Foreign Direct Investment in India: Routes, Caps, and Reporting

Foreign direct investment in India is regulated by the Reserve Bank of India and the Department for Promotion of Industry and Internal Trade, and most sectors are open to 100% foreign ownership without prior government approval. FDI is defined as an investment through equity instruments by a person resident outside India into an unlisted Indian company, or an investment representing 10% or more of the post-issue paid-up equity capital of a listed Indian company.¹ Whether you need approval before investing, how much you can own, how you must price the shares, and what you have to file afterwards all depend on the sector, the instrument, and where the investor is based.

The Two Entry Routes

Investment flows into India through one of two routes. Under the Automatic Route, neither the foreign investor nor the Indian company needs prior clearance from the government or the RBI.² The shares are issued, the money moves, and the reporting is done after the fact. Most industrial sectors sit here.

Under the Government Route, the foreign entity must get approval from the relevant administrative ministry before any capital changes hands.² Applications go through the Foreign Investment Facilitation Portal at fifp.gov.in, which routes each proposal to the appropriate ministry and tracks the decision.

Investors From Countries Sharing a Land Border

One rule cuts across every sector. Entities and citizens of countries that share a land border with India can invest only through the Government Route, even where the sector would otherwise be automatic. Under Press Note 2 of the 2026 Series, this covers China, Pakistan, Bangladesh, Myanmar, Nepal, Bhutan, and Afghanistan.³

The restriction also catches transfers of beneficial ownership. If an existing or future FDI transaction results in beneficial ownership shifting to a citizen or entity of a land-border country, that transfer needs prior government approval too.³ Layered corporate structures cannot be used to route around the screening.

Where Foreign Investment Is Not Allowed

Several sectors are closed to FDI entirely, and no approval process can open them:

Lottery businesses, whether government-run, private, or online.
Gambling and betting, including casinos in all formats.
Chit funds and Nidhi companies.
Real estate business and construction of farmhouses.
Trading in Transferable Development Rights.
Manufacture of cigars, cigarettes, and tobacco substitutes.
Atomic energy.
Railway operations, except specifically permitted segments.

The real estate prohibition is narrower than it looks. “Real estate business” does not include the development of townships, construction of residential or commercial buildings, roads, or bridges, and it does not cover investment in Real Estate Investment Trusts registered under SEBI regulations.⁴ Foreign capital in Indian real estate development is common through these channels. What is barred is dealing in land and buildings as a speculative business.

Sector Caps You Are Most Likely to Hit

Outside the prohibited list, each sector has its own ownership ceiling. Manufacturing and software development sit at 100% under the automatic route. The sectors below are the ones that most often catch investors off guard.

Insurance

Insurance now permits up to 100% foreign investment, raised from the previous 74% cap through the Insurance Amendment Act passed in 2025.⁵ The chairperson, managing director, or chief executive officer of an insurance company must be an Indian citizen. Foreign reinsurers benefit from reduced net owned fund requirements under the amended rules.

Defense

Defense manufacturing is tiered. New license applicants can receive up to 74% foreign ownership automatically; existing license holders are limited to 49% automatic. Anything above these thresholds needs government approval, typically granted only when the investor brings modern technology not otherwise available in India.

Print, Digital, and Broadcast Media

Print media and digital news platforms are capped at 26%, and every rupee requires government approval. Television news channels sit at 49%.

E-Commerce

E-commerce splits sharply into two models. Marketplace platforms that connect buyers and sellers can receive 100% FDI under the automatic route. Inventory-based e-commerce, where the company owns the goods it sells, does not permit FDI at all.⁶

The boundary is policed aggressively. A marketplace is deemed to control inventory if more than 25% of a vendor’s purchases on the platform come from the marketplace entity or its group companies. No entity with equity participation from the marketplace can sell products on the same platform.⁶ Warehousing, logistics, and payment collection are allowed as support services; crossing into inventory ownership puts the FDI at risk.

Multi-Brand Retail

Multi-brand retail allows up to 51% FDI through the government route with substantial conditions attached. The investor must commit a minimum of $100 million, with at least half of that first tranche directed to back-end infrastructure such as cold chains, warehousing, and processing facilities.⁷ At least 30% of manufactured or processed goods purchased must be sourced from Indian micro, small, and medium-sized businesses.

What Counts as an FDI Instrument

Only three instruments qualify as foreign direct investment: equity shares, fully and mandatorily convertible debentures, and fully and mandatorily convertible preference shares. The word that matters is “mandatorily.” Optionally or partially convertible debentures do not count as FDI and instead fall under the External Commercial Borrowings framework. The same applies to non-convertible preference shares.⁸ Foreign Currency Convertible Bonds and Depository Receipts are also treated as FDI. Investors who use non-qualifying instruments risk having the transaction reclassified, which creates compliance problems later.

How the Shares Have to Be Priced

India does not let the parties freely negotiate the share price. For listed companies issuing fresh shares to a non-resident, the price must follow SEBI guidelines. For unlisted companies, the price cannot be lower than the fair market value determined by a SEBI-registered merchant banker or a chartered accountant using the Discounted Free Cash Flow method.⁹

Transfers of existing shares work the same way. When a resident sells to a non-resident, the price cannot fall below fair value for unlisted companies. When a non-resident sells to a resident, the price cannot exceed fair value. The floor-and-ceiling framework prevents both undervaluation of Indian sellers and overvaluation that could facilitate round-tripping of money. Valuation errors are one of the most common compliance failures, and regulators look at these numbers closely.

Reporting the Investment

Every FDI transaction generates paperwork that the Indian company is responsible for filing. When the company issues new shares to a non-resident, it reports the allotment on Form FC-GPR.¹⁰ When existing shares transfer between a resident and a non-resident, the form is FC-TRS. Both are filed through the Single Master Form on the FIRMS portal maintained by the RBI.

Supporting documents that must go with the filing include:

The Foreign Inward Remittance Certificate from the receiving bank, showing that funds entered India through authorized banking channels.
A KYC report issued by the non-resident investor’s overseas bank.
A valuation certificate from a chartered accountant or SEBI-registered merchant banker confirming the share price meets fair market value.
A board resolution authorizing the allotment or transfer.

Every date, amount, and name in the filing has to match the banking records exactly. Mismatches between the FIRC and the reporting form are the fastest route to a review or rejection.

Deadline and Late Fees

Share issuances must be reported within 30 days of allotment.¹¹ Missing the deadline does not invalidate the transaction, but it triggers a Late Submission Fee. For transactional filings like FC-GPR, the LSF is ₹7,500 plus 0.025% of the amount involved multiplied by the number of years of delay, capped at 100% of the transaction amount.¹² The LSF window closes three years after the original due date. After that, the company is exposed to FEMA enforcement.

Once the Authorised Dealer Bank approves the filing, the system generates an acknowledgement. That acknowledgement is often demanded later when the investor wants to repatriate dividends or sale proceeds.

Annual FLA Return

Separate from transactional reporting, every Indian entity with outstanding FDI or overseas direct investment as of end-March must file an annual Foreign Liabilities and Assets return. The deadline is July 15 each year, and the return is submitted on the FLAIR portal (flair.rbi.org.in), which is not the same as FIRMS.¹³ The return covers the current and previous financial years. No financial statements need to be attached, but the numbers must line up with the audited figures. An entity with no outstanding foreign investment in either year does not have to file.

Tax on Dividends and Capital Gains

Dividends paid by an Indian company to a non-resident investor are subject to withholding tax at 20%, plus surcharge and cess. Dividends from units located in an International Financial Services Centre are taxed at 10%.¹⁴ The income is taxed on a gross basis, so non-residents cannot deduct expenses. Where India has a Double Taxation Avoidance Agreement with the investor’s country, the treaty rate applies if it is lower than the domestic rate.

On the sale of Indian equity shares, the rate depends on the holding period. Short-term capital gains on listed equity where Securities Transaction Tax has been paid are taxed at 20%. Long-term gains on listed equity, equity-oriented fund units, or business trust units are taxed at 12.5%.¹⁵ For unlisted shares, short-term gains are taxed at applicable slab rates and long-term gains at 12.5%. Surcharge and cess apply on top.

Taking Money Out of India

Repatriation depends on the type of account holding the funds. Money in Non-Resident External (NRE) or Foreign Currency Non-Resident (FCNR) accounts can be repatriated freely, with no cap on either principal or accumulated interest. Money in Non-Resident Ordinary (NRO) accounts is subject to a limit of $1 million per financial year for the principal amount.

Repatriation from an NRO account requires Form 15CA (an online self-declaration that taxes have been deducted), Form 15CB (a chartered accountant’s certification that taxes have been paid), Form A2 (the standard FEMA declaration for foreign exchange transactions), and a bank request form. Banks may ask for further proof of the source of funds. For NRE and FCNR accounts, only a request application and Form A2 are needed.

Investments made under the Portfolio Investment Scheme through an NRE account are fully repatriable. The same scheme routed through an NRO account is non-repatriable, though the principal and gains can be transferred within India subject to the $1 million annual cap.

Penalties and Compounding

Violations of FEMA are expensive. Under Section 13, contravening the Act, its rules, or the conditions attached to an RBI authorization can attract a penalty of up to three times the amount involved when quantifiable, or up to ₹2 lakh when not.¹⁶ For continuing violations, an additional ₹5,000 per day applies after the first day. The adjudicating authority can also order confiscation of the currency, security, or property involved.

Compounding is the voluntary route out. The company or individual admits the contravention and applies to the RBI for a settlement through the PRAVAAH portal or physically, with a fee of ₹10,000 plus GST.¹⁷ Before applying, the company must complete all overdue filings and obtain any required approvals, and it must confirm it is not under investigation by the Directorate of Enforcement.

The RBI aims to conclude the process within 180 days. Once the compounding authority sets the amount, the company has 15 days to pay. If it misses that window, the application is treated as if it was never made, and the case is referred to the Directorate of Enforcement for formal action.¹⁷ There is no appeal against a compounding order and no way to negotiate the amount down after it has been fixed.

1
Department for Promotion of Industry and Internal Trade. FAQs on FDI Policy
2
Make in India. Foreign Direct Investment
3
Department for Promotion of Industry and Internal Trade. Press Note No. 2 (2026 Series) – Review of FDI Policy on Investments From Countries Sharing Land Border With India
4
Department for Promotion of Industry and Internal Trade. Consolidated FDI Policy (FAQs)
5
Press Information Bureau. FDI Limit for Insurance Sector Raised From 74 to 100 Per Cent
6
Invest India. Frequently Asked Questions – E-commerce
7
Press Information Bureau. FDI Policy in Multi Brand Retail
8
Department for Promotion of Industry and Internal Trade. Consolidated FDI Policy
9
Reserve Bank of India. Master Circular on Foreign Investment in India
10
Reserve Bank of India. Form FC-GPR
11
Reserve Bank of India. Master Direction – Foreign Investment in India
12
Reserve Bank of India. A.P. (DIR Series) Circular No. 16
13
Reserve Bank of India. Annual Return on Foreign Liabilities and Assets (FLA) Under FEMA, 1999
14
Income Tax Department. Taxation of Non-Resident
15
Income Tax Department. Non-Resident – Benefits Allowable
16
India Code. FEMA 1999 – Section 13
17
Reserve Bank of India. FAQs on Compounding of Contraventions Under FEMA, 1999