The Foreign Exchange Management Act (FEMA) was enacted by the Government of India in 1999. It substituted the previous Foreign Exchange Regulation Act (FERA) of 1973. The FEMA Act 1973 was formulated to enhance external payments and foreign trade in India. FEMA represents a civil law in contrast to FERA which was a draconian police law.
Foreign Exchange Management Act in India represented a modernization of the Indian economy and was established to liberalize and privatize the markets in India. In this article, we’ll provide an overview of the Foreign Exchange Management Act in India, covering the fundamentals that you need to be aware of.
What is the FEMA Act?
The FEMA Act is the legal framework that governs foreign exchange transactions in India. It lays down the provisions for facilitating external trade and payments while maintaining foreign exchange reserves. The Act covers areas such as foreign direct investment (FDI), overseas investment, remittances, and transactions between residents and non-residents. By simplifying rules compared to its predecessor FERA, the FEMA Act ensures that India’s foreign exchange environment aligns with liberalisation and global economic practices.
What is FEMA in India?
FEMA in India refers to the Foreign Exchange Management Act, 1999, which regulates cross-border transactions, foreign exchange dealings, and external trade. It was designed to promote orderly development and maintenance of India’s foreign exchange market while facilitating international payments. FEMA also empowers the Reserve Bank of India (RBI) to frame rules and regulations governing foreign exchange, thereby ensuring transparency and compliance in global transactions.
What Are The Objectives Of The FEMA Act?
The primary aim of introducing the Foreign Exchange Management Act was to liberalize the Indian economy by promoting external trade and payments. It facilitated the regulation of the Indian forex market.
According to FEMA, the balance of payment represents a record of transactions involving products, services, or properties between citizens of two separate countries.
The Government of India has classified FEMA into two categories:
Capital Account Transactions – all capital transactions and the inflow and outflow of money to and from India.
Current Account Transactions – all trade of merchandise as an indicator of an economy’s status.
Thus, establishing the structure and measures for all foreign exchange transactions in India.
How Is FEMA Applied In India?
FEMA applies to the whole of India. It also extends to the agencies and offices located outside India that are managed or owned by an Indian citizen. The headquarters is situated in New Delhi and is known as the Enforcement Directorate.
More specifically, the FEMA Act applies to:
- Indian foreign exchange
- Indian foreign security
- Banking, financial, and insurance services
- Exporting of any product and/or services from India to a foreign country
- Importing of any product and/or services from outside India
- Securities as defined under the Public Debt Act of 1994
- Buying, Selling,
- Any Indian Entity owned by a person resident outside India
- Any citizen of India, residing in India or in a foreign country
- and the exchange of any kind of product/service
- Any overseas company owned by a non-resident Indian (NRI)
Current Account transactions listed by FEMA have been categorized into three areas:
- Transactions prohibited by the FEMA Act
- A transaction that requires Central Government’s permission
- A transaction that requires the Reserve Bank of India’s (RBI’s) permission
What Prohibitions Are Made Under the FEMA Act In India?
- Sending money which is the result of winning the lottery.
- Sending money which is the result of winning horse racing, cricket games, etc.
- Sending money to buy a lottery ticket, football betting, sweepstakes, banned publications, etc.
- The payment of commission on exports towards equity investment of Indian companies in joint ventures or wholly-owned subsidiaries abroad.
- The sending of a dividend by any company. This is only applicable if dividend balancing is applicable.
- The payment of commission on exports under the Rupees State Credit Routes (except commission up to 10 percent of the invoice value of export of tea and tobacco).
- Any payment regarding “Call-back Services” of telephones.
- Any travel to Bhutan and/or Nepal.
- Sending interest income on funds held in Non-resident Special Rupees (NRSR) scheme account.
- A transaction of any kind with a resident of Bhutan or Nepal.
What Are The Rules Of Trade For Foreign Exchange Management Act (FEMA) In India?
According to the RBI, foreign exchange can be undertaken with any authorized dealer via the Prior Approval Route or General Permission Route.
| Scenario | Limitations |
| Visiting privately to any country (except Bhutan and Nepal) | Liberalized Remittance Scheme (LRS) limit of USD 2,50,000/- per year. |
| Personal donations/gifts by resident individuals | Liberalized Remittance Scheme (LRS) limit of USD 2,50,000/- per year. |
| Corporate Donations by persons other than resident individual | One per cent of the forex earnings during the preceding three financial years.<br>OR<br>US$ 5,000,000, whichever is less, for a specified purpose. |
| Leaving India for the purposes of gainful employment | Liberalized Remittance Scheme (LRS) limit of USD 2,50,000/- per year. |
| Payment for emigration | Liberalized Remittance Scheme (LRS) limit of USD 2,50,000/- per year. |
| Payment for the care of relatives (only close relatives) outside of India by a person who is resident but not permanently resident in India | The salary (after deducting income tax, Provident Fund, and other deductions) of a person not being a permanent resident in India and a citizen of a foreign state other than Pakistan.<br>OR<br>US$2,50,000/- a year per recipient in all other cases. |
| Business travel abroad | US$250,000 per year. |
| Attending a training course or conference | US$250,000 per year. |
| For overseas medical treatment | US$250,000 per year. |
| The care of a patient going for a medical check-up or medical treatment abroad. | US$250,000 per year. |
| The care of a patient going for a medical check-up or medical treatment abroad. | US$250,000 per year. |
| Studying abroad | US$250,000 per academic year or the education institution’s estimation, whichever is higher |
| Meeting the expenses of a person accompanying a patient going for a medical check-up or for medical treatment abroad | US$250,000 per year. |
| Commission payment to an agent outside India for the saleselling of commercial or residential land or property in India | US$25,000 or five percent of the transaction, whichever is higher. |
| Consultancy services from overseas | US$10,000,000 per project (for infrastructure projects).<br>For all other projects, US$1,000,000 per project |
| Pre-incorporation expense reimbursements | US$100,000 or five percent of the investment brought into India, whichever is higher. |
The following foreign transactions require the approval of the Central Government:
- Cultural tours.
- Advertising in foreign print media for any purpose other than promoting tourism, investments exceeding US$10,000 by a State Government or its Public Sector Undertaking.
- Payment of importation by a Public Sector Undertaking on cost, insurance, and freight on ocean transport.
- Payment for chartered freight vessels.
- Payment of shipping container detention charges above the Director-General of Shipping’s (DGS’s) rate.
- Payment of prize money or sponsorship money for any activity. Payment of any sport participated outside of India (other than national/international level sports) if it exceeds US$1,00,000.
- The payment for hiring transponders for internet service providers or television channels.
- Payment of Protection and Indemnity (P&I) Club membership.
- Payment for multi-model transport operators and their agencies abroad.
Why Choose India Company Incorporation?
The Foreign Exchange Management Act (FEMA) of India requires a great deal of compliance. At India Company Incorporation, we have a team of experts who will gladly assist you in becoming FEMA Act compliant. We have an experienced team that will cater to all your legal compliance.
Contact us if you have any concerns about your FEMA Act compliance or other tax obligations in India.
