Current account transactions under FEMA cover a variety of transactions that include payments for business purposes, education, medical treatment, and personal remittances. Guidelines for these transactions give an outline of what is permissible, what requires approval, and what is prohibited.
The current account transactions under FEMA rules are designed to ensure that the flow of foreign exchange is in line with India’s foreign policy and economic interests, and they ensure that transactions do not adversely affect the country’s foreign exchange reserves. Let us read more on current account transactions under FEMA and know the rules and limitations of it.
Table of contents
- What are Current Account Transactions Under FEMA?
- Important Aspects of Current Account Transactions Under FEMA
- Examples of Current Account Transactions Under FEMA
- Importance of Current Account Transactions Under FEMA
- Permissible Transactions Under FEMA for Current Accounts
- Limits for Current Account Transactions Under FEMA
- Restricted Current Account Transactions Under FEMA
- Prohibited Current Account Transactions Under FEMA
- Current Account Transaction Limits for Individuals
- Documents Required for Current Account Transactions Under FEMA
- Role of RBI in Monitoring Current Account Transactions Under FEMA
- Procedure for Seeking Approval for Restricted Current Account Transactions Under FEMA
- Penalties for Non-Compliance with Current Account Transactions Under FEMA
- Difference Between Capital Account Transactions and Current Account Transactions
- Taxation and Compliance for Current Account Transactions
- FAQs on Current Account Transactions Under FEMA
What are Current Account Transactions Under FEMA?
Current Account Transactions under FEMA are foreign exchange transactions related to payments and receipts for goods, services, and current income. They involve the inflow and outflow of money to and from India.
These transactions are crucial for facilitating international trade, personal mobility, and economic growth while adhering to India’s foreign exchange regulations. All current account transactions under FEMA (Foreign Exchange Management) as regulated by the FEMA Act, 1999.
FEMA provides a structured framework to regulate external trade and payments, ensuring transparency and compliance with both national and global financial standards. Current account transactions include activities such as:
- Payments for imports and exports
- Travel-related expenses
- Personal remittances, such as funds for education, medical treatment, or family support
The Reserve Bank of India (RBI) plays a pivotal role in monitoring these transactions, placing restrictions or limits on specific remittances, particularly to countries other than Nepal and Bhutan.
Important Aspects of Current Account Transactions Under FEMA
The Current Account transactions under FEMA are governed by several key aspects that ensure smooth and compliant foreign exchange activities. These aspects define the types of transactions, their purpose, and the regulatory measures in place to maintain stability in India’s foreign exchange market.
Below are the important elements that shape how these transactions are monitored and managed under FEMA.
- Regulatory Oversight
The Reserve Bank of India (RBI) monitors these transactions and sets limits or restrictions, especially for remittances to certain countries. - Terminology
FEMA defines “withdrawal” as the use of foreign exchange for activities like issuing letters of credit or using international debit/credit cards. - Objective
The framework ensures that international payments and receipts align with India’s economic priorities and promote global financial integration.
By clearly defining Current Account Transactions Under FEMA, the regulations simplify international payments while maintaining a robust foreign exchange market in India.
Also Read: Discover the significant differences between FERA and FEMA and their impact on India’s economy. Understand their objectives, structure, and influence.
Examples of Current Account Transactions Under FEMA
Current Account Transactions Under FEMA involve various legitimate activities that require the use of foreign exchange. Some common examples include:
- Payments for Education: Fees for education at foreign institutions.
- Medical Treatment Abroad: Payments for medical care outside India.
- Travel Expenses: Expenses related to travel abroad for tourism, business, or visiting family members.
- Remittances to Family Members: Sending money to family members living overseas.
- Business Transactions: Payments for imported raw materials or settling international service fees.
- Personal Travel: Use of foreign exchange for attending conferences or personal trips abroad.
There are limits on the amount of foreign exchange that can be used for these transactions. If the limits are exceeded, approval from the Reserve Bank of India (RBI) or the Government of India may be necessary, depending on the nature of the transaction.
Importance of Current Account Transactions Under FEMA
Current Account Transactions Under FEMA are crucial for regulating international financial activities and ensuring the smooth flow of payments. Here’s why they are important:
- Regulation of International Payments: FEMA ensures that payments for goods, services, and income are aligned with India’s foreign exchange policies.
- Maintaining Financial Stability: By regulating these transactions, FEMA helps protect the country’s financial stability and foreign exchange reserves.
- Prevention of Misuse: FEMA prevents the misuse of foreign exchange by ensuring it is used for productive purposes such as trade and investments, rather than speculative or illegal activities.
- Legal Compliance: It defines what requires prior approval, ensuring that businesses and individuals comply with legal standards.
- Protection Against Illegal Activities: FEMA’s rules help in preventing funding for prohibited activities or illegal transactions.
- Boosting Global Trust: By ensuring clarity and transparency, FEMA enhances India’s credibility in the global financial market.
These regulations are integral in ensuring that Current Account Transactions Under FEMA contribute to the country’s economic growth and stability.
Permissible Transactions Under FEMA for Current Accounts
FEMA allows for various permissible current account transactions, including payments for private visits, business trips, education, and medical expenses abroad. Some of the major purposes for which residents can remit funds under the LRS include:
- Private visits to any country (except Nepal and Bhutan).
- Education and related expenses for studying abroad.
- Medical treatment and expenses incurred for the medical treatment of the individual or their dependents.
- Remittances for travel and business expenses.
Limits for Current Account Transactions Under FEMA
FEMA imposes limits on the amount of foreign exchange that can be drawn for various types of current account transactions. For instance, individuals can remit up to USD 250,000 annually for personal purposes such as travel, medical treatment, and education under the Liberalized Remittance Scheme (LRS). Remittances for other purposes, like business expenses, are subject to different limits depending on the nature of the transaction.
For larger remittances, prior approval from the RBI or the Government of India is required due to the limits of international money transfers. These limits are set to prevent excessive outflow of foreign exchange and ensure that funds are utilized for productive and essential purposes.
Liberalized Remittance Scheme (LRS) and Current Account Transactions Under FEMA
The Liberalised Remittance Scheme (LRS) allows Indian residents to remit a certain amount of foreign exchange for permissible current account transactions without prior approval. Under this scheme, individuals can remit up to USD 250,000 per financial year for various purposes such as education, travel, medical treatment, and business-related expenses abroad.
The LRS helps facilitate international financial transactions and provides a streamlined process for individuals to access foreign exchange for legitimate personal and business needs. However, it is important to adhere to the limits set under the LRS, as any remittance beyond this threshold requires approval from the RBI.
Restricted Current Account Transactions Under FEMA
Some current account transactions under FEMA require prior approval from the Reserve Bank of India (RBI) or the Government of India. These include certain types of payments, such as cultural tours, donations, and payments for sports sponsorships exceeding specific limits. For example, remittances for international sports activities exceeding USD 100,000 require the approval of the Ministry of Youth Affairs and Sports.
Additionally, the rules specify restrictions on payments related to the commission for selling residential property abroad or the remittance of funds for certain types of consultancy services. Such transactions are considered sensitive and need to be assessed on a case-by-case basis to ensure compliance with India’s foreign exchange management objectives.
Prohibited Current Account Transactions Under FEMA
FEMA also lists certain transactions that are entirely prohibited. These include remittances from lottery winnings, payments for banned magazines, and commissions related to the export of goods under certain conditions. Other prohibited transactions include remittances for the purchase of lottery tickets and certain sports betting activities.
Among the prohibited activities for current account transactions are:
- Remittances for gambling, purchasing lottery tickets, or investment in non-permissible activities.
- Sending money abroad for margin calls or trading in foreign exchange.
- Investment in certain foreign securities such as foreign convertible bonds (FCCBs).
- Transactions to countries identified as non-cooperative by the Financial Action Task Force (FATF).
Current Account Transaction Limits for Individuals
The FEMA framework stipulates that individuals can remit up to USD 2,50,000 per financial year under the LRS for any combination of current and capital account transactions. However, this amount cannot be exceeded, and once an individual has remitted the full allowable amount for the year, they are ineligible for further remittances until the following year.
In cases where multiple family members wish to remit funds, they may consolidate their remittances within the limit, but each family member must meet the eligibility requirements, including providing necessary documentation and adhering to the permissible transaction purposes.
Also Read: Check the blog and know all about Cheapest International Money Transfer
Documents Required for Current Account Transactions Under FEMA
For current account transactions under FEMA, individuals and entities are required to provide specific documentation. This typically includes proof of the purpose for which foreign exchange is being drawn. The documentation ensures transparency and helps the RBI and financial institutions verify the legitimacy of the transaction.
Here’s a table carrying a list of the required documents for current account transactions under FEMA:
| Transaction Type | Required Documents | Additional Information |
| Personal Transactions (e.g., education, medical) | – Proof of purpose (e.g., admission letter for education, medical certificate for treatment) – Passport – Aadhar card or other ID proof | – Form A2 may be required for remittance – Proof of foreign currency requirement |
| Business Transactions (e.g., goods/services, contracts) | – Invoices – Contracts – Proof of payment for goods/services – KYC (Know Your Customer) documents (for verification) | – Tax documents like income tax returns may be required – Corporate authorization from the business entity |
| Transactions Requiring Prior Approval | – Supporting documents to justify the remittance – KYC documents | – Additional documentation depending on the specific nature of the transaction |
| Foreign Income Proof (e.g., gifts, inheritance) | – Proof of foreign income or source of funds | – Required if remittance is linked to foreign gifts or inheritance |
| Tax-related Transactions (for businesses) | – Tax returns – Financial statements | – Needed to confirm business legitimacy and compliance |
| Foreign Currency Transactions | – Currency exchange receipt (if applicable) | – Needed if the remittance is for specific foreign currencies |
| General (for both individuals and businesses) | – KYC documents (Passport, Voter ID, Aadhar Card) | – Necessary for both personal and business transactions for verification |
Role of RBI in Monitoring Current Account Transactions Under FEMA
The Reserve Bank of India (RBI) plays a pivotal role in monitoring current account transactions under FEMA. The RBI is responsible for ensuring that foreign exchange is drawn and used in compliance with the guidelines set out in the Foreign Exchange Management Act. It oversees the implementation of rules and ensures that any transactions that require prior approval are evaluated and processed accordingly.
The RBI also acts as an enforcer of the regulations by issuing directives and guidelines to authorized dealers and financial institutions. It provides the necessary oversight to ensure that foreign exchange is being used for permissible and legitimate purposes, such as international trade, business, and personal needs while preventing any misuse or illegal activities.
Procedure for Seeking Approval for Restricted Current Account Transactions Under FEMA
For current account transactions that fall under the restricted categories in FEMA, individuals and entities must seek prior approval from the Reserve Bank of India or the Government of India. The process typically involves submitting a formal application along with supporting documentation that outlines the purpose and justification for the remittance.
The application is reviewed by the relevant authorities, who assess the necessity and compliance of the transaction with India’s foreign exchange policies. Depending on the nature of the transaction, the approval may be granted subject to certain terms and conditions.
Penalties for Non-Compliance with Current Account Transactions Under FEMA
Non-compliance with FEMA regulations on current account transactions can result in severe penalties. Violators may face fines, legal actions, and the potential suspension or cancellation of their ability to conduct foreign exchange transactions. The penalties are imposed to ensure that foreign exchange is not misused or diverted for illegal activities and that all transactions comply with the established rules.
The Reserve Bank of India, in collaboration with other government agencies, ensures that those who violate FEMA’s provisions are held accountable. Individuals and entities must ensure they are fully aware of the regulations to avoid costly mistakes and penalties.
Difference Between Capital Account Transactions and Current Account Transactions
The primary difference between Capital Account and Current Account transactions lies in their nature and purpose. Capital Account transactions involve long-term financial activities such as investments, loans, and property purchases that change assets or liabilities across borders.
Here’s a table on the difference between Capital Account transactions and Current Account transactions based on various aspects:
| Aspect | Capital Account Transactions | Current Account Transactions |
| Definition | Transactions that change or alter assets and liabilities (including contingent liabilities) held abroad by Indian residents or in India by non-residents. | Transactions related to foreign trade, services, short-term banking, and payments due for interest, income, and remittances. |
| Purpose | Involves long-term investments, ownership changes, or shifting of capital across countries. | Involves regular business, trade, and living expenses, typically short-term in nature. |
| Examples | – Changes in foreign assets or liabilities- Foreign Direct Investment (FDI)- Loans and borrowings- Property purchases abroad | – Payments for goods/services in international trade- Interest on loans- Remittances for living expenses of family members abroad- Foreign travel, education, and medical expenses |
| Regulation | Regulated by the Reserve Bank of India (RBI) with more specific, sometimes complex compliance procedures. | Regulated by FEMA, relatively simpler and involves fewer regulatory requirements. |
| Documents/Compliance | Often requires coordination with accountants, law firms, and bankers, with extensive documentation for regulatory filings. | Generally involves straightforward documentation, with fewer regulatory hurdles. |
| Type of Transactions | Long-term, strategic transactions that impact national balance sheets, foreign investments, etc. | Routine, day-to-day transactions such as expenses and services that don’t alter asset ownership. |
| Involvement of Bank/Institution | Banks assist with the processing and compliance of more complex capital account transactions, such as FDI. | Banks help facilitate the regular remittance of funds and payments for living expenses, education, etc. |
Also Read: Worried about taxes on Remittance? Check this blog and learn all about TCS on Foreign Exchange and Remittance
Taxation and Compliance for Current Account Transactions
While making remittances under the LRS, individuals are required to comply with the applicable tax laws. For remittances exceeding certain thresholds, individuals may need to submit additional documentation such as Form 15CA or 15CB, which ensures tax compliance with the Indian tax authorities.
In addition to the tax implications, authorized dealers (ADs) are responsible for confirming the legitimacy of the remittance based on the declared nature of the transaction. Individuals must provide their Permanent Account Number (PAN) while initiating the remittance process.
This was all about the current account transactions under FEMA. To know about the loan application process, the best bank accounts for students, forex and banking experience for global students or international money transfers, reach out to our experts at 1800572126 to help ease your study abroad experience.
FAQs on Current Account Transactions Under FEMA
Current account transactions under FEMA (Foreign Exchange Management Act) refer to all payments and receipts involving foreign exchange related to international trade, services, personal remittances, and other current activities. These transactions include remittances for payments of imports and exports, travel expenses, medical treatment, education fees, and business payments.
FEMA, or the Foreign Exchange Management Act, 1999, regulates foreign exchange transactions in India. It ensures that current account transactions, such as payments for business, education, and medical purposes, comply with India’s foreign policy and economic interests. FEMA outlines permissible, restricted, and prohibited transactions to maintain financial stability and prevent misuse of foreign exchange.
Current account transactions under FEMA include payments for goods and services, remittances for personal needs (e.g., education, medical treatment, and travel), and payments for international trade. These transactions are typically short-term in nature and do not alter assets or liabilities across borders.
The Liberalised Remittance Scheme (LRS) allows Indian residents to remit funds abroad without prior approval from the Reserve Bank of India (RBI) for certain permissible purposes. Individuals can remit up to USD 250,000 annually for education, medical treatment, travel, and personal remittances under LRS.
Yes, minors can remit funds under the LRS, but the remittance must be carried out by their natural guardian, who needs to sign a declaration form. The same limit of USD 250,000 applies to minors, but the guardian is responsible for ensuring compliance with the rules.
Permissible current account transactions include remittances for personal purposes like education, medical treatment, travel, and visiting family members. Business-related expenses like payment for imported goods or international service fees are also allowed under FEMA guidelines.
Certain transactions require prior approval from the RBI or the Government of India. Examples include donations, cultural tours, international sports activities exceeding USD 100,000, and payments for consultancy services or property sales abroad.
Prohibited transactions under FEMA include remittances for gambling, purchasing lottery tickets, and funding non-permissible activities like sports betting. It also bans transactions to countries identified as non-cooperative by the Financial Action Task Force (FATF).
The RBI monitors and regulates all current account transactions under FEMA. It ensures that foreign exchange is drawn and used for permissible activities, issuing guidelines to financial institutions and authorized dealers. The RBI also evaluates transactions requiring prior approval.
Individuals can remit up to USD 250,000 per financial year under the LRS. This amount can be used for any combination of permissible purposes such as education, medical treatment, travel, and business expenses.
Required documents typically include proof of purpose (admission letter, medical certificate, etc.), passport, Aadhar card, invoices, contracts, and KYC documents. Business transactions may also require tax documents, such as income tax returns.
For restricted transactions, individuals or entities must apply to the RBI or the Government of India, along with supporting documentation that justifies the purpose of the remittance. The authorities assess the request based on compliance with foreign exchange policies.
Non-compliance with FEMA can lead to penalties, including fines, legal actions, and suspension of foreign exchange transaction privileges. To avoid these, individuals and businesses must ensure compliance with all transaction limits and documentation requirements.
Yes, businesses can remit funds for payments related to goods and services under FEMA. However, they must provide invoices, contracts, and proof of payment, along with KYC documentation to ensure compliance with regulatory guidelines.
Yes, FEMA imposes limits on the amount of foreign exchange that can be drawn for various purposes. For personal purposes like education, medical treatment, and travel, individuals can remit up to USD 250,000 annually under the LRS. Business-related remittances are subject to different limits.
Individuals or businesses must provide their PAN number and submit tax compliance documents such as Form 15CA or 15CB for remittances exceeding specific thresholds. These forms ensure tax compliance with Indian tax authorities.
Business expenses such as payments for imported raw materials, international service fees, and trade-related expenses can be paid under current account transactions. Businesses need to provide invoices and proof of payment along with other required documentation.
Yes, under FEMA, individuals can use foreign exchange for personal expenses like attending business conferences, visiting family, or travelling abroad for leisure, provided the transaction adheres to the guidelines and documentation is provided.
Current account transactions involve short-term payments for goods, services, and living expenses, while capital account transactions deal with long-term investments, loans, and property purchases that affect assets or liabilities across borders.
For remittances related to foreign gifts or inheritance, proof of foreign income or source of funds is required. This ensures that the remittance complies with the guidelines and is used for permissible purposes under FEMA.
Yes, remittances for the purchase of property abroad are not typically allowed under FEMA unless it is in line with the capital account regulations. Such transactions often require prior approval from the RBI or the Government of India.
Follow Us on Social Media
