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The legal foundation for overseeing foreign exchange transactions in India was established by the Foreign Exchange Management Act of 1999. The Foreign Exchange Management Act 1999, which took effect on June 1, 2000, classified all transactions involving foreign currency as either capital or current account transactions.
The legislation has simplified things by categorising all permitted and prohibited transactions into two broad categories: capital and current account activities under FEMA. However, the law cannot cater to every acceptable and prohibited transaction. This blog will discuss the Capital and Current Account Transactions and the prohibited transactions under FEMA Act.
Table of Contents
The foundation of FEMA is made up of both capital and current account activities. Capital and Current account activities. Capital and current account transactions are all transactions between residents and non-residents.
The rule for identifying the transaction as a capital account transaction is that it is prohibited under FEMA unless it is specifically permitted, and the rule for identifying a current account transaction is that it is permitted by FEMA unless it is specifically prohibited or regulated by it.
However, it is simple to understand applying it is a difficult task due to varying subjective interpretations of the definitions of capital transactions and current account transactions.
Under FEMA, the transaction regulations are determined based on whether the transactions are capital accounts or current accounts. According to section 2 (e) of the FEMA, capital account transactions are those that affect the assets or liabilities, including contingent liabilities, outside India of a person resident in India or assets or liabilities in India of persons resident outside India. Capital transactions are also the ones that impact the balance sheet of an entity.
No one may undertake, sell to, or buy foreign exchange from an authorised agent for any capital account transaction, according to regulation No.4. Therefore, all other capital account transactions are forbidden unless Schedule I and Schedule II cover them.
Additionally, according to Regulation No.4, no person residing outside of India may invest in any entity in India if the entity is engaged in or plans to engage in the following:
According to section (2) (j) of FEMA, Current Account Transactions (CAT) are defined as transactions other than capital account transactions that include:
The current account transactions are categorised into three parts under the regulation:
The Foreign Exchange Management (Current Account Transactions) Rules, 2000. It is forbidden for anyone to withdraw money for the following reasons:
(a) For the transaction listed in Schedule I;
(b) Travel to Nepal and Bhutan; or
(c) A transaction with a resident of Nepal or Bhutan. Provided that the prohibition in this clause may be exempted as long as RBI imposes the terms and conditions that it deems essential to specify by special or general order.
There are several transactions listed in Schedule II to the Rules. Rule 4 of the FEMA (Current Account Transaction) Rules 2000 stipulates that prior authorisation from the Government of India is necessary before such Current Account Transactions for remittance. These include cultural tours, advertisements, transponder hiring charges, P&I Club membership fees, etc. Rule 4 does not, however, apply when the remitter’s RFC (Resident Foreign Currency) Account or EEFC (Exchange Earner Foreign Currency) Account is used to make the payment.
No one may draw foreign currency for a transaction listed in Schedule III without the Reserve Bank’s prior consent, according to Rule 5 of the FEMA (Current Account Transaction) Rules 2000. Schedule III has a list of these transactions. According to this, individuals can avail themselves of foreign currency services up to $ 2,50,000 for emigration, donation, gifts, or studies abroad etc.
The following are the prohibition listed in the FEMA (Current Account Transactions) Rules, 2000, that are not covered by the relevant regulations. These are the remittances from various scenarios:
With the liberal goals and objectives of the Foreign Exchange Management Act of 1999, India is anticipated to be an active trading participant. The prohibition mandated in the FEMA regulations is essential in the current scenario. The Foreign Exchange Management Act regulates foreign exchange in a more relaxed and less stringent manner. It came about as a result of the Indian economy being opened up. Numerous changes brought about by FEMA have drastically changed many facets of the Indian economy.
Read our Article: Enforcement of FEMA Regulation
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