The situation

Where the client started.

Oil & gas executive with three NRE accounts, two demat folios, and a missed redesignation from a 2019 return.

Problem

What was at stake.

Client briefly returned in 2019, never redesignated NRE → resident — a FEMA default that compounds in scrutiny.
Two demat folios were KYC'd as resident; a third as NRI. Dividends flowed across both — TDS chaos.
Three years of Schedule FA were thin / incorrect.

Approach

How we worked it.

Mapped the full account + folio landscape; identified the FEMA breach and quantified the exposure.
Re-architected to one NRE + one NRO with a single bank; closed legacy folios.
Filed compounding application with RBI — voluntary disclosure, full backup.
Re-filed Schedule FA for 3 FYs under Section 139(5) with corrected asset-level disclosure.

Outcome

What changed.

Compounding settled, no escalation.
Account architecture reduced from 5 to 2; dividend flow cleaned up.
Disclosure history corrected and audit-defensible.

Takeaway

The principle behind it.

FEMA defaults don't expire — they age. Voluntary compounding is almost always cheaper than waiting for a notice.

The FEMA rule behind the default

When a non-resident returns to India to take up employment, carry on business or otherwise with an intention to stay, they become a person resident in India under FEMA, and NRE accounts must be redesignated as resident accounts. Leaving NRE accounts running after such a return — even a short one — is a contravention, and so is holding demat accounts under a status that no longer applies.

How compounding resolves it

Compounding is voluntary: the applicant admits the contravention, explains the facts and shows that it has been rectified. RBI then levies a compounding amount, computed with reference to the sum involved and the duration, and the matter closes without adjudication. Applications are stronger when the account history is reconstructed in full and the corrective steps are already in place — which is why consolidating the accounts came first.

Correcting the tax side

FEMA corrections often expose income-tax errors. Returns can be revised within the time the law allows, and beyond that the updated-return route may be available with additional tax. Dividend TDS deducted at the wrong rate because of a status mismatch is reconciled through the return, and foreign-asset disclosures are aligned with the corrected account structure so future years start clean.

Cleaning up a decade of NRE/NRO drift with a compounding application