Comprehensive Study Notes on the Foreign Exchange Management Act, 1999 (FEMA)

THE FOREIGN EXCHANGE MANAGEMENT ACT, 1999: OVERVIEW AND EVOLUTION

Need for the Act: The shift in the global economic scenario, globalization of capital, and the rise of free trade necessitated an orderly management of foreign exchange. Cross-border trade and capital flows required a specific legal framework.
Historical Timeline:
- 1939: Exchange control law was first introduced by the British through the Defense of India rules.
- 1947: The Foreign Exchange Regulation Act (FERA) was enacted.
- 1973: FERA was replaced with the 'Foreign Exchange Regulation Act, 1973'.
- 1991: Libralization of the Indian economy allowed for freer movement of foreign exchange and increased foreign investment, leading to a substantial increase in reserves.
- 1999: The Foreign Exchange Management Act (FEMA) was enacted to replace FERA, focusing on management rather than just regulation.
- 2000: FEMA became effective on June 1, 2000.

PREAMBLE, EXTENT, AND APPLICATION

Objective: To consolidate and amend the law relating to foreign exchange for the purpose of:
- Facilitating external trade and payments.
- Promoting the orderly development and maintenance of the foreign exchange market in India.
Extent and Application (Section 1):
- Applies to the whole of India.
- Applies to all branches, offices, and agencies outside India that are owned or controlled by a person resident in India.
- Applies to any contravention committed outside India by any person to whom the Act applies.
Enforcement: While the Reserve Bank of India (RBI) exercises overall control, the enforcement of FEMA is entrusted to the 'Directorate of Enforcement' [Section 36].

DEFINITIONS [SECTION 2]

Authorised Person [Section 2(c)]: Means an authorised dealer, money changer, off-shore banking unit, or any other person authorised under section 10(1) to deal in foreign exchange or foreign securities.
Capital Account Transaction [Section 2(e)]: A transaction which alters the assets or liabilities (including contingent liabilities) outside India of persons resident in India, or assets or liabilities in India of persons resident outside India. It includes transactions previously referred to in Section 6(3) (noting Section 6(3) was deleted effective October 15, 2019).
Currency [Section 2(h)]: Includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travelers’ cheques, letters of credit, bills of exchange, promissory notes, credit cards, or other similar instruments notified by the RBI.
Currency Notes [Section 2(i)]: Cash in the form of coins and bank notes.
Current Account Transaction [Section 2(j)]: A transaction other than a capital account transaction. It specifically includes:
- Payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business.
- Payments due as interest on loans and as net income from investments.
- Remittances for living expenses of parents, spouse, and children residing abroad.
- Expenses in connection with foreign travel, education, and medical care of parents, spouse, and children.
Export [Section 2(l)]: Taking goods out of India to a place outside India or the provision of services from India to any person outside India.
Foreign Currency [Section 2(m)]: Any currency other than Indian currency.
Foreign Exchange [Section 2(n)]: Foreign currency and includes:
- Deposits, credits, and balances payable in foreign currency.
- Drafts, travelers’ cheques, letters of credit, or bills of exchange drawn in Indian currency but payable in foreign currency.
- Drafts, travelers’ cheques, letters of credit, or bills of exchange drawn by entities outside India but payable in Indian currency.
Foreign Security [Section 2(o)]: Any security (shares, stocks, bonds, debentures) denominated or expressed in foreign currency, including those where redemption/return is payable in Indian currency.
Import [Section 2(p)]: Bringing into India any goods or services.
Person [Section 2(u)]: Includes individuals, Hindu Undivided Families (HUF), companies, firms, associations of persons (AOP), bodies of individuals (BOI), artificial juridical persons, and any agency/office/branch owned or controlled by such persons.
Person Resident in India (PRII) [Section 2(v)]:
- Limb 1: A person residing in India for more than $182$ days during the course of the preceding financial year.
- Exceptions (Limb 2 - Going Abroad): Does not include a person who has gone/stays outside India for: (a) employment, (b) carrying on business/vocation, or (c) any other purpose indicating an intention to stay for an uncertain period.
- Exceptions (Limb 3 - Coming to India): Does not include a person who has come to/stays in India otherwise than for: (a) employment, (b) business/vocation, or (c) any other purpose indicating an intention to stay for an uncertain period. Use of "otherwise than" means if they come for these three reasons, they ARE residents; if they come for any other reason (like visiting), they are NOT residents, even if they stay > $182$ days.
- Includes entities registered/incorporated in India.
- Includes offices/branches in India owned/controlled by a person resident outside India.
- Includes offices/branches outside India owned/controlled by a person resident in India.
Person Resident Outside India (PROI) [Section 2(w)]: A person who is not resident in India.
Transfer [Section 2(ze)]: Includes sale, purchase, exchange, mortgage, pledge, gift, loan, or any other form of transfer of right, title, possession, or lien.

RESIDENTIAL STATUS DETERMINATION

Comparison with Income Tax Act: Unlike tax law, which looks at the complete year for liability, FEMA is regulatory. Status must be known at the time of the transaction. Therefore, residential status under FEMA is often determined from a particular date rather than the whole year.
Citizenship: This is not the criteria for determining residence under FEMA.
Entities (HUF, AOP, BOI): The second and third limbs (employment, business, uncertain stay) apply only to individuals. For HUF and AOP, they are generally considered residents if they are in India.
Example (Clause A - Leaving India): If a person resides in India for > $182$ days in FY 2025-26 but leaves India on November 2, 2026, for employment, they become a PROI from the date of departure (November 2, 2026).
Example (Clause B - Entering India): If a person comes to India for a visit (not employment/business) on June 1, 2026, and stays until March 31, 2027, they remain a PROI for FY 2026-27 because they did not meet the > $182$ day test in the preceding year (2025-26). Even in FY 2027-28, they remain a PROI because their purpose of stay was not employment/business/uncertain stay.
Clarification for Students: Although students stay abroad for a certain period for studies, the RBI (via AP circular no. 45, dated December 8, 2003) clarifies they are considered non-residents as they often work to support their costs.

REGULATION AND MANAGEMENT OF FOREIGN EXCHANGE

Dealing in Foreign Exchange [Section 3]: No person shall:
- Deal in or transfer FX or foreign securities to anyone except an Authorised Person (AP).
- Make any payment to or for the credit of a PROI.
- Receive payment on behalf of a PROI except through an AP. (Deemed violation if received through someone else without inward remittance).
- Enter into financial transactions in India as consideration for acquiring assets outside India (Hawala transactions).
Holding Foreign Exchange [Section 4]: No PRII shall acquire, hold, own, possess, or transfer FX, foreign security, or immovable property outside India, except as permitted under the Act.
Current Account Transactions [Section 5]: Any person may sell or draw FX to or from an AP if it is a current account transaction. The Central Government, in consultation with RBI, can impose reasonable restrictions.

SCHEDULES TO CURRENT ACCOUNT RULES, 2000

Schedule I (Prohibited Transactions):
- Remittance from lottery winnings.
- Remittance of income from racing/riding or other hobbies.
- Remittance for purchase of lottery tickets, banned magazines, football pools, etc.
- Export commission towards equity investment in JVs/Subsidiaries abroad.
- Dividend remittances where dividend balancing applies.
- Commission on exports under Rupee State Credit Route (except tea/tobacco up to $10\%$ ).
- Call Back Services of telephones.
- Remittance of interest income on funds in Non-resident Special Rupee Scheme a/c.
Schedule II (Transactions requiring Government Approval):
- Cultural Tours: Ministry of Human Resources Development.
- Advertisement in foreign print media (excluding tourism/investment/bidding) exceeding $USD\,10,000$ by State Govt/PSUs: Ministry of Finance.
- Freight of vessel charted by PSU: Ministry of Surface Transport.
- Import via ocean transport (c.i.f. basis) by Govt/PSU: Ministry of Surface Transport.
- Multi-modal transport operators: Registration Certificate from Director General of Shipping.
- Hiring transponders (TV/Internet): Ministry of Information and Broadcasting/Communication.
- Container detention charges exceeding prescribed rates: Director General of Shipping.
- Prize money/sponsorship of sports abroad (if > $USD\,100,000$ and not a national/state body): Ministry of Human Resource Development.
- Membership of P & I Club: Ministry of Finance (Insurance Division).
Schedule III (Transactions requiring RBI Approval):
- Individuals: Can avail FX up to $USD\,250,000$ per FY for various purposes (private visits, gifts, emigration, maintenance of relatives, travel, medical, studies).
  - Excess of $USD\,250,000$ requires RBI approval unless specifically for emigration, medical treatment, or studies (if required by the foreign institution).
- Non-Individuals:
  - Donations exceeding $1\%$ of FX earnings over 3 years or $USD\,5,000,000$ (whichever is less) for chairs in educational institutes or technical bodies.
  - Commission to agents for selling real estate in India exceeding $USD\,25,000$ or $5\%$ of inward remittance (whichever is more).
  - Consultancy for infrastructure projects exceeding $USD\,10,000,000$ .
  - Other consultancy services exceeding $USD\,1,000,000$ .
  - Pre-incorporation expenses exceeding $5\%$ of investment or $USD\,100,000$ (whichever is higher).

CAPITAL ACCOUNT TRANSACTIONS [SECTION 6]

General Rule: Prohibited unless specifically permitted (unlike current account, which is permitted unless restricted).
Regulating Authorities:
- Debt Instruments: Regulated by RBI in consultation with the Central Government.
- Non-Debt Instruments: Regulated by Central Government in consultation with RBI (effective Oct 15, 2019).
Section 6(4) - PRII Assets Abroad: A PRII may hold/invest in foreign assets (FX, securities, property) if they were acquired when the person was a PROI or inherited from a PROI.
Section 6(5) - PROI Assets in India: A PROI may hold/invest in Indian assets if acquired when they were a PRII or inherited from a PRII.
Permissible Transactions (Resident in India - Schedule I):
- Investment in foreign securities.
- Foreign currency loans in India/abroad.
- Transfer of immovable property outside India.
- Guarantees to PROIs.
- Import/Export of currency notes.
- Borrowing (Loans/Overdrafts) from PROIs.
- Maintenance of foreign currency accounts.
- Insurance policies from foreign companies.
- Loans/Overdrafts to PROIs.
- Remittance of capital assets outside India.
- Derivative contracts.
Permissible Transactions (Resident Outside India - Schedule II):
- Investment in Indian securities/companies/firms.
- Acquisition/Transfer of immovable property in India.
- Guarantee for PRIIs.
- Import/Export of currency.
- Deposits between PRII and PROI.
- Foreign currency accounts in India.
- Remittance of capital assets in India.
Prohibited Capital Account Investments for PROIs:
- Chit Funds (except NRIs on non-repatriation basis with permission).
- Nidhi Companies.
- Agricultural or plantation activities.
- Real Estate business or construction of farmhouses (excludes townships, residential/commercial premises, roads, bridges, and REITs).
- Trading in Transferable Development Rights (TDRs).
- Transactions with citizens/entities of the Democratic People’s Republic of Korea (North Korea).

LIBERALISED REMITTANCE SCHEME (LRS)

Allows resident individuals (including minors) to remit up to $USD\,250,000$ per financial year for permissible current or capital account transactions.
Minors' declaration must be signed by a natural guardian.
The scheme is NOT available to corporates, partnership firms, HUF, or Trusts.
Consolidation is permitted for family members, but clubbing for capital account transactions (like buying property) is only permitted if the family members are co-owners.

QUESTIONS & DISCUSSION

MCQ Based Questions

Scenario: Mr. Purshottam Saha withdrew $USD\,50,000$ for business, $USD\,50,000$ for son's studies, and $USD\,75,000$ for mother's medical treatment in the same FY. He then spent $USD\,35,000$ in Dubai. For his daughter's wedding in Zurich, the estimate is $USD\,250,000$ .
- Question: Is prior approval required for the various withdrawals?
- Answer: (a) Mr. Purshottam Saha is not required to obtain any prior approval because the aggregate of multiple current account transactions (except specific ones like studies or medical if they exceed LRS limits based on estimates) falls under the freedom granted to individuals for current account transactions within the Liberalised Remittance Scheme limits or based on institutional estimates.
Scenario: Kedhar Sports Academy wants to remit $USD\,51,000$ as prize money for a cricket tournament in England.
- Question: What steps are required for remittance?
- Answer: (c) Kedhar Sports Academy is not required to obtain any prior permission from any authority because the amount does not exceed the limit of $USD\,100,000$ for sports sponsorship abroad by non-national/state bodies (Schedule II).
Scenario: Akash Ceramics Ltd needs to pay $USD\,42,000$ commission to a US broker for selling a commercial plot in Chennai to a PRII.
- Question: Is RBI approval required?
- Answer: (d) It is mandatory to obtain prior permission of RBI for the entire commission because commissions to agents abroad for sale of residential/commercial plots in India exceeding $USD\,25,000$ require approval (Schedule III).
Scenario: Mohita Periodicals wants to remit for consultancy services for a software program from France.
- Question: What is the limit for remittance without RBI approval?
- Answer: (d) $USD\,1,000,000$ per project for other consultancy services.
Scenario: Mr. Umesh came to India from USA in Oct 2025 for business. He established a branch of his Indian business in Minnesota, USA, within two months.
- Question: What is the residential status for FY 2026-27?
- Answer: (c) Both Mr. Umesh and his branch in Minnesota are PRIIs. Umesh is a PRII because he came to India for business/uncertain stay. The Minnesota branch is a PRII because it is a branch outside India owned/controlled by a PRII.

Descriptive Questions

Scenario: Printex Computer (Singapore) has a HQ in Pune and a branch in Dubai. The Pune HQ controls the Dubai branch.
- Residential Status: Printex (Singapore) is a PROI. The Pune unit, being a branch in India controlled by a PROI, is a PRII [Section 2(v)(iii)]. The Dubai branch, being a branch outside India controlled by a person resident in India (the Pune HQ), is also a PRII [Section 2(v)(iv)].
Scenario: Mr. Sane wants to remit (i) $USD\,50,000$ from lottery winnings and (ii) $USD\,100,000$ for a cultural troupe tour in USA.
- Advice: (i) Remittance of lottery winnings is prohibited (Schedule I). (ii) Expenses for a cultural tour require prior approval from the Ministry of Human Resources Development (Department of Education and Culture) (Schedule II).
Scenario: (i) Film star performing in NY (drawal $USD\,20,000$ ). (ii) Heart surgery in UK.
- Advice: (i) Requires Ministry of Human Resources Development approval (Cultural Tour). (ii) Individuals can draw up to $USD\,250,000$ for medical treatment without approval. Higher amounts are allowed if based on an estimate from the medical institute.
Scenario: (i) M requires $USD\,5,000$ for transponder hiring. (ii) P requires $USD\,2,000$ for call back services.
- Advice: (i) Requires Ministry of Information and Broadcasting (TV) or Communication (Internet) approval (Schedule II). (ii) Prohibited (Schedule I).
Scenario: Suresh (resident in 2024-25) leaves for Switzerland in July 2025 for 2 years of study. Needs $USD\,55,000$ annually.
- Residential Status: For FY 2025-26, he is a PRII until July 15 and a PROI from July 16, 2025 (as students are treated as non-residents per RBI). For FY 2026-27, he is a PROI.
- Remittance: He can remit the funds as the amount ( $USD\,55,000$ ) is below the $USD\,250,000$ threshold; no RBI approval needed.
Scenario: Ms. Pearl moved to India from USA after 15 years. She wants to buy a new house in USA using rent from her US house.
- Advice: Under Section 6(4), a PRII can invest in immovable property outside India if the funds were acquired when she was a PROI. Thus, she can purchase the house using her US account funds.
Scenario: Startech Pvt Ltd wants to remit $USD\,12\,million$ for highway consultancy and $USD\,900,000$ for software upgrade consultancy.
- Advice: The highway project (infrastructure) exceeds the $USD\,10\,million$ limit, so RBI approval is required. The software upgrade project is below the $USD\,1\,million$ limit for other consultancy, so no approval is needed (Schedule III).