The document outlines the regulations under the Foreign Exchange Management Act (FEMA) related to capital and current account transactions, specifying their definitions, permissible transactions, and conditions. It differentiates between capital account transactions, which are generally prohibited unless specified, and current account transactions, which are usually permitted unless prohibited. Additionally, it details the approval processes for various external transactions and restrictions on foreign exchange drawals.

1. Capital and Current Account
Transactions under FEMA
CA. Divakar Vijayasarathy

2. Credits and Acknowledgments
V Thirumal
CA Jugal Gala

3. Legends used in the Presentation
AD Authorised Dealer
CG Central Government
FATF Financial Action Task Force
FEM Foreign Exchange Management
FEMA Foreign Exchange Management Act, 1999
FY Financial Year
LRS Liberalised Remittance Scheme
NRI Non Resident Indians
PAN Permanent Account Number
PSU Public Sector Undertakings
RBI Reserve Bank of India
Reg. Regulation
RFC Resident Foreign Currency
TDR Transferable Development Rights
USD United States Dollar

4. Presentation Schema
Introduction
Definition - Capital
Account Transaction
– Sec 2 (e)
Definition - Current
Account Transaction
– Sec 2 (j)
Illustration
Capital Account
Transactions – Sec 6
FEM (Permissible
Capital Account
Transactions)
Regulations, 2000
Current Account
Transactions – Sec 5
FEM (Current
Account
Transactions) Rules,
2000

5. Introduction
FEMA regulates a transaction based on whether the transaction is “Capital Account Transaction” or a
“Current Account Transaction”
Capital account transactions are deemed to be prohibited unless permitted; while current account
transactions are deemed to be permitted unless prohibited

6. Relevance

7. Capital Account Transaction – Sec 2 (e)
A transaction which alters
the assets or liabilities, including
contingent liabilities, outside India
assets or liabilities in India
of persons resident in India of persons resident outside India
In simple terms, cross border transactions pertaining to investments, loans, immovable
property, transfer of assets across borders are Capital Account Transactions

8. Current Account Transaction – Sec 2 (j)
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, and
expenses in connection with foreign travel, education and medical care of parents, spouse and children
A transaction other than a capital account transaction
and includes
In simple terms, cross border transactions pertaining to business which are recurring, personal
transactions such as travel, education, maintenance of family members, are Current Account Transactions

9. Illustration
An Indian resident imports machinery from a vendor in UK for installing in his factory
• As per accounts and income-tax law, purchase of machinery is a “capital expenditure”
• However, under FEMA, it does not alter (create) an asset in India for the UK vendor.
• It does not create, any liability to a UK vendor, for the Indian importer.
• Once the payment is made, the Indian resident or the UK vendor neither owns nor owes
anything in the other country.
• Hence it is a Current Account Transaction

10. Capital Account Transactions – Sec 6
Any person may sell or draw foreign exchange to or from an
authorised person for a capital account transaction
a) any class or classes of capital account transactions which are permissible;
b) the limit up to which foreign exchange shall be admissible for such transactions
c) any conditions which may be placed on such transactions
However,
Provided that RBI or the Central Govt. shall not impose any restrictions on the drawal of foreign exchange for payment due
on account of amortisation of loans (spreading out a loan into a series of fixed payments over time) or for depreciation
(decline in value) of direct investments in the ordinary course of business
RBI may, in consultation with the
Central Govt., specify
The Central Govt. may, in consultation with
RBI, prescribe
For cases involving debt instruments Cases not involving debt instruments

11. Contd.
hold, own, transfer or invest in
foreign currency, foreign security
or any immovable property
situated outside India
A person resident
in India may
if such currency,
security or property
was acquired, held or owned by
such person when he was
resident outside India
inherited from a person who
was resident outside India
or
RBI vide A.P. (DIR Series) Circular No. 90 dated 9/1/2014 has clarified that this provision covers the following transactions
Foreign currency accounts opened and maintained by such a person when he was a non-resident
Income earned through employment or business or vocation outside India taken up or commenced while being non-
resident, or from investments made, or from gift or inheritance received while such a person was a non-resident
Foreign exchange including any income arising therefrom, and conversion or replacement or accrual to the same, held
outside India by a person resident in India acquired by way of inheritance from a non-resident
A resident may freely utilize all their eligible assets (mentioned above) abroad as well as income on such assets or sale
proceeds after their return to India for making any payments or to make any fresh investments abroad without
approval of RBI, provided the cost of such investments and/or any subsequent payments received therefor are met
exclusively out of funds forming part of eligible assets held by them and the transactions is not in contravention to
extant FEMA provisions.

12. Contd.
Without prejudice to the provisions of this section, RBI may by regulation, prohibit, restrict, or regulate
establishment in India of a branch, office or other place of business by a person resident outside India, for
carrying on any activity relating to such branch, office or other place of business
hold, own, transfer or invest
in Indian currency, security or
any immovable property
situated in India
A person resident
outside India may
if such currency,
security or property
was acquired, held or owned
by such person when he was
resident in India
inherited from a person
who was resident in India
or
“debt instruments” shall mean such instruments as may be determined by CG in consultant with RBI

13. FEM (Permissible Capital Account Transactions)
Regulations, 2000
Rule 2 Definitions
Drawal means drawal of foreign exchange from an authorised person and includes
• opening of Letter of Credit or
• use of International Credit Card or International Debit Card or ATM card or
• any other thing by whatever name called which has the effect of creating foreign exchange
liability
Transferable
Development
Rights
means certificates issued in respect of category of land acquired for public purpose either by
Central or State Govt. in consideration of surrender of land by the owner without monetary
compensation, which are transferable in part or whole
Derivative means a financial contract, to be settled at a future date, whose value is derived from one or
more financial, or non-financial variables

14. Rule 3 - Permissible Capital Account Transactions
For Persons resident in India (Schedule I)
Investment by a person resident in India in foreign securities
Foreign currency loans raised in India and abroad by a person resident in India
Transfer of immovable property outside India by a person resident in India
Guarantees issued by a person resident in India in favour of a person resident outside India
Export, import and holding of currency/currency notes
Loans and overdrafts (borrowings) by a person resident in India from a person resident outside India
Maintenance of foreign currency accounts in India and outside India by a person resident in India
Taking out of insurance policy by a person resident in India from an insurance company outside India
Loans and overdrafts by a person resident in India to a person resident outside India
Remittance outside India of capital assets of a person resident in India
Undertake derivative contracts
Any person may sell or draw foreign exchange to or from an authorised person for a capital account transaction
specified in the Schedules:
Provided that the transaction is within the limit, if any, specified in the regulations relevant to the transaction.

15. Contd.
For Persons resident outside India (Schedule II)
Investment in India by a person resident outside India, that is to say,
• issue of security by a body corporate or an entity in India and investment therein by a person resident outside India; and
• investment by way of contribution by a person resident outside India to the capital of a firm or a proprietorship concern
or an association of persons in India.
Acquisition and transfer of immovable property in India by a person resident outside India
Guarantee by a person resident outside India in favour of, or on behalf of, a person resident in India
Import and export of currency/currency notes into/from India by a person resident outside India
Deposits between a person resident in India and a person resident outside India
Foreign currency accounts in India of a person resident outside India
Remittance outside India of capital assets in India of a person resident outside India
Undertake derivative contracts

16. Rule 4 - Prohibition
No person shall undertake or sell or draw foreign exchange to or from an authorised person for any capital account transaction
Provided that
Subject to other provisions, a resident individual may, draw from an authorized person
foreign exchange not exceeding USD 250,000 per FY or such amount as decided by RBI
from time to time for a capital account transaction specified in Schedule I
Facilities provided to Individuals (Schedule III) for Current Account
Transaction (discussed later) shall be subsumed within the above limit
where such drawal exceeds the amount specified above, the limit specified in the
regulations relevant to the transaction shall apply
No part of the foreign exchange of USD 250,000 shall be used for remittance directly or
indirectly to countries notified as non-co-operative countries and territories by Financial
Action Task Force (FATF) from time to time and communicated by RBI to all concerned
Currently FATF blacklisted countries: Iran and North Korea

17. Contd.
No person resident outside India shall make investment in India, in any form, in any company or partnership firm or
proprietary concern or any entity, whether incorporated or not, which is engaged or proposes to engage:
in the business of chit fund, or
as Nidhi Company, or
in agricultural or plantation activities, or
in real estate business, or construction of farm houses, or
in trading in Transferable Development Rights (TDRs).
"real estate business" shall not include development of townships, construction of
residential/commercial premises, roads or bridges and Real Estate Investment Trusts (REITs)
• The Registrar of Chits or an officer authorised by the State Govt. in this behalf, may, in consultation
with the State Govt. concerned, permit any chit fund to accept subscription from NRIs.
• NRIs shall be eligible to subscribe, through banking channel and on non-repatriation basis, to such
chit funds, without limit subject to the conditions stipulated by RBI

18. Contd.
No person resident in India shall undertake any capital account transaction which is not permissible,
as per Govt. Order, with any person who is, a citizen of or a resident of, or an entity incorporated in
Democratic People's Republic of Korea, unless specific approval from CG to carry on such transaction
The existing investment transactions, with any person who is, a citizen of or a resident of, or an
entity incorporated in, or any existing representative office or other assets possessed in
Democratic People's Republic of Korea, by a person resident in India, which is not permissible as
per Govt. Order shall be closed/liquidated/disposed/settled within a period of 180 days from
the date of notification of order being 21/04/2017, unless specific approval from CG to continue
The Govt. order was passed, for excluding Korea, based on resolutions sanctioned by the Security Council of the
United Nations

19. Method of payment & Declaration
Rule 5 The payment for investment shall be made by remittance from abroad through normal
banking channels or by debit to an account of the investor maintained with an authorised
person in India in accordance with the regulations made by RBI under the Act
Rule 6 Every person selling or drawing foreign exchange to or from an authorised person for a capital
account transaction shall furnish to RBI, a declaration in the form and within the time
specified in the regulations relevant to the transaction

20. Current Account Transactions – Sec 5
Any person may sell or draw foreign exchange to or from an authorised
person if such sale or drawal is a current account transaction
Provided that the CG may, in public interest and in consultation with RBI, impose such reasonable
restrictions for current account transactions as may be prescribed

21. FEM (Current Account Transactions) Rules, 2000
Rule 3 Prohibition on Drawal of Foreign Exchange
Drawal of foreign exchange by any person for the following purposes is prohibited:
Travel to Nepal and/or Bhutan; or
Transaction with a person resident in Nepal or Bhutan
(may be exempted by RBI subject to such terms and conditions)
Remittance out of lottery winnings
Remittance of income from racing/riding, etc., or any other hobby.
Remittance for purchase of lottery tickets, banned/prescribed magazines, football pools, sweepstakes etc.
Payment of commission on exports made towards equity investment in Joint Ventures/Wholly Owned
Subsidiaries abroad of Indian companies.
Remittance of dividend by any company to which the requirement of dividend balancing is applicable.
Payment of commission on exports under Rupee State Credit Route, except commission up to 10% of
invoice value of exports of tea and tobacco.
Payment related to "Call Back Services" of telephones.
Remittance of interest income on funds held in Non-resident Special Rupee Scheme a/c.
Transaction as per Schedule I as follows:

22. Rule 4 - Prior approval of Govt. of India
No person shall draw foreign exchange for Schedule II transactions without prior approval of the Govt. of India
Schedule II
Purpose of Remittance Ministry/Dept of Govt. of India whose approval is required
Cultural Tours Ministry of Human Resources Development (Department of
Education and Culture)
Advertisement in foreign print media for the purposes other
than promotion of tourism, foreign investments and
international bidding (exceeding US$ 10,000) by a State Govt.
and its Public Sector Undertakings
Ministry of Finance, Department of Economic Affairs
Remittance of freight of vessel charted by a PSU Ministry of Surface Transport (Chartering Wing)
Payment of import through ocean transport by a Govt.
Department or a PSU on cost insurance & freight basis (i.e.,
other than free on board and free alongside ship basis)
Ministry of Surface Transport (Chartering Wing) (other than
free alongside ship basis or free on board basis)
Provided that this rule shall not apply where the payment is made out of
funds held in Resident Foreign Currency (RFC) Account of the remitter

23. Contd.
Purpose of Remittance Ministry/Dept of Govt. of India whose approval is required
Multi-modal transport operators making remittance to their
agents abroad
Registration Certificate from the Director General of Shipping
Remittance of hiring charges of transponders by
a) TV Channels
b) Internet service providers
Ministry of Information and Broadcasting
Ministry of Communication and Information Technology
Remittance of container detention charges exceeding the
rate prescribed by Director General of Shipping
Ministry of Surface Transport (Director General of Shipping)
Remittance of prize money/sponsorship of sports activity
abroad by a person other than International/National/State
Level sports bodies, if the amount involved exceeds US $
100,000
Ministry of Human Resource Development (Department of
Youth Affairs and Sports)
Remittance for membership of Protection & Indemnity
Insurance Club
Ministry of Finance (Insurance Division)

24. Rule 5 - Prior approval of RBI
Every drawal of foreign exchange for transactions included in Schedule III shall be governed as provided therein
shall not apply where the payment is made out of funds held in Resident Foreign Currency (RFC) Account of the remitter
Schedule III
Individuals can avail of foreign exchange facility for the following purposes within the limit of USD 2,50,000 only
Any additional remittance in excess of the said limit for the following purposes shall require prior approval of RBI
Private visits to any country (except Nepal and Bhutan) Gift or donation
Going abroad for employmentEmigration Maintenance of close relatives abroad
Travel for business, or attending a conference or specialised training or for meeting
expenses for meeting medical expenses, or check-up abroad, or for accompanying as
attendant to a patient going abroad for medical treatment/check-up
Expenses in connection with medical treatment abroadStudies abroad.
Any other current account transaction
Facilities for Individuals

25. Contd.
For the purposes of Emigration, medical treatment and studies abroad, the individual may avail of exchange facility
for an amount in excess of the limit prescribed under the Liberalised Remittance Scheme (LRS) if it is so required
by a country of emigration, medical institute offering treatment or the university
if an individual remits any amount under LRS in a FY, then the applicable limit for
such individual would be reduced from USD 250,000 by the amount so remitted
“Resident but not permanently resident” - a person resident in India on account of his employment or deputation
of a specified duration or for a specific job or assignments, the duration of which does not exceed 3 years
For a person who is resident but not permanently resident in India and-
• is a citizen of a foreign State other than Pakistan; or
• is a citizen of India, who is on deputation to the office or branch of a foreign company or subsidiary or joint venture in
India of such foreign company,
may make remittance up to his net salary (after deduction of taxes, contribution to provident fund and other deductions).
A person other than an individual may also avail of foreign exchange facility, mutatis
mutandis, within the limit prescribed under LRS for the purposes mentioned

26. Contd.
Facilities for Persons other than Individual
The following remittances by persons other than individuals shall require prior approval of RBI
Donations exceeding 1% of their Forex earnings during the previous 3 FYs or USD 5,000,000, whichever is less, for—
• creation of Chairs in reputed educational institutes,
• contribution to funds (not being an investment fund) promoted by educational institutes; and
• contribution to a technical institution or body or association in the field of activity of the donor Company.
Commission, per transaction, to agents abroad for sale of residential flats or commercial plots in India exceeding
USD 25,000 or five per cent of the inward remittance whichever is more
Remittances exceeding USD 10,000,000 per project for any consultancy services in respect of infrastructure*
projects and USD 1,000,000 per project, for other consultancy services procured from outside India
Remittances exceeding 5% of investment brought into India or USD 100,000 whichever is higher, by an entity in
India by way of reimbursement of pre-incorporation expenses
Procedure
The procedure for drawal or remit of any foreign exchange under this Schedule
shall be the same as applicable for remitting any amount under the LRS

27. *Infrastructure Sector
Energy which will include
(i) electricity generation,
(ii) electricity transmission,
(iii) electricity distribution,
(iv) oil pipelines,
(v) oil/gas /liquefied natural gas (LNG) storage facility (includes strategic storage of crude oil) and
(vi) gas pipelines (includes city gas distribution network)
Communication which will include
(i) mobile telephony services /companies providing cellular services,
(ii) fixed network telecommunication (includes optic fibre/cable networks which provide broadband/internet) and
(iii) telecommunication towers
Transport which will include
(i) railways (railway track, tunnel, viaduct, bridges and includes supporting terminal infrastructure such as loading/
unloading terminals, stations and buildings),
(ii) roads and bridges,
(iii) ports,
(iv) inland waterways,
(v) airport and
(vi) urban public transport (except rolling stock in case of urban road transport)

28. Contd.
Water and sanitation which will include
(i) water supply pipelines,
(ii) solid waste management,
(iii) water treatment plants,
(iv) sewage projects (sewage collection, treatment and disposal system),
(v) irrigation (dams, channels, embankments, etc.) and (vi) storm water drainage system
(i) mining, (ii) exploration and (iii) Refining
Social and commercial infrastructure which will include
(i) hospitals (capital stock and includes medical colleges and para medical training institutes),
(ii) Hotel Sector which will include hotels with fixed capital investment of Rs. 200 crore and above, convention centres
with fixed capital investment of Rs. 300 crore and above and three star or higher category classified hotels located outside
cities with population of more than 1 million (fixed capital investment is excluding of land value),
(iii) common infrastructure for industrial parks, SEZs, tourism facilities,
(iv) fertilizer (capital investment),
(v) post harvest storage infrastructure for agriculture and horticulture produce including cold storage,
(vi) soil testing laboratories and
(vii) cold chain (includes cold room facility for farm level pre-cooling, for preservation or storage or agriculture and allied
produce, marine products and meat
Any other sectors as prescribed by the Reserve Bank in consultation with Government of India

29. Procedure under LRS
Individual must
designate a branch of
an AD for remittances
Mandatory to Furnish
PAN to make
remittances under LRS
Resident individual
seeking to make
remittance shall furnish
Form A2 – An
application for
remittance abroad
In case of remitter being
a minor, Form A2 must
be countersigned by
minor’s guardian

30. Non-applicability of Acquiring Approvals
Requirement of Approval from Govt. or RBI shall not apply to drawal made out of
funds held in Exchange Earners' Foreign Currency (EEFC) account of the remitter
However, it shall still apply for going abroad for employment, emigration and
remittance for membership of Protection & Indemnity Insurance Club
Requirement for prior approval of RBI shall not apply to the use of International Credit Card for making
payment by a person towards meeting expenses while such person is on a visit outside India
Rule 6
Rule 7

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