Of the 700-odd Indians having foreign bank accounts, not all can be deemed to be operating these illegally.
An Indian resident is allowed to open an foreign bank account under the Liberalised Remittance Scheme for undertaking current or capital account transactions.
They can remit money from India - only up to a specified limit within a financial year - as prescribed under the Foreign Exchange Management Act (Fema) of 1999.
Tax experts say at the time of opening an account, it is advisable for such persons to first approach an authorised dealer, appointed under Reserve Bank of India (RBI) guidelines.
"This would establish their intent that they will be using this account only for money that will be remitted under the Liberalised Remittance Scheme," says Kishore Joshi, senior associate from corporate law firm Nishith Desai Associates.
Moreover, the account holder has to meet the know-your-customer compliance requirements of the foreign bank. Any deviation from the prescribed format of opening an overseas account can raise the red flag with banking and tax authorities.
Further, once the bank account is opened, credit to such an account has to be from the resident's Indian account through normal banking channels.
Under Fema regulations, there is no restriction on an Indian resident to get a loan from a foreign bank in which he has an account. However, the account holder is not allowed to provide any guarantee to the foreign lender bank, without prior RBI approval.
Tax experts say any amount received in the foreign bank account, in the form of any fees or any other income for any services rendered from India, has to be brought back to the country within a specified period of time.
Joshi warns holders of foreign bank account – opened under Liberalised Remittance Scheme - to avoid using the funds for investing back in India.
Separately, the Resident Indian should avoid utilizing the monies in the said foreign bank account opened under LRS, for investing back into India.
“While there is no specific prohibition under the exchange control laws for round tripping, the RBI and the Ministry of Finance have been expressing their concerns on the round tripping transactions,” he adds.
As an exception, a person resident in India, who was a NRI earlier, and had a foreign bank account opened then, can continue to hold and maintain it even after returning to India. FEMA provisions allow such a person resident in India to use foreign bank accounts for any purpose without any monetary limits.
When it comes to income tax treatment, an ordinary resident is taxed on their worldwide income - wherever arising or received or earned on overseas as well as Indian bank account.
According to Parizad Sirwalla, Partner and Head of Global Mobility Services Tax, KPMG in India, Indian residents are required to make a disclosure in the tax return form in respect of their assets - including bank accounts, investments, properties, interest in trusts - situated outside India.
They are also subject to wealth tax on specified assets - that includes urban land, motor car, more than one house, which is not rented for more than 300 days, jewellery bullion, among other things - situated outside, and in India, she adds.
So, those residents with overseas bank account violating any provisions of FEMA or the income-tax laws are the ones may need to get their act into place, to be on the right side of the law.