Foreign Exchange Management Act (FEMA)

Foreign Exchange Management Act, popularly known as FEMA, was introduced in 1999 to replace the Foreign Exchange Regulation Act (FERA), 1973. FEMA, 1999 was formulated to consolidate and amend the law concerning foreign exchange with the objective of facilitating foreign trade and payments and hence several economic reforms were introduced under the Act. What is FEMA (Foreign Exchange Management Act) is asked by many people. Let’s go through the objectives of FEMA, as well as features and provisions of FEMA Act 199

Foreign Exchange Management Act (FEMA)
Foreign Exchange Management Act (FEMA)

Also Read: What is the definition of NRI as per FEMA?

What is FEMA?

FEMA (Foreign Exchange Management Act) is a much-simplified version of the Foreign Exchange Regulation Act (FERA), 1973. It was created to liberalize and privatize the Indian market, and thereby boost external payments and foreign trades. FEMA is the central legislation that deals with the inflow and outflow of investments to and from India and trade and business between India and other nations. 

Features of FEMA

The Foreign Exchange Management Act provides:

  • Free transactions on current account subject to some restrictions 
  • RBI control over capital account transactions
  • Dealings in Foreign Exchange through entities such an Authorized Dealer/ Money Changer/ Off-shore Banking Unit
  • Directorate of Enforcement
  • Provisions for enforcement, penalties, adjudication and appeal

Objectives of FEMA

FEMA was enacted with the objective of facilitating foreign trade and payments and promoting the sustainable development and management of the foreign exchange market. It helps in regulating the Indian forex market. 

As per FEMA, the balance of payment is an account of transactions between citizens of two different countries in products, services or properties. FEMA can be classified into two categories – Capital Account Transactions and Current Account Transactions. 

  • Capital account transactions for all capital transactions and the inflow and outflow of transactions.
  • Current account transactions for all trades of merchandise as an indicator of an economy’s status. 

Applicability of FEMA Act

FEMA 1999 is applicable to the entire India. The Act also extends to all branches, offices and agencies located outside India owned or controlled by an Indian citizen. Provisions of FEMA Act 1999 are highly liberalised in respect of foreign exchange. FEMA 1999 is applicable to:

  • Foreign exchange
  • Foreign security
  • BFSI (Banking Finance and Insurance) services
  • Export and import of any product/ or services from and to India
  • Citizen of India, residing in India or an NRI and PIO/OCI cardholder
  • Exchange of any kind of product/ service
  • Securities as defined under the Public Debt Act of 1994
  • Purchase and sell 
  • An entity owned by an Indian citizen outside India
  • Any Indian citizen residing in or outside India
  • Exchange of any kind of product or service
  • Any overseas company owned by a Non-Resident Indian  (NRI)

Current account transactions listed by FEMA are covered under the following:

  • Transactions prohibited by FEMA
  • Transactions that require prior approval of GOI
  • Transactions that require the Reserve Bank of India’s permission

Prohibitions under Foreign Exchange Management Act (FEMA)

  • Remittance out of lottery winnings
  • Sending money earned from horse racing/ riding, or any other hobby
  • Remittance for the purchase of lottery tickets, football pools, sweepstakes, banned publications, etc.
  • Payments of commission on exports made towards equity investment in joint ventures/ wholly-owned subsidiaries abroad of Indian companies.  
  • Remittance of dividends by any company, only to which the requirement of dividend balancing is applicable. 
  • Payment of commission on exports under Rupee State Credit Route. Commission up to 10% of the invoice value of export of tea and tobacco is not prohibited.
  •  Payments related to Call-back Services of telephone calls.
  • Remittance of interest income on funds in NRSR (Non-Resident Special Rupees) scheme account. 
  • Transactions with a resident of Nepal and Bhutan. 

Rules of trade for Foreign Exchange Management Act (FEMA)

As per the RBI guidelines, foreign exchange can be conducted with any authorized dealer by prior approval route or general permission route.

Private visit to any country except Nepal and BhutanLiberalized Remittance Scheme (LRS) limit of USD 2,50,000/ year
Personal donations/ gifts by residentsLiberalized Remittance Scheme (LRS) limit of USD 2,50,000/ year
Corporate donations by individuals except for a resident1% of the forex income during the previous 3 financial years or USD 5,000,000, whichever is less
Leaving India for employment abroadLiberalized Remittance Scheme (LRS) limit of USD 2,50,000/ year
Payment for emigrationLiberalized Remittance Scheme (LRS) limit of USD 2,50,000/ year
Business travel/ attending a training course or conference abroadUSD 2,50,000 per year
For medical treatment overseasUSD 2,50,000 per year
For maintenance expenses of a patient visiting abroad for a medical check-up or treatmentUSD 2,50,000 per year
Studies abroadUSD 2,50,000 per academic year or the estimation by the education institution, whichever is higher
For accompanying as attendant to a patient going abroad for medical check-up or treatmentUSD 2,50,000 per year
Payment of commission to a foreign agent for selling commercial or residential property in IndiaUSD 2,5,000 or 5% of the transaction, whichever is higher 
Consultancy services from overseasUSD 10,000,000/ project (for infrastructure projects). For other projects, USD1,000,000/ project
Reimbursement of pre-incorporation expensesUSD1,00,000 or 5% of the investment brought in India, whichever is higher
Rules of trade for FEMA

The Central Government approval is required for the following foreign transactions:

  • Cultural tours
  • Advertisement in international print media for any purpose, except for promotion of tourism, international bidding and foreign investments more than USD10000 by a State Government and its Public Sector Undertaking. 
  • Payment of import through ocean transport by a PSU or Government Department. 
  • Payment of freight of vessels chartered by PSU.
  • Payment of shipping container detention charges more than the rate prescribed by the Director-General of Shipping.  
  • Remittance of prize money or sponsorship of sports activity abroad by a person (except national/ international bodies) if the amount is more than USD1,00,000. 
  • The payment for hiring charges of transponders. 
  • Payment for membership of P&I Club. 
  • Payment of multimodal transport operators and their agents abroad. 

Also Read: Overseas Corporate Body (OCB) Meaning

The objective of FEMA is to ease foreign trade and payments and promote the sustainable development and management of foreign exchange market. FEMA requires a great deal of compliance. SBNRI has a team of experts to help NRIs comply with FEMA for investment in India, tax filing, NRE account opening, etc. You can download SBNRI App from the Google Play Store or App Store to ask any questions related to investment in stock market/ mutual funds, NRI account opening online and tax filing in India. To ask any questions, click on the button below. Also visit our blog and YouTube channel for more details. 

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