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Banks question transfer of funds by NRIs via LLP route

Several non-resident Indians (NRIs) moving money out of the country are having a run-in with the banks.

The use of limited liability partnership (LLP) vehicles by NRIs to repatriate funds overseas has come under the scrutiny of large domestic banks where these individuals have their non-resident ordinary (NRO) account. NRIs manage their deposits and receive dividend, rent and interest earned in India in NRO accounts.

In recent months, at least three large private sector banks have blocked the transfer of funds by NRIs received as share of profit from LLPs where they were partners, two senior tax professionals familiar with the development told ET.

LLPs, a hybrid corporate structure, offers the benefit of a limited liability of a company and the flexibility of a partnership. While an LLP pays tax on earnings, the profit distributed is not taxed in the hands of the partners. Also, LLPs have comparatively fewer legal and procedural requirements. Many NRIs became partners in LLPs in what now appears to be a strategy to overcome limits on fund repatriation.

According to the exchange control rules, while current account receipts like dividend and rent can be freely transferred abroad without any limit, there is a cap of $1 million a year on the repatriation of capital receipts like proceeds from sale of stocks and properties.

A partnership in an LLP came handy as an NRI’s share of profits distributed by the entity was considered current income and could therefore be repatriated irrespective of the quantum of funds. However, many banks are now insisting that such profit shares received by an NRI partner from LLPs should be considered as capital account and are blocking repatriation beyond $1 million.

“While the $1 million limit doesn’t apply to current income, banks are now looking beyond the declarations provided by the NRIs to ascertain that the current income is of a bona fide nature,” said Moin Ladha, partner at Khaitan & Co.

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