The full form of FEMA is the Foreign Exchange Management Act. It was passed by the Reserve Bank of India in 1999 and helps the government make decisions in matters of India’s foreign trade policy. It lays a set of rules and regulations relating to foreign exchange and prevents cases of money laundering by keeping a tight check on the amount of currency taken out from the country. Let’s dive into more important details about what is FEMA, its full form, features, objectives, and essential regulations that international students must know.
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What is FEMA Act, 1999?
FEMA is a Foreign Exchange Management Act passed on 29 December 1999 by the Reserve Bank of India. It replaced the older Foreign Exchange Regulation Act (FERA). FEMA Act, 1999 lays down a set of regulations on foreign exchange and the amount of money that can be taken out of the country for business purposes, travelling, medical reasons, or to study abroad.
The primary aim of FEMA is to promote external trade and payments while ensuring the orderly development and maintenance of the foreign exchange market in India. Unlike FERA, which treated violations as criminal offences, FEMA classifies them as civil offences, making compliance more accessible for individuals and businesses.
Also Read: Discover the significant differences between FERA and FEMA and their impact on India’s economy. Understand their objectives, structure, and influence.
Features of FEMA
The FEMA Act, of 1999, was introduced to create a more flexible framework for managing foreign exchange transactions in India. This act replaced the older Foreign Exchange Regulation Act (FERA). FEMA emphasizes a liberal approach, treating violations as civil offences rather than criminal ones, which helps streamline compliance and encourage foreign investment. Below are the key features of FEMA:
| Features | Description |
| Regulation of Transactions | FEMA regulates transactions between residents and non-residents, ensuring compliance with guidelines. |
| Current and Capital Account Transactions | It differentiates between current account transactions (like trade) and capital account transactions (like investments). |
| Freely Permissible Transactions | Current account transactions are generally allowed without restrictions, subject to reasonable limits. |
| Role of RBI and Central Government | The Reserve Bank of India (RBI) and the Central Government oversee capital account transactions. |
| Realization and Repatriation | It mandates the realization of export proceeds and their repatriation to India within specified timeframes. |
| Authorized Persons | Transactions must be conducted through authorized dealers, money changers, or offshore banking units. |
| Adjudication and Compounding of Offences | FEMA provides mechanisms for adjudicating violations and compounding offences related to foreign exchange. |
| Enforcement by Directorate of Enforcement | The Directorate of Enforcement is responsible for investigating violations and enforcing compliance with FEMA provisions. |
| Appeal Provisions | The Act includes provisions for appeals to the Special Director (Appeals) and Appellate Tribunal for Foreign Exchange. |
| Penalties for Violations | FEMA imposes penalties for non-compliance, including fines, confiscation of assets, and prosecution for serious violations. |
Objectives of FEMA
The Foreign Exchange Management Act (FEMA), enacted in 1999, serves several key objectives aimed at facilitating external trade and payments while promoting the orderly development and maintenance of the foreign exchange market in India. Here are the primary objectives of FEMA:
- Facilitate External Trade: FEMA aims to simplify and enhance the process of conducting international trade by allowing businesses and individuals easier access to foreign exchange.
- Promote Foreign Investment: The Act encourages foreign investments in India by providing a regulatory framework more conducive to investment flows.
- Manage Foreign Exchange: FEMA establishes guidelines for managing foreign exchange transactions, ensuring that they are conducted orderly to mitigate risks associated with currency fluctuations.
- Support Economic Stability: By regulating foreign exchange, FEMA helps maintain economic stability and supports the country’s overall financial health.
- Liberalized Remittance Scheme (LRS): The Act includes provisions for the LRS, which allows residents to remit a specified amount abroad for various purposes without needing prior approval from the Reserve Bank of India (RBI).
FEMA Regulations Every International Students Must Know
If you are going to foreign countries to study abroad, you are treated as NRIs and are eligible for all facilities under FEMA. Let’s learn about FEMA regulations and how to fix the FEMA violations if you commit any unintentionally. You must know them as NRIs as they can affect the flow of funds (sending or receiving foreign currency).
Limits to Remittances Provision
Foreign Remittance means sending or receiving money across borders. Under the Foreign Exchange Management Act, students can remit up to USD 250,000 in a financial year for education-related expenses without needing prior approval from the RBI from their NRO or NRE accounts. Let’s know about these accounts in the next pointer.
Applicable Bank Account
Once you become a NRI, FEMA rules do not allow NRIs to hold a savings account. This means that transactions cannot be made through savings accounts but through NRO (Non-Resident Ordinary), NRE accounts (Non-Resident External) or Resident Foreign Currency Accounts (RFCAs).
NRO and NRE accounts allow you to proceed with remittances received in any permitted currency from outside India and permit money transfers. The only difference is that the deposits made in an NRE account are free from income tax, including the principal amount and the interest earned. However, the interest earned on an NRO account is subject to Tax Deductible at Source (TDS).
Investment Provision
Under FEMA, NRIs are not allowed to invest in small savings accounts or government PPF schemes.
Property Laws
NRIs are entitled to immovable property as gifts of inheritance from relatives and can also purchase property (residential or commercial) in India. However, purchasing agricultural lands, plantations, and farmhouse lands is prohibited.
Also Read: Check out the FAQs on the Restructuring 2.0 Scheme of RBI that provides benefits to the borrowers affected by the COVID-19 pandemic.
This was all about the Foreign Exchange Management Act for international students. 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 FEMA
The full form of FEMA is the Foreign Exchange Management Act. It was enacted by the Reserve Bank of India (RBI) to replace the Foreign Exchange Regulation Act (FERA).
FEMA Act, 1999 is a set of regulations governing foreign exchange transactions in India. It outlines procedures for sending money abroad for purposes like business, travel, medical needs, or education.
FEMA aims to facilitate external trade and payments while preventing money laundering and ensuring proper management of foreign currency transactions.
International students are treated as Non-Resident Indians (NRIs) under FEMA and can remit up to USD 250,000 per year for education-related expenses, based on the Liberalised Remittance Scheme of RBI.
Violations of FEMA regulations are treated as civil offenses and may result in monetary penalties rather than imprisonment, although non-compliance can lead to legal action.
RBI ensures orderly conditions in the foreign exchange market. For this purpose, it monitors the developments in the financial markets in the home country and abroad. When necessary, it intervenes in the market by buying or selling foreign currencies.
FEMA applies to all Indians and all branches, offices and agencies outside India owned or controlled by a person who is resident in India.
Yes, NRIs can invest in Indian stocks and mutual funds under FEMA regulations, but they must follow specific guidelines and procedures set by the RBI.
FEMA allows students to remit funds for tuition and living expenses, ensuring they have access to necessary financial resources while studying overseas.
NRIs can open Non-Resident External (NRE), Non-Resident Ordinary (NRO), and Foreign Currency Non-Resident (FCNR) accounts to manage their finances while living abroad.
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