareness, the right documentation practices, and the right professional support. The LRS framework is designed to be accessible. The Schedule FA disclosure, once understood, is a straightforward annual exercise. The TCS mechanism, properly planned for, creates no net tax cost. And the ODI framework – for those founding or investing substantially in foreign companies – has been significantly simplified by the 2022 reforms.

What matters is that compliance begins from the first investment – not retroactively when a notice arrives. The window to regularise past non-compliance through the RBI’s compounding process exists, but it is far better to be correct from the start.

AccounTX’s International Taxation practice helps Indian residents navigate the full spectrum of FEMA and income tax compliance for foreign investments – from LRS remittance structuring and TCS planning, to Schedule FA preparation, ESOP tax optimisation, DTAA relief claims, and Annual Performance Report filings for ODI investments.

Schedule a consultation with AccounTX today. Whether you are just beginning your first foreign investment or are already holding foreign assets that need proper compliance review, our team will guide you through exactly what is required – and what is at risk if left unaddressed.

About the Author

Satish Sarawagi is a Partner at AccounTX with over a decade of experience advising Indian entrepreneurs on cross-border company formation, international taxation, and multi-jurisdiction compliance across the USA, Singapore, Australia, the UK, and the UAE. He leads AccounTX’s Global Desk practice and has guided 100+ Indian founders through the Singapore Pte Ltd formation and compliance process. Connect on LinkedIn.