FEMA 1999 & Foreign Exchange Management India 2026

In order to understand the approach and structure of FEMA, there are some basic concepts related to the movement of foreign currency outside or inside a country. In this section, Dr. Vijesh Jain will discuss these essential basic concepts for the reader to effectively understand what FEMA calls for.

What are the basic concepts that need clarity to understand the value and functions of FEMA?

Dr. Vijesh will list out three concepts that need clarity in order to understand what FEMA is and what it does.

So the balance of payment of a country denotes the difference between FX earnings and FX expenses of a country while transacting any business or non-business with other countries

Current Account

Current account transactions are bona fide transactions in the normal business of foreign trade and investments. For example, exports of goods and services or imports of goods and services. These transactions are essential to the process of globalization of a country, and the government needs to manage and allow such transactions as per the requirements of increasing world trade.

Capital Account

Capital account signifies all such transactions that alter the assets and liabilities of a country, including FX reserves, which also vary from time to time as per the changing trade scenario of a nation. For example, when we export something, the country receives FX or, in other words, import currency (capital), and when we import something, the country loses foreign currency (capital), thereby altering the FX reserves.

What is a capital account, and what are the capital account transactions?

And to understand the Foreign Exchange Management Act, which is of the nature of facilitation, which is of the nature of encouragement of business, and which is in line with the liberalization, privatization, and globalization of India, the economic reforms that started in 1991 in India, the above concepts have to be understood very clearly.

It was not required to understand these things in the case of FERA, but it is very much required to be understood in the case of FEMA, because FEMA is a very well-thought act which is in line with international practices and in line with the needs of the country, which wants to progress and take the benefits which are accrued to it, due to the overall globalization in the world, the progress of the world in the technological field, in the different dimensions of business, trade, and society, whatever advancements are happening in the world to take the benefit from that globalization and progress of the world, it is very, very important that the FEMA act is in line with the need of the hour.

And to understand this act, these basic concepts have to be understood very well.

Welcome back.

Now, let us first try to understand what the balance of payments is.

Every country has a balance of payments with respect to its foreign exchange transactions.

Details of all the foreign exchange transactions of a country with respect to net foreign exchange earnings and net foreign exchange expenditure, all types of current transfers, or investments.

Whatever different types of foreign exchange transactions exist, those details are recorded in the balance of payments.

The balance of payment is the dossier of all these transactions, the net sum of which theoretically should be zero. Because it also includes the foreign exchange reserves, which can be positive as well as negative, depending on whether the net foreign exchange earnings are more than or less than the net foreign exchange expenditure in a particular period of time, which can be six months or one year.

Whatever the period is, which is normally one year, but whatever it may be, in that particular period, whatever the country's different transactions are, they are listed in the balance of payment.

In practice, however, there can be some differences, some statistical errors, because of foreign exchange rate fluctuations and many other reasons.

In practice, it is never zero, but theoretically it has to be near zero.

If it is a positive foreign exchange reserve, it means net earnings are more than expenditure.

Then it is a surplus foreign exchange reserve.

And if the foreign exchange expenditure is more than the foreign exchange earnings of a country, then it is said that the foreign exchange reserve is in deficit.

The deficit balance of payment means a negative balance of payment, which means the expenditure is more than earnings.

There are generally two components of the balance of payment, and these components are the current account, which lists all the current account transactions, which are normally the net national income.

It reflects net national income— the current transfers, export-import transactions, and any transaction of the current nature that does not change the assets and liabilities of a country.

All these transactions are listed in the current account. And all other transactions, which include transactions for investments, foreign exchange reserves, or commercial borrowings, international commercial borrowings, foreign aid.

Any transaction that has an impact on the assets and liabilities of a country is listed in the capital account.

There are only two accounts.

And the foreign exchange reserve is part of the capital account.

Capital account transactions are nothing but the reflection of the net change in the assets and liabilities of the country and the FX reserve.

This is what is called the balance of payments.

To give you more details on the different types of current account transactions and capital account transactions.

If we talk of the current account transactions: trade in goods, trade in services.

Any earnings made in selling services internationally or importing the services, any expenditure made in foreign exchange for importing these services from abroad, are all part of the current account transactions. Or any income or expenditure on investments already made overseas.

For example, interest income or dividend income from investments made overseas, which comes to the country, either to a person or a company, the government, or any other organization in the country which has made any investments abroad, or the individuals, companies, governments, or any organization in the country that have to pay for the investments made by overseas persons.

All these transactions are current account transactions. Current transfers, like money to be sent to relatives, parents, or dear ones abroad by individuals, companies, or even trusts, who pay money to the people who are related to the trust in the country.

Any kind of payment is to be made.

Also, the payment is made for educational purposes, for the education of relatives or dear ones.

All these are current transfers.

All are part of the current account transactions. Capital account transactions are those transactions that I just explained to you, which have an impact on the assets or liabilities of an individual or a company, a government organization, or any private or public organization, or even some trusts or societies, or even NGOs or nonprofit organizations.

Any kind of transaction that has an impact on the assets and liabilities of residents dealing with non-residents.

They all come in the capital account.

For example, import of capital, export of capital, foreign aid, or, of course, the foreign exchange reserve, which is maintained in the country, are all part of the capital account transactions.

To give you examples of these transactions.

For example, if we talk of the current account, we have the transactions which are related to export proceeds or the payments for the imports of goods or services, or overseas profits, dividends, payments for relatives, or for education.

These are all examples of current account transactions.

Similarly, examples of capital account transactions include foreign direct investment (FDI), overseas direct investment (ODI), external commercial borrowings (ECB), or the sale/purchase of properties, investments made in projects outside the country, or money coming into the country through investments.

All these transactions have an impact on the changed status of assets or liabilities.

All these transactions are part of the capital account along with the foreign exchange reserves.

These are very important things to understand when we talk about foreign exchange and foreign exchange management, or the regulations.

These are the very basic things that are required to be understood.

These are also some of the basic things that are normally asked when you go for certain interviews, which are related to foreign exchange management roles in companies.

So your knowledge should be very clear—knowledge, very clear-cut knowledge of the meaning of the balance of payment, the meaning of current account and capital account, the difference between the two, and the types of transactions which are categorized as current account transactions or capital account transactions.

These qualities should be in your mind when you go for any such interviews related to these types of roles.

In the next video, Dr. Vijesh Jain will talk about the different objectives of FEMA in order to understand what FEMA does and why.

Now, friends, let us talk about the main objective of the Foreign Exchange Management Act.

And we are talking about the Foreign Exchange Management Act of 1999.

As I had already mentioned to you, FEMA 1999 was the reflection of the changing fortunes of the country, the changing approach of the country, and the integration of India with the globalized economy, the globalized system of business.

The main objective of the FEMA Act was to consolidate and amend the laws related to the regulation of foreign exchange in the country, keeping in view the interest of the economic development of the country in the light of the changing approach—liberalization, privatization, and globalization of the country—which had already started giving very good results, and the country was enjoying the fruits of liberalization.

To accelerate that process, consolidation and amendment of the laws related to foreign exchange management and regulations governing foreign exchange transactions were needed very badly.

The twin objectives, or rather the sub-objectives, of FEMA are:

1. Facilitating external trade and payments and other types of foreign exchange transactions of all types, which I just mentioned—whether it is current transfers, investments, foreign aid, or borrowings. All types of foreign exchange transactions need to be categorized under different heads by the nature of the transactions, and the law should be able to facilitate and promote external trade, and also make it easy to make foreign exchange payments, overseas payments, receive earnings, and handle all other types of foreign exchange transactions in light of the changing times.

2. Promoting and facilitating the orderly development and maintenance of a very healthy foreign exchange market in the country, which means in India. India needed a professional, globalized, modern foreign exchange market, which is in line with the global practices—uniform practices of dealing with foreign exchange throughout the world.

To be able to integrate with the global economy, it was very important that the laws enshrined in the Foreign Exchange Management Act promote the orderly development and maintenance of a very healthy foreign exchange market in India.

In this next video, Dr. Vijesh Jain discusses the elements of the entire ecosystem of FEMA, which need to be in the possession or control of a person concerned with an up-to-date knowledge of FEMA

Now, friends, if we look at the different dimensions of the legal framework that regulates foreign exchange in the present times in India.

We have the provisions of the Foreign Exchange Management Act, which were originally enacted in 1999. And since 1999, in several decades, many new amendments and modifications have been made.

All these legal provisions, which are in force at present, originate either from the Foreign Exchange Management Act or the additional regulations, notifications, rules, circulars, or master circulars.

There is a range of categories of amendments, circulars, and changes in the rules and regulations that came afterward.

We have this whole complete ecosystem now, which comprises the full ecosystem of the legal provisions of foreign exchange management and regulations in India.

This is actually the present status of the different dimensions of the legal provisions and regulations of foreign exchange management in India. Authorities which handle all the legal provisions and regulations of foreign exchange management in India, and enforce the rules, regulations, and controls, and facilitate the foreign exchange transactions by these provisions, are RBI, the foreign exchange department of RBI, Enforcement Directorate which also has certain roles even today, adjudicating authority, special director of Appeals, Appellate Tribunal, FIPB, Foreign Exchange Promotion Bureau, and DIPP, Department for Promotion of Industries and Internal Trade.

All these entities and authorities together govern and enforce the rules and regulations connected with foreign exchange management in India.

As I had already mentioned to you, overall, the Act has been made very simple, and the sections are very limited in the Act. The total number of sections is 49 in this Act.

For example, sections 1 and 2 deal with the preliminaries, preamble, and definitions.

Sections 3 to 9 deal with the regulations and management of foreign exchange.

As I had mentioned to you, in Schedule three, Section 3 transactions are mentioned for which, under the permissible limits, there is no need for any permission from the RBI. Only for the transactions that exceed the permissible limit, permissions are required, and that too only for section 3.

Sections 10 to 12 deal with the authorized person who can deal with foreign exchange in India, and contraventions and penalties are listed in sections 13 to 15 of the Act.

Adjudication and procedure for appeal for any decisions and penalties made for the contravention of the Foreign Exchange Management Act, and the legal provisions thereafter, are given in sections 16 to 35, including the amendments. The description and details of the Directorate of Enforcement, and their role, are mentioned in sections 36 to 38, and all other miscellaneous provisions of the Act are in sections 39 to 49.

This is the simplified structure of the Foreign Exchange Management Act 1999.

Welcome back, friends.

Let us talk about some important basic concepts that have to be understood in this course.

And these are the focus of this course.

The core issue in this course is to understand the basics connected with things like residential status, which means who is the resident from the FEMA point of view, from the Foreign Exchange Management Act point of view.

We will focus on this aspect.

We will take some examples to understand what exactly the concept of the resident and the concept of the non-resident are.

Who is the non-resident?

What is the difference between a resident and a non-resident?

These are the things we will try to understand, and this will be our focus.

Then we will also be talking about the main objective of the Foreign Exchange Management Act.

And when it comes to foreign exchange, we will discuss the types of foreign exchange transactions.

What investments can be made by non-residents involving India, involving our country, which is trying to manage the foreign exchange transactions, and the nature of the foreign exchange transactions that are useful for the long-term economic development of the country?

Looking at the broader picture and the definition of the non-resident, who are the non-residents, and what types of investments they can make in India, and how they can do it—these are the concepts we have to understand.

And of course, what about the residents? What can the residents do with foreign exchange? What types of transactions can they carry out? And what are the limits? To what limits can they spend foreign exchange without permissions or with permissions?

And what are the types of transactions for which residents are prohibited or non-residents are prohibited? That actually is the basic understanding of the Foreign Exchange Management Act.

That is where the role and the importance of the Foreign Exchange Management Act come.

And of course, we have already talked about it in the earlier sessions.

We will be further talking about the classifications of the different transactions in the capital account and the current account.

From the resident point of view, from the non-resident point of view, what are the current account transactions that are freely applicable, where no permission is required?

What are the current account transactions which are prohibited?

Let me tell you, because India has adopted current account convertibility, the majority of the transactions related to current account transactions are freely operable by residents.

There are no restrictions.

And even for non-residents, the government has provided a lot of freedom for current account transactions.

And the fact that we have current account convertibility means that, in line with international practices, the systems are much more liberal.

I will be talking about those kinds of things.

And of course, the capital account transactions, many of which, in fact, most of which, are still restricted and permissions are required, because India has not adopted capital account convertibility.

And because India has not adopted capital account convertibility, the types of transactions that are listed in the capital account have to be watched and carefully managed.

Any transaction that has an impact on the assets or liabilities of individuals, companies, organizations, or government departments, whether resident or non-resident, and if the impact of any transaction changes the status of the assets and liabilities, is a capital account transaction, and restrictions apply to them almost entirely.

I will be talking about this regime of the capital account also.

And that has to be watched.

We also need a basic understanding of the types of accounts which residents can operate in India, as well as non-residents can operate in India.

What are the features of those accounts?

What are these accounts called?

How can they be opened?

How can they be operated?

All these things I will be talking about in this section, which will deal specifically with the types of accounts related to foreign exchange or the holding of foreign exchange, and where the transactions are foreign exchange transactions.

What are the freely allowable transactions in those accounts for residents as well as for non-residents? These are the things we will be talking about.

This will be our approach and course structure when we talk about making the Foreign Exchange Management Act easy, explained, and defined in the most comprehensive manner.

That actually is the objective of this course.

We have several concepts that apply to residents to be called residents in India as per FEMA, based on conditions, mainly focusing on the previous year's status of the person. And this person may not necessarily be an Indian citizen. The intention of the person to stay in India is the focus

Friends, we would be talking about, first of all, the description of the definitions as per the FEMA Act of 1999 about the residential status of different individuals, companies, organizations, NGOs, government departments, and government entities.

Whatever the entities, how do you define the residential status—whether they are resident or non-resident?

In this section, I will be talking about these aspects.

Section 2 of the FEMA Act defines the nature of a resident.

As per the FEMA Act, a resident is defined in Section 2, para V.

In a very short form, it is to be understood that a resident is defined as someone who resided in India for more than 182 days, almost half of the previous financial year.

That is very important.

The residential status of any individual, company, entity, or government organization is defined in the current year based on the action of that person, and that is their residing in the country, their presence in the country in the last financial year for more than 182 days, which means almost six months.

The definition is further elaborated by saying that it does not include people who are currently outside India. They have already left the country in the current financial year for the purpose of employment, which means the money angle is there. They are making money outside India, for employment and for setting up a profession or business outside the country. It means they have left the country.

They are not in the country, and they are gone for good. They want to work there. They want to get some salaries there. They want to make some income, and they probably would like to set up their own business if they are not looking for a job there. They will try to earn some money from that business.

Whatever their intention is for this type, where they want to earn money, their intention is very important. They intend to be out of the country for an uncertain period because they have gone for a job. They are making money. They are not sure how long they will be working.

There is no definite time period that they will come back unless they have been sent by an employer. If there is a company in India that has sent them for six months, eight months, or a fixed tenure, they have been sent on deputation to a foreign country, and they are not included. Anybody who has gone voluntarily to earn money is excluded.

Recently, as per a circular of the RBI, which you can see in this lecture resource section, I have included a document in this lecture in the resource section. The circular from the RBI talks of students who have left the country in the current year. Even if they have resided for more than six months, that is 182 days, in the last financial year, if they have left the country in this current year for education purposes, they are excluded.

They have been admitted to a college and are studying there. RBI has clarified that it is very much possible that even though their course may be of two years, three years, or maybe one year, which is a fixed period and not indefinite, and their intention may be to come back to India, it has been observed that students go outside the country, they study, and when they study, they are involved in some activities wherein they would like to earn some money.

They want to earn while they learn, and that is very common. Not only that, in many cases when the course is complete—one year, two years, three years, whatever it is—they invariably take up some practical assignment in some companies, or sometimes they get permanent jobs also, or long-term jobs there, based on their studies. They definitely earn money.

What RBI has done, as per the circular I just mentioned, which you can see in the resource section, is that those kinds of cases have also been excluded. As per the FEMA Act of 1999, through this circular, students going abroad for studies are also excluded from being called residents.

There has been a lot of debate on this topic of students, but as of today, this is the situation. What actually is happening is that they intend to stay outside India for an uncertain period. Anybody who has gone outside the country in the current year, in spite of the fact that in the last financial year they spent more than 182 days in the country, is excluded.

What matters is their status in the current year regarding their presence in the country. If it is not there, then what is the intention of their absence from the country in the current year? These things are defined in the FEMA Act of 1999, along with the circulars that frequently come.

In this course, I will be talking about several other types of circulars of different appellate authorities that enforce the FEMA regime of regulating foreign exchange transactions in India.

Now, there is another category of residents who are coming to the country, and they are also included as residents. These include persons who have come to India to stay here. They intend to stay for an indefinite period. They are here.

Some foreign companies send their employees for a deputation of six months or seven months, which is a fixed tenure. They may not be called residents, but if anybody has been posted in India by a foreign company in their branch office, subsidiary company, or joint venture company, then all those people who have come to India, or certain people who have come voluntarily to India to take some job and who have got permission to work, are residents.

For example, IT companies invariably hire a lot of talent from abroad who come to India and work in IT companies in India. Those people who have come to India to stay here are also residents, but they would have to satisfy the condition that in the last financial year, they had spent more than six months, that is 182 days, in India.

That condition has to be applied to anyone who would be called a resident in India. That condition will stay. People who have come to India for employment purposes, as I just mentioned, and who meet the criteria of having spent more than 182 days in India in the previous financial year, the Indian financial year, are included.

I would like to specify this: as per the FEMA Act, we are talking of the Indian financial year, not the financial year of the person’s country of origin. That is not the case.

People who have come to India for business or some vocation, and who also meet the criteria of having spent more than 182 days in the country in the previous financial year, are included.

All these people are included, and meeting the criteria, they are referred to as residents as per the FEMA Act of 1999 and the circulars and addenda.

Now, body corporates incorporated in India, including overseas companies such as Amazon (Amazon India), Samsung (Samsung India), LG (LG India), and Honda Cars India, are also residents. Many companies from Japan, America, and other countries have set up companies in India. The companies, being entities, are referred to as residents once they meet the criteria of having spent 182 days in the previous financial year. The same criteria apply to body corporates also.

It is not just individuals, not just small businesses—it also applies to bodies corporate and multinational companies. The Act also includes branches or agencies of non-residents located in India. The non-resident, of course, is not resident, as they are outside India, but their company branches or agencies owned by or associated with non-residents, which are incorporated in India and present in India, meet the criteria of having operated in India for more than 182 days in the last financial year. These branches, agencies, and entities are also called residents.

This description of residents is very elaborate.

I have written down the complete details of who is a resident, the complete dossier—what are the entities, individuals, people, and bodies corporate. All these descriptions I have listed in a complete document titled Who is Resident in India as per FEMA Act of 1999.

That document, friends, you can see in the resource section of this lecture. Please check the resource section of this lecture, and you will find this document, which will give you very fine details of who all are residents.

Friends, welcome back.

We were talking about who is the resident as per FEMA 1999.

Let us look at certain examples.

We will have a better idea about the residential status as per FEMA 1999.

As you can see from this example, which actually explains the residential status of a person:

If a person stayed in India during 2001-2002 for less than 182 days, he will not be a resident. Of course, he will not be a resident because he did not complete 182 days during the financial year 2001-2002.

For 2002-2003, even if he resides in India for more than 182 days, that is in the current year, when we are finding the status, what is relevant in 1999 is the preceding year, not the current year.

In the preceding year, if the person has not stayed for 182 days, then it will not work.

Now, even if a person is a foreign citizen, if he has not left India for any of the aforesaid purposes—right—if he has left in the current year for purposes other than the mentioned purposes, which show the intention of long-term stay outside India, if it is not so, then during 2002-2003, if he has not left, that means in the current year he would be considered as a person resident in India during the financial year 2002-2003, because in 2001-2002 he stayed for more than 182 days as per the requirement of FEMA 1999.

This is the explanation.

Now, let us take some examples, and I will leave it to you to find the answer yourself.

If you want to see the answers for these examples, which I am going to take up, you can look into the resource section. You will find a note that will explain the solution for this example, and it will give you the answer.

But before you look into the resource section and look at the answer, try to find the solution to these examples, these exercises, yourself, so you will get an idea that you have understood the concept of the residential status.

What is residential status as per FEMA 1999?

In this example, Mr. M. Shaha resided in India during the financial year 2015-16. He left India on 1st August 2016 for the United States to pursue higher studies for three years. That was the idea.

What would be his residential status during the financial year 2016-17 and during 2018-19?

Try to find out the answer to this example, this exercise, and look at the answer later on. Once you have done your exercise, then look at the answer which is given in the note, which is a downloadable Word file that contains the answer to this question.

Now, let us look at another exercise.

Another example.

Again, try to find out the answer yourself, and if you are satisfied with your answer, if you feel that your answer is correct, then recheck your answer from the answer note, which is available in the resource section of this lecture, which is a downloadable file. You can download the file and look at the answer.

Let us look at this exercise.

It is about a company, the name of which is Tokio. It is a Japanese company with several business units all over the world. It has a robotic unit with its headquarters in Mumbai.

Basically, they are in robotics. This unit works on robotic solutions and artificial intelligence, and is headquartered in Mumbai.

Now this headquarters is of the Indian subsidiary. This company has an Indian subsidiary, which has its headquarters in Mumbai.

This Indian robotic company of Tokyo has a branch in Singapore.

Headquartered in Mumbai, it controls the Singapore branch of another robotic unit that works on robotic solutions. They create robotic solutions.

Let us try to find out the status of the Robotic Solutions unit in Mumbai and the Robotic Solutions unit in Singapore. And Singapore is actually a branch of the company.

We have to find out the status of the Indian subsidiary of Tokio, which is the headquarters, and the branch unit, which is in Singapore.

Once you have written down your answer, please look into the final answer with an explanation. I have also explained the reason for the answer in the downloadable file, which is given in the resource section of this lecture, and it is a downloadable file.

Now, let us look at the last example and exercise, which is related to the residential status of individuals, companies, organizations, government organizations, or any type of entity that is located in India and has a relationship with India.

We are trying to understand: how do you define and understand the residential status of the person, the company, or the entity as per the FEMA 1999 Act?

This is the last example and exercise.

Miss Sophia is a British citizen and she is an air hostess with British Airways. She flies for 12 days a month, and thereafter she takes a break for 18 days. During the break, she is normally accommodated in London, which is the city where the airline is headquartered.

However, for some peculiar security considerations, she was based in Mumbai in the last financial year. During the last financial year, she was accommodated in Mumbai for more than 182 days.

This becomes a FEMA-compliant stay in the last financial year for Miss Sophia.

Let us try to find out what her status would be under FEMA in the current year.

Okay, let us find out the answer. And if you are satisfied with whatever you have written down as your answer, and you want to recheck it, you can look at the solution, which is given in the downloadable file in the resource section of this lecture.

In the next video, Dr. Vijesh Jain will compare the FEMA and IT Acts in terms of their different treatment of the term 'resident' and the reasons behind this difference.

Okay, friends, now let us look at the differences between the status of a person, the residential status of the person from the point of view of FEMA, versus what is defined in the Income Tax Act of India.

Basically, we are trying to understand the differences between FEMA and the Income Tax Act.

In both Acts, we have the definition of the resident, and it is not the same.

Actually, I want to tell you that the definition of a resident from the point of view of FEMA is different from the definition explained in the Income Tax Act.

As I have just mentioned, the definition of non-resident or resident is different under the Income Tax Act and the Foreign Exchange Management Act.

The reason for this difference is that both the Acts have different objectives.

Now, what are these different objectives?

The objective of FEMA is to decide whether a person is a resident or non-resident, and how they can invest in India or make any investment related to India. That is the objective of FEMA.

The objective of the Income Tax Act is to decide how the income from various investments will be taxed.

Basically, the Income Tax Act is for government revenue collection through direct taxes. That is the Income Tax Act.

But FEMA is not for that purpose.

FEMA is about permissibility. It decides the permissibility of making foreign exchange-denominated investments, foreign currency-denominated investments, and how and where such investments can be made.

That is not the objective of the Income Tax Act.

Now, if we look at the general differences between the Income Tax Act and FEMA, the financial year is actually not clearly defined in FEMA.

For the purpose of working, it is assumed that the financial year is the same as in the Income Tax Act, which in India starts from 1st April and ends on 31st March of the following year.

That is assumed, but it is not defined.

Income tax requires the physical presence of a person in India for 182 days or more, and that too in the current year.

FEMA, on the other hand, requires 183 days, meaning actually more than 182 days. There is a difference here.

The Income Tax Act considers the physical presence of a person in the current financial year, while the status of a resident under FEMA (1999 Act) is estimated based on the physical presence of the person in the preceding year.

These are the differences between the two Acts, and these differences persist because of their different objectives.

The balance of payments still has the transactions, which are either capital account transactions or current account transactions. But the FEMA Act classifies transactions in three categories: capital account transactions, current account transactions, and transactions under the Liberalised Remittance Scheme. This has to be understood very clearly.

Friends, if we go a little deeper into the classifications of the transactions in FEMA and based on the Act and the other legal ecosystem—circulars, master circulars, addenda, amendments—we have the categories of transactions, which are generally categorized as capital account transactions, current account transactions, and transactions under the Liberalised Remittance Scheme (LRS).

We now have the third category also under FEMA, based on the new schemes that were added to the Act subsequently.

We have these three types of classification.

The balance of payments still has the transactions, which are either capital account transactions or current account transactions.

But the FEMA Act classifies transactions in three categories: capital account transactions, current account transactions, and transactions under the Liberalised Remittance Scheme.

This has to be understood very clearly.

Section 2(j) explains the different types of current account transactions as per FEMA.

I will just give you glimpses of the different types of current account transactions.

If you want to see the complete explanation and the complete list of the current account transactions, please look at the master document, which gives the complete explanation and set of current account transactions as per Section 2, in the note I have provided in the resource section of this lecture.

You can download this note, and you will get complete details—a complete dossier of the current account transactions as per the FEMA Act.

The common current account transactions include those that are other than capital account transactions, which means the transactions that do not alter the status with respect to the assets and liabilities of any person in India, or the company, or the entity, or the organization, or the government department.

The assets and liabilities are not affected. Those transactions are current account transactions.

They include, for example, foreign trade in goods and services. These are transactions involving foreign exchange.

Interest on loans and net income from investments made abroad, or payments to be made with respect to paying the interest for loans which a resident in India has borrowed from external sources overseas in foreign currency.

Then, transactions related to the remittances to be made for the general upkeep and requirements of parents, spouse, or children residing abroad.

These are the common current account transactions.

They also include foreign travel, education, and medical care for themselves or family members.

These current account transactions, under the permissible limits, allow any person to sell or draw foreign exchange to or from an authorized person, normally the authorized foreign exchange dealer.

If such a sale or withdrawal is a current account transaction and is within the permissible limit, this is mentioned in Section 5 of the FEMA Act.

Now, let us look at the current account transactions that are prohibited as per FEMA.

The complete list of the prohibited transactions as per FEMA I have listed in a complete dossier, a note I created, which is a downloadable file and is provided in the resource section of this lecture.

You can download this file from the resource section of this lecture, and it will give you the complete list.

I will only tell you some of the common prohibited transactions, which are Schedule I transactions.

For example, winnings from lotteries or from racing or any other hobbies you may have, like Formula One races or certain types of bets. If you win money, that money is prohibited—you cannot bring it back to India.

Payments for callback services in telephony are also prohibited.

Other types of transactions prohibited as per FEMA relate to travel to Nepal and Bhutan, where foreign currency transactions are prohibited with respect to travel to these countries.

Transactions with any person who is a resident of Nepal or Bhutan are also prohibited.

Both are neighboring countries of India, and because of rupee arrangements with these countries, the Government of India forbids any foreign exchange transactions related to travel or transactions with residents of these two countries.

Other prohibitions include the purchase of lottery tickets, banned and proscribed magazines, football pools, and sweepstakes.

Any money involved in these activities, either for payment purposes or for receiving income, is prohibited as per the FEMA Act.

Another example is dividends by any company to which the requirement of dividend balancing is applicable.

Dividend balancing means the dividend is balanced or adjusted against export earnings.

This practice is not very common nowadays—it used to be common in the past to offset foreign exchange outflow or inflow.

But there may still be certain cases of companies to which the requirement of dividend balancing is applicable.

Such foreign exchange transactions involving dividends from those companies are prohibited.

For the complete list of current account transactions that are prohibited, please look at the complete document I have provided in the resource section of this lecture.

You can download that. It is a downloadable file.

Hello, friends.

Welcome to this new lecture in this course, which is nothing but a comprehensive guide to LRS with respect to CAT, that is, the current account transactions.

That is the focus of this particular lecture.

Let us start with the discussion on what LRS is. Let us try to understand what LRS is. LRS, the Liberalised Remittance Scheme, was introduced by the Reserve Bank of India in February 2004.

It enables Indian residents to remit funds abroad for permissible current and capital account transactions.

Under this scheme, that is, the LRS scheme, Indian residents can freely remit up to $250,000 per financial year for approved purposes only, subject to certain conditions.

We will try to go a little deeper into this aspect—what are the approved purposes, what are the conditions, and what are the documents and procedures required? All these things we are going to discuss in this particular lecture.

We will be covering in this guide things like what permissible current account transactions are, what the limits and restrictions on these are, and how they differ. We will talk about that.

We will discuss what the prohibited transactions are under LRS, what the documentation requirements are, what the procedures are, and what the role of monitoring and reporting by the banks you deal with is for this purpose.

Finally, we will discuss a summary of all the key points that we have covered in this guide.

Let us first ponder what are the permissible current account transactions.

LRS allows remittances for several types of current account transactions, including but not limited to private visits, gifts or donations, business travel, or medical treatment.

When we say private visits, we are talking about foreign travel for leisure, vacation, or any personal purpose, any personal visits.

When we talk of gifts or donations, we are talking about sending monetary gifts or making donations to individuals or organizations abroad, if applicable.

Business travel includes expenses for business-related travel, such as attending conferences or meetings, or presenting research papers by academics.

Medical treatment covers transactions involving expenses incurred for medical treatment abroad, including travel of the patient as well as accompanying attendants.

In addition, other permissible transactions include studies abroad, maintenance of close relatives, emigration costs, and employment abroad. Employment abroad refers to initial expenses for taking up employment in a foreign country.

If we talk about the limits and restrictions under LRS, the maximum amount that can be remitted without permission of the RBI or the Government of India is $250,000 per financial year. When we say financial year, we are talking of April 1st to March 31st of the next year.

For minors, the LRS limit applies, but remittances must be made through their guardians. The limits are the same, but the transactions must be executed by and through the guardians.

No prior approval from the RBI is required, but these current account transactions must comply with the Foreign Exchange Management Act (FEMA) of 1999. That is very important. That is why this course is there—you need to understand FEMA. With complete holistic knowledge, you will be able to operate better under this scheme.

Certain current account transactions are not allowed under the LRS scheme.

Prohibited transactions include remittances related to activities banned under Indian laws, such as gambling, betting, or certain lottery schemes.

Payments for margin or margin calls for trading in foreign exchange are also prohibited.

Remittances for investments in countries identified as non-cooperative by the Financial Action Task Force (FATF) are not allowed. You need to know the latest list of countries identified as non-cooperative by FATF under international regulations.

For documentation requirements under LRS, individuals must submit a declaration in Form A2 stating the purpose of the remittance and provide necessary supporting documents, such as travel itineraries, medical prescriptions, or admission letters for education-related remittances.

When it comes to monitoring and reporting by banks, knowledge is essential. Banks, acting as Authorized Dealers (ADs), facilitate remittances under LRS. They ensure compliance by verifying the purpose, the accuracy, and the genuineness of documents for the transaction.

Banks monitor cumulative remittances based on the PAN number of individuals to ensure that total remittances do not exceed the annual limit of $250,000. They also report details of these LRS transactions to the RBI, which is the apex body that runs this scheme through the system called FETERS.

FETERS stands for Foreign Exchange Transactions Electronic Reporting System. Banks use this system for reporting to the RBI.

In summary, the LRS scheme is reformative in nature and aligns with the liberalization, privatization, and globalization of the country. It enables Indian residents to remit funds abroad for permissible current account transactions within the annual limit of $250,000.

It facilitates foreign travel for education, personal visits, medical treatment abroad, and other personal and professional needs. This lecture explained how it is done under LRS and the role of banks, which monitor and report prohibited activities such as gambling and speculative investments.

Banks play a key role in compliance and reporting under LRS provisions. This scheme simplifies outward remittances for individuals while ensuring adherence to FEMA regulations and promoting transparency in foreign exchange management.

Let us talk a little about the FETERS system of RBI that I mentioned earlier. That is the reporting system of the banks through which banks report to the RBI.

Let us go into this in the next lecture.

Now, let us go a little deeper into this understanding of the mechanism that happens in this scheme.

Let us talk a little about the FETERS system of RBI that I mentioned earlier. That is the reporting system of the banks through which banks report to the RBI.

Let us go into this.

What is FETERS? Foreign Exchange Transactions Electronic Reporting System (FETERS) is a mechanism established by the Reserve Bank of India to monitor foreign exchange transactions in the country, including those carried out under this particular scheme, LRS, especially because permissions are not required, and financial year amount limits are quite high at $250,000. Obviously, this system focuses on these transactions.

What happens through FETERS? ADs, that is, the authorized dealers (banks), report details of foreign exchange transactions to RBI through the FETERS system to ensure compliance with regulatory requirements and to aid in the compilation of India's BoP statistics—Balance of Payment statistics. That is very important.

How does the reporting under FETERS happen? We will talk in more detail about it. In this part of the lecture, we will cover the purpose of this system, the FETERS reporting system, the process of reporting LRS transactions under FETERS, the key features of this system and its reporting for LRS, the compliances that must be ensured, how misuse of the system is prevented, and finally, the benefits of FETERS, especially in the LRS scheme. We will also give a summary of this reporting mechanism under FETERS.

First, let us talk about the purpose of FETERS reporting.

A very important purpose of FETERS reporting is monitoring compliance to ensure remittances under LRS comply with the prescribed limits and purposes.

The second purpose of FETERS is data collection of these transactions for BoP purposes. It provides accurate data for India's external sector statistics, such as exports, imports, and personal transfer transactions. All these are clubbed to determine the BoP situation.

Another purpose is regulatory oversight, which allows the RBI to monitor trends in outward remittances and identify any misuse of the LRS framework for policy decisions. This helps check the health of the scheme—how it is running and whether it is meeting its objectives.

Now, let us talk about the process of reporting LRS transactions under the FETERS system.

The reporting process involves several key stages. What are these stages or steps?

The first is transaction execution. When a customer initiates a foreign exchange transaction under LRS, the AD (the authorized dealer bank) processes the remittance. The customer provides all required documents, including Form A2 in the case of individuals. Entities also provide Form A2, with slight differences. Form A2 is nothing but the declaration form indicating the purpose of the remittance. I will talk in more detail about it in subsequent slides.

The second step is the capture of transaction details by the AD banks. In this step, the bank records transaction details, including the amount remitted, the purpose of the remittance (using a designated purpose code provided by RBI), and customer details such as name, PAN number, and address. PAN is crucial because the annual limit must not be crossed on a particular PAN. The country of remittance, that is, the destination country where the money is going, is also recorded. This information is captured electronically in the bank’s foreign exchange transaction system and then reported to FETERS.

In the next step, the generation of reports happens in the FETERS system. The bank compiles the data into a standardized report format prescribed by RBI. There is a standard format, and the bank must create it. Software tools are used—it is not done manually, and banks are already doing it regularly.

Here, each LRS transaction is categorized using the relevant purpose code. This code may indicate travel, medical expenses, education, gifts, etc. The bank consolidates all foreign exchange transactions for the reporting period. The reporting period is very important because limits have to be monitored and compliance verified.

In the next step, these reports and transaction lists are submitted to RBI through FETERS. Banks upload transaction details to the RBI’s FETERS portal at regular intervals. These intervals can be daily or monthly, depending on the type of transactions. The data is submitted in electronic format to ensure accuracy and efficiency.

In the final step, verification is done by the RBI of all these submissions. The RBI reviews the submitted data to verify compliance with LRS guidelines and to monitor aggregate remittance funds. It checks against the PAN number for individuals and applies similar checks for entities. Any discrepancy or suspicious transaction flagged by RBI will be further reviewed. This is how the system works.

Now we just talked about the process of FETERS.

Let us now talk about the key features of FETERS reporting for LRS.

A very important feature is unique identification. Each transaction is tagged with a unique identifier for tracking purposes.

Another feature is the purpose code. Specific codes are used to classify transactions, such as S03E01 for travel for leisure, S03E02 for business travel, S0305 for studies abroad, or S1301 for maintenance of relatives.

Another key feature is integration with PAN numbers for individuals. The PAN (Permanent Account Number) is mandatory for transactions exceeding $25,000, ensuring that transactions are tracked against the annual limit of $250,000.

Now, talking about compliance and misuse prevention in the FETERS system: the main purpose of this system is to enable RBI to track cumulative remittances by individuals to prevent exceeding the annual limit, identify unusual patterns or high-value transactions for further scrutiny, and monitor adherence to restrictions such as the prohibition of remittances for speculative purposes, gambling, or lottery.

The benefits of FETERS to the LRS scheme are also significant.

The first benefit is efficient data management because it simplifies reporting for banks, creates a centralized repository of foreign exchange data, and ensures efficient data management.

The second benefit is regulatory transparency. It promotes accountability and ensures transactions align with FEMA regulations.

Another benefit is that it helps RBI and policymakers in policy formulation. It provides critical data for RBI to assess foreign exchange outflows and make informed policy decisions.

This was all about reporting under FETERS.

Let’s talk about what we have learned in this particular part of the lecture.

In summary, authorized dealer banks (ADs) play a central role in this reporting and recording system—recording, categorizing, and reporting transactions to the RBI. The key role is of ADs and banks. This FETERS system ensures real-time monitoring and compilation of foreign exchange data.

This system supports regulatory compliance, transparency, and accurate Balance of Payment (BoP) reporting, forming the backbone of India’s foreign exchange governance.

Hello, friends.

Welcome back to the course.

Now, in this particular lecture, I want to discuss the documentation and procedures under the LRS scheme. What are the different documents, and what are the procedures and processes required to operate in LRS and benefit from this scheme?

This is a comprehensive guide for understanding the documentation and procedures under LRS.

Let’s go into this.

Remitting funds under the Liberalised Remittance Scheme requires individuals and entities to comply with specific documentation and procedures to ensure adherence to the Foreign Exchange Management Act (FEMA) and the guidelines issued by the Reserve Bank of India.

These procedures are designed to confirm the legitimacy of the transactions, verify their purpose, and track compliance with the permissible annual limits. That is the purpose.

That is why this documentation and procedure are required, which I am going to discuss with you in this lecture.

In this guide, we will talk about documentation requirements for individuals, documentation requirements for entities, compliance and verification by banks, post-remittance obligations (wherever applicable), and a summary of the documentation and procedures. That is our plan.

Let us first discuss the documentation requirements for individuals.

There are two categories of documents relevant under LRS for individuals. The first category is common documents, and the second category is specific documents based on purpose.

Common documents include Form A2, Permanent Account Number (PAN) of the individual, identity proof, and bank account information. These are the common documents required.

Specific documents are required depending on the purpose, and the purpose code must also be added in Form A2.

The purposes can include, for example: private visits/travel, education abroad, medical treatment, maintenance of close relatives, gifts or donations, emigration, and employment abroad.

Let us go into a little detail about these documents.

Form A2 is a mandatory declaration form for all foreign exchange transactions under LRS. Its purpose is to capture details such as the name and address of the remitter, purpose of remittance (specified through a purpose code), the amount to be remitted, and the country of remittance/destination of the money. The remitter must declare that the funds are for permissible purposes under LRS as well as FEMA.

PAN number is mandatory for all remittances under LRS to track cumulative transactions, as it helps monitor adherence to the annual limit.

Identity proof must be a government-issued photo identity document, such as an Aadhaar card or passport, to establish the identity of the remitter.

Bank account information must include details of the remitter’s bank account, such as account number and IFSC code, and also evidence of sufficient funds in the account.

Now, talking about specific documents based on purpose and purpose code:

• Private visits/travel abroad: Travel itinerary, airline tickets, hotel bookings (if applicable), and a declaration stating that the funds are for travel purposes only.

• Education abroad: Admission offer/confirmation letter from the educational institution, fee structure or payment schedule (covering tuition, hostel, or other fees).

• Medical treatment abroad: Doctor’s prescription or referral letter indicating the necessity of treatment, and an estimate of expenses issued by the foreign medical institution or hospital.

• Maintenance of close relatives: Proof of relationship with the recipient (case-specific) and a declaration from the remitter regarding the purpose of funds.

• Gifts or donations: Recipient’s details and a declaration of the nature of the gift or donation.

• Emigration: Visa or emigration approval document, fee receipt of visa application, and details of expected future emigration-related expenses.

• Employment abroad: Offer letter from the foreign employer and details/declaration of initial settlement expenses.

Additionally, there may be some bank-specific requirements. Banks may request supplementary documents based on their internal compliance policies, such as declarations related to Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements.

Banks may also ask for income proof to justify the remittance in some cases. It is at the discretion of the bank whether these documents are required.

Now, let us discuss the documentation and procedure for entities.

Earlier, we talked about individuals.

Now we are talking about entities.

Although I discussed with you that LRS is primarily designed for individuals, certain kinds of entities, like proprietorships, partnerships, or other types of entities, can also remit funds for permissible current account transactions under LRS. The documentation requirements for entities are more extensive due to stricter compliance norms.

This is the difference: requirements are more intense and strict in the case of entities.

If you look at these documentation requirements, again, they are of two types: general documents and purpose-specific documents.

In general documents, you have the common form, that is Form A2, along with KYC documents, a board resolution or authorization letter, and bank account information. In this case, it will be the entity’s bank account information.

For the second category of documents required for entities, that is, the purpose-specific documents:

If it is for business travel, then details of the purpose of the travel, such as meeting agendas or conference invitations, have to be provided, along with the travel itinerary and estimated expenses.

If the purpose is for gifts or donations by entities, then a declaration of the nature and recipient of the gift or donation must be provided. Additional details about the recipient’s organization for donations may also be required.

For training and education purposes for employees of companies or entities, admission or registration documentation for training programs abroad must be provided, along with a declaration explaining the relevance of the training to the entity’s business.

Although you are not actually applying for approval, because it is automatic approval, these documents must be such that they are accepted by the bank remitting the money. The bank will guide you on whether the information you provide is sufficient or if more information is required.

It is not that you have to wait for any permission or approval, but this information has to be given.

Talking of compliance and verification by the banks in this process, what happens is that the banks, as ADs (authorized dealers), are responsible for verifying all documents before processing a transaction.

That is why, at this point, the bank will check your details. They will check whether the information you have given is convincing and that there are no gaps. That is the job of the bank or the AD.

The bank ensures that the purpose of the remittance matches the permitted categories under LRS. They are experts, so they can see what the permitted categories are and whether it fits into them.

Secondly, the bank also ensures that the annual remittance limit of $250,000 is not exceeded for both entities and individuals.

It must also ensure that the documents are complete, valid, and consistent with the declared purpose. At this point, they will check the details you have provided—for example, your fee structure in the case of education abroad, or the type of conference invitation, or the nature and purpose of gifts and donations. All those things will be checked for consistency.

There are certain post-remittance obligations that can arise, and I want to discuss these with you in this guide.

It is very important that you know about them.

Banks report transactions to RBI through a system called FETERS.

In the case of remittances for education, medical treatment, or emigration, the remitter may be required to submit proof of utilization. That is the post-remittance obligation.

For example, a tuition fee receipt you could not provide earlier, or hospital bills. The bank may ask you to provide it.

If the bank requests it, you have to provide it. Even if authorities connected with the bank through the FETERS system request such documents, it may be your obligation to submit them.

If we talk about the summary of the documentation requirements for transactions under the LRS scheme:

In the case of individuals, you have the general documents—Form A2, PAN number, ID proof, bank account information—which are very similar in the case of entities as well. Form A2, PAN (or TAN), KYC of the entity and signatories, a board resolution, and bank account information. The common and general documents are similar in both cases.

Purpose-specific documents, however, differ because the purposes of individuals and entities are obviously different.

In the case of individuals, we talked about itineraries, admission letters, medical estimates, or relationship proof in the case of maintenance of close relatives. These are the purpose-specific requirements of individuals.

For entities, it could be meeting agendas for travel purposes, registration documents in the case of employee training, recipient information in the case of gifts and donations, or declaration forms in the case of gifts.

These are the different purpose-specific documents in the cases of both individuals and entities.

If we summarize what we have discussed in this guide on documentation procedure, we can say that by following these detailed documentation and procedures, individuals and entities can ensure smooth and compliant remittance transactions under the LRS scheme and the overall framework of LRS.

That is a very important part of foreign exchange management in India.

The Liberalised Remittance Scheme (LRS) by the Reserve Bank of India (RBI) has undergone extensive changes recently. There are very notable changes that took place last year, in 2023, particularly impacting TCS. TCS means Tax Collected at Source and refers to the rates for foreign remittances under LRS.

Now, friends, let us talk about the latest updates in the LRS scheme.

That is very important to understand. The Liberalised Remittance Scheme (LRS) by the Reserve Bank of India (RBI) has undergone extensive changes recently.

There are very notable changes that took place last year, in 2023, particularly impacting TCS.

TCS means Tax Collected at Source and refers to the rates for foreign remittances under LRS.

In a nutshell, we can say there has been an increase in TCS rates along with sudden changes and updates on applicability, exemptions, and adjustments in tax filing.

We will discuss these main points in this lecture.

Talking of the increased TCS rates, starting October 1st, 2023, the TCS on foreign remittances under LRS, for purposes other than education and medical treatment, has increased to almost 20%. This includes foreign investments, tour packages, and other general remittances.

The TCS on remittances for education and medical treatment remains as it was earlier—5% of the amounts that exceed INR 7 lakh annually. This must be very clear.

Talking of the changes and updates in applicability and exemptions: this TCS applies only to outward remittances and not to funds received inward into India.

Another point to note is that remittances via credit cards abroad have now been brought under the LRS scheme, contributing to the overall remittance limit. That is the annual limit. Even those transactions will be clubbed within the $250,000 annual limit.

Another important update is the adjustments in tax filing. Individuals can adjust the collected TCS against their income tax liability while filing their annual returns.

The collected amount is reflected in Form 26AS or the Annual Information Statement (AIS).

These were the latest updates in the LRS scheme, and you should always look for any new changes, notifications, or addenda to what has already been notified.

There can be further changes depending on feedback from the users of the system.

It is very important to keep yourself updated on FEMA 1999 and this LRS scheme.

Prohibited Current Account Foreign Exchange Transactions for Residents Under FEMA 1999 and the Liberalized Remittance Scheme (LRS)

The Foreign Exchange Management Act (FEMA) 1999 and guidelines issued by the Reserve Bank of India (RBI) define certain prohibited foreign exchange transactions for Indian residents. These restrictions ensure alignment with India’s economic and regulatory policies. Below is a detailed note on these prohibitions as per the latest provisions.

1. Overview of Current Account Transactions

Under FEMA, current account transactions refer to transactions involving the inflow or outflow of foreign exchange for trade in goods and services, remittances, or transfers. While many transactions are allowed with or without limits, specific transactions are prohibited outright, ensuring compliance with India’s regulatory framework.

2. Prohibited Transactions

Residents of India are prohibited from carrying out the following foreign exchange transactions:

a. Remittances for Lottery, Gambling, and Betting

• Payments related to the purchase of lottery tickets, banned or prescribed magazines, sweepstakes, and betting activities, including horse races, casinos, and similar forms of speculative or recreational gambling, are strictly prohibited.

b. Remittances for Margin Trading

• Payments for margin calls to overseas exchanges or brokers for trading in foreign exchange and other speculative activities are not permitted.

c. Capital Account Transactions Masquerading as Current Account Transactions

• Transactions that involve direct or indirect capital transfers under the guise of current account remittances are not allowed. Examples include remitting funds to acquire assets like real estate abroad unless permitted under specific schemes.

d. Payments for Certain Goods and Services

• Remittances for goods or services that are prohibited under Indian law or those restricted by any regulatory authority (e.g., prohibited exports or imports).

e. Transactions Breaching Sovereign Restrictions

• Transactions breaching sovereign laws, such as those involving countries or entities under sanctions imposed by India, the UN, or other international agreements, are disallowed.

3. Key Provisions Under the Liberalized Remittance Scheme (LRS)

The LRS, introduced in 2004, permits Indian residents to remit up to USD 250,000 per financial year for permissible current and capital account transactions. However, under the LRS, the following specific current account transactions are prohibited:

a. Prohibited by FEMA or RBI Notifications

• Gambling and lottery transactions.

• Remittances to entities in countries identified as non-cooperative jurisdictions by the Financial Action Task Force (FATF).

b. Restricted Use of Funds

• Investments in foreign companies involved in speculative activities.

• Payments involving crypto-assets are not permitted unless explicitly clarified as permissible by the RBI.

c. Foreign Exchange for Prohibited Political Activities

• Payments for contributions to foreign political parties, political campaigns, or any activity undermining India’s sovereign interests.

4. Transactions Needing Prior Approval

While the above transactions are outright prohibited, certain transactions under the LRS and FEMA require prior approval from the RBI, failing which they are considered restricted:

• Donations exceeding USD 250,000 per financial year.

• Travel for specific purposes exceeding permissible limits under FEMA guidelines.

• Overseas direct investment that does not meet FEMA compliance requirements.

5. Monitoring and Penalties

a. Monitoring Mechanisms

• All remittances under LRS are reported by Authorized Dealer (AD) banks to the RBI.

• Suspicious or non-compliant transactions are flagged under the Foreign Exchange Management (Current Account Transactions) Rules, 2000.

b. Penal Provisions

• Non-compliance with prohibited transaction rules may attract penalties under FEMA, including fines up to 300% of the amount involved, confiscation of foreign exchange, and other legal actions.

6. Important Updates and Clarifications

As of the latest updates:

• Cryptocurrency Transactions: The RBI has reiterated that remittances involving cryptocurrency are restricted unless explicitly allowed in future policies.

• Sanctions Compliance: Remittances to countries under sanctions (e.g., Iran, North Korea) or entities flagged under FATF non-cooperative jurisdictions remain prohibited.

• Environmental and Social Concerns: Transactions involving products banned for ethical or environmental reasons, such as certain wildlife products, are prohibited.

7. Conclusion

India’s foreign exchange regulations under FEMA and LRS aim to regulate the flow of foreign exchange while preventing misuse for unlawful or speculative purposes. Residents must adhere to these restrictions to ensure compliance. For clarity on specific transactions, individuals should consult their Authorized Dealer bank or refer to the latest RBI and FEMA notifications.

In the following video, Dr. Vijesh Jain discusses the nature, treatment, and provisions of capital account transactions.

Now, friends, let us talk about the capital account transactions as per FEMA.

First of all, what is a capital account transaction?

A transaction which alters the assets or the liabilities outside India of a person resident in India, or assets and liabilities in India of a person resident outside India, and includes the transactions referred to in section 6(3) (securities, borrowings, currency notes, immovable property, guarantees, etc.). In the resource section of this lecture, you will find the details of section 6(3). You can download those details.

All these transactions are referred to as capital account transactions.

As per the notification of FEMA dated 3rd May 2000, no person shall undertake or sell or withdraw foreign exchange to or from any authorized or unauthorized person for any capital account transaction except for the purposes specified in Schedule I and Schedule II.

Except for Schedule I and Schedule II, other transactions cannot be carried out by Indian residents without approval.

Basically, these transactions are not allowed.

This is different from current account transactions, where almost all transactions are allowed, subject to the limits and conditions given there.

In the case of capital account transactions, the transactions that can be carried out are only those referred to in Schedule I and Schedule II.

To give you an idea of the Schedule I and Schedule II transactions, let us look at them in detail.

Schedule I transactions are meant for residents of India.

• Investment by a person resident in India in foreign securities is allowed.

• Foreign currency loans raised in India and abroad by a person resident in India are allowed.

• Transfer of immovable property outside India by a person resident in India is also allowed.

• Guarantees issued by a person resident in India in favour of a person resident outside India are also allowed.

• The export, import, and holding of currency notes are permitted.

These are the highlights of the Schedule I transactions that can be carried out by residents in India.

For dealings with India, the capital account transactions allowed for non-residents (persons defined as non-residents under FEMA) are listed in Schedule II.

They are allowed to carry out transactions such as:

• Investment in securities of body corporates in India.

• Acquisition and transfer of immovable property in India by a person resident outside India.

• Guarantees by a person resident outside India in favour of or on behalf of a person resident in India.

• Import and export of currency notes into 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.

• Remittances outside India of the capital assets in India of a person resident outside India.

These are the descriptions of the transactions in Schedule II, which are meant for non-residents as per the FEMA Act of 1999.

For the complete dossier of the transactions and the limits, you can download the document provided in the resource section of this lecture.

Friends, let us look at what the prohibitions in the capital account are for non-residents.

A person resident outside India shall not make investments in the following sectors.

They cannot carry out capital account transactions related to the business of chit funds, which may be allowed subject to authorisation given by the Registrar of Chits or an officer authorised by the concerned State Government. Unless this authorisation is there, non-residents cannot carry out transactions related to the business of chit funds or companies, or agricultural or plantation activities, or for real estate business, or construction of farmhouses, or trading in transferable development rights.

These are the transactions that are prohibited for non-residents.

Now, there are certain capital account transactions, both for residents and non-residents, which actually cannot be prohibited. Therefore, they are not really prohibited in capital account transactions.

These include amortization of loans, depreciation of direct investment in the ordinary course of business, or the acquisition or transfer of immovable property in India on lease up to five years by a person resident in India.

It is for residents. Then, the acquisition or transfer of immovable property in India on lease up to five years by a person who is a non-resident, which means he is a resident outside India. Also, holding, owning, transferring, or investing in foreign currency, foreign securities, or any immovable property outside India by a person resident in India, if the same was acquired, held, or owned by such person when he was resident outside India or inherited from a person who was resident outside India.

Similarly, holding, owning, transferring, or investing in Indian currency, securities, or any immovable property in India by a person resident outside India if the same was acquired, held, or owned by such person when he was resident in India or inherited from a person who was resident in India.

These are very natural kinds of ownership and holdings, which, by the logic of any sort, cannot prohibit these kinds of transactions.

These are mentioned in the capital account-related transactions under FEMA.

These are the transactions that are not prohibited for residents as well as for non-residents, as the case may be, as per FEMA.

In the next lesson, you will learn the Liberalized Remittance Scheme for capital account transactions. A highly liberalized foreign exchange limit is provided under this scheme for all permissible capital account transactions and remittances, where no RBI approval is required. Dr. Vijesh Jain will discuss this scheme in the next video.

Hello friends.

Welcome back to the course.

In this lecture, I want to discuss the LRS again for capital account transactions.

This lecture or series of lectures should be treated as a comprehensive guide to everything about LRS with respect to capital account transactions.

That's my idea of this lecture.

Let's go into the details of what I am going to cover in this particular lecture. Let's see that.

The agenda of this lecture is to talk about the permitted capital account transactions under LRS, as well as the prohibited capital account transactions under LRS.

We will also talk about some regulatory and compliance considerations when we are talking about the LRS from the perspective of capital account transactions. In our earlier lectures, we discussed LRS and the basic things that we were concerned with regarding current account transactions.

So, very basic things you already know. I am not going to repeat those things about LRS.

My focus in this lecture will be to talk about LRS from the point of view of capital account transactions, leaving aside all other basic things that we have already discussed.

I will also discuss in this lecture again, as we did in our earlier lectures, about current account transactions, the recent updates and changes in LRS with respect to capital account transactions.

We will have just a peek into some of the things that have changed recently. Some important things. Many new things keep coming. New addenda and information keep coming. Obviously, we have to keep ourselves updated in any case.

Let us first talk about the permitted capital account transactions under LRS.

Some of the heads under which we can categorize these permitted capital account transactions include acquisition of immovable property abroad, investment in foreign securities, establishment of companies abroad, contribution to capital funds of overseas entities, and loans to NRI relatives.

These are some of the heads that I want to talk about with respect to permitted capital account transactions under the Liberalised Remittance Scheme (LRS).

Talking about the acquisition of immovable property abroad, Indian residents can purchase immovable property in foreign countries. However, the funds must comply with the annual LRS limit, which is the same as we discussed: 250,000 US dollars per financial year.

Similarly, Indian residents can also invest in foreign securities. Residents are allowed to invest in listed or unlisted equity shares, bonds, or debt instruments of foreign companies.

This includes investments in joint ventures and wholly-owned subsidiaries abroad, subject to specified guidelines under the Foreign Exchange Management Act (FEMA).

For the establishment of companies abroad, Indian residents can set up companies overseas within the permissible limit under the LRS. This is primarily for legitimate business purposes.

Contribution to capital funds of overseas entities is also allowed, so residents can contribute capital to partnerships or other business ventures abroad, aligning with the same annual cap.

It is also possible to extend loans to NRI relatives. Loans can be extended to non-resident relatives outside India, subject to compliance with LRS limits.

These are some of the categories of permitted capital account transactions under LRS.

Now, let us talk about the prohibited capital account transactions under LRS. These include foreign investments in foreign exchange trading, prohibited sectors or destinations, real estate for trade or speculation, investments in prohibited financial products, or funding for terrorism or illegal activity.

Talking about investments in foreign exchange trading, participation in margin trading, speculative investments, or foreign currency trading, including forex derivatives, is not permitted.

Similarly, investments in sectors or countries identified as high risk by the FATF (Financial Action Task Force) or prohibited by Indian laws are also restricted.

Purchasing real estate for speculative trading rather than for bona fide personal or business use is also prohibited.

Investment in prohibited financial products, such as those that contravene Indian laws like cryptocurrency transactions, is restricted under LRS.

Obviously, any form of remittance that could be used for funding terrorism, gambling, or other illegal activities is strictly prohibited.

Now, let us discuss some regulatory and compliance considerations when we are talking about the LRS from the perspective of capital account transactions.

As already mentioned, the annual cap of 250,000 US dollars per financial year also applies to capital account remittances. Documentation and reporting are very important in this. Capital account transactions often require additional documentation, such as investment declarations and approval from concerned authorities.

Banks must report such transactions to the RBI through the Foreign Exchange Transactions Electronic Reporting System (FETERS), which we discussed in detail in earlier lectures.

In the case of capital account transactions, restrictions for minors apply. Capital account remittances under LRS for minors are subject to specific conditions, often requiring approval from a guardian.

We will also be talking in more detail in subsequent slides about some recent updates and changes.

These changes in LRS related to capital account transactions often align with broader regulatory updates, such as revised caps for foreign investments or new restrictions on specific destinations or financial instruments.

It is always advisable to verify the latest guidelines issued by the RBI and FEMA notifications.

We will discuss some of these recent changes in subsequent slides in more detail.

Let us now talk about some of the documentation, procedures, and reporting for capital account transactions.

When individuals or entities engage in capital account transactions under the LRS scheme, specified documentation, procedures, and reporting requirements must be followed.

These requirements are designed to ensure compliance with FEMA (Foreign Exchange Management Act) and the RBI guidelines.

In this particular lecture, my agenda is to talk about the documentation required for individuals as well as the documentation required for entities.

A very similar discussion will follow as we had in the case of current account transactions. We will also talk about the procedures involved. We will have a very brief discussion on the reporting requirements, similar to what we had discussed in the case of current account transactions. We will also talk about some of the key considerations in this lecture about documentation, procedures, and reporting.

Now, talking about the documentation requirements for individuals: as in current account transactions, in capital account transactions also, the application form called the A2 form is required, and it must be filled out and submitted to the authorized dealer bank. It includes details of the transaction purpose and a declaration of adherence to the LRS limit.

Individuals also require a PAN card. Very similar to what we had discussed in current account transactions, a Permanent Account Number card is mandatory for all LRS transactions related to capital account transactions to ensure tax compliance and prevent misuse. An investment declaration is also needed.

For investments in foreign securities or property, a declaration stating compliance with FEMA and LRS limits is required. At the same time, proof of purpose is also to be submitted by individuals. For this, supporting documents such as agreements for property purchase, share subscription agreements, or partnership deeds are required, depending on the nature of the capital account transaction.

KYC documents are also required. Updated KYC details, including identity and address proof, must be submitted. Additional disclosures may be required by banks for specific transactions, such as loans to NRI relatives or contributions to overseas entities. Certain approvals may also be required depending on the case.

Talking about the documentation requirements for entities, the most important thing is the board resolution. A board resolution authorizing the transaction is required.

Apart from the A2 form and other common documents, additional documents are needed. For example, Form ODI (Overseas Direct Investment form) may be required if the entity is investing in a joint venture or wholly-owned subsidiary abroad. This Form ODI must be completed and submitted along with the application for the transaction.

Incorporation documents may also be required, such as copies of the certificate of incorporation and relevant agreements for the overseas entity.

Entities are also required to submit financial statements, and these should be audited financial statements to establish the financial capacity of the entity. If applicable, a tax clearance certificate may also be required in certain cases. Entities may have to obtain such certificates before proceeding.

Let’s talk about the procedures involved when it comes to capital account transactions under LRS.

The first step is the submission of the application. Individuals or entities must submit the required forms, like the A2 form (the common form) or Form ODI, along with supporting documents to the authorized dealer bank.

The second step is verification by the bank. The bank verifies the application, the purpose of the remittance, and compliance with LRS limits.

The third step is the approval process. If the capital account transaction aligns with RBI and FEMA guidelines, the bank processes the remittance. In certain cases, prior RBI approval may be required. This depends on the case and situation.

The next step is the execution of the remittance. The bank executes the transfer after deducting the applicable TCS (Tax Collected at Source), which we had discussed earlier, and updates its internal records.

This is followed by reporting to the RBI by the bank. The authorized dealer reports the transaction to the RBI through the Foreign Exchange Transaction Electronic Reporting System (FETERS), which we discussed in earlier lectures.

Talking about the details of reporting requirements: FETERS reporting involves banks reporting all transactions under capital accounts to RBI through the FETERS system, providing details such as the nature, purpose, and amount of the transaction.

Form ODI reporting for overseas investments is also important. Banks submit Form ODI on behalf of the remitter to the RBI.

Then there is the reporting of the annual compliance report. This is very important in the case of capital account transactions. For ongoing overseas investments, the investor must file an Annual Performance Report (APR) with the RBI, detailing the status of the investment.

Record maintenance also applies. Individuals and entities must retain records of the transaction, including receipts, agreements, and other supporting documents, for a specified period under FEMA rules. These records can be requested during this period.

Alongside this goes tax reporting. Remittances under LRS for capital account transactions must be reported in the individual’s or entity’s tax returns. The collected TCS, which is reflected in Form 26AS or the Annual Information Statement (AIS), will help align any further payments required or refunds available. Tax reporting has to be done by each remitter.

Talking about some of the key considerations when we talk of capital account transactions under LRS:

Compliance with the LRS limit is very important, as we have discussed many times. The aggregate capital account transaction must not exceed the annual limit of USD 250,000 per financial year.

There are also certain restrictions and prohibitions. The remitter must ensure that the capital account transaction does not fall under the prohibited activities we discussed earlier, such as foreign exchange trading or speculative investments.

Tax implications must also be considered. Every remitter must understand the TCS rates applicable to each type of remittance and adjust tax filings accordingly.

The possibility of RBI approvals must also be considered. Certain transactions, such as investments in specific sectors or high-risk jurisdictions, may require prior RBI approval.

By adhering to all this documentation, procedures, and reporting standards, individuals and entities can ensure smooth and compliant capital account transactions under LRS. For precise execution, consulting with the authorized dealer bank or financial experts is always advisable.

Okay.

Now, let us talk about the recent updates and changes in the LRS with respect to capital account transactions.

In recent times, like in the case of current account transactions, the Liberalized Remittance Scheme (LRS) has undergone significant and notable updates concerning capital account transactions.

Some of the most notable developments, which are very important, include the expanded remittance scope of IFSCs. I will explain to you what IFSCs are. That is, the International Financial Services Centres. We will talk a little more about them. It also includes revised TCS, that is, the Tax Collected at Source, similar to the case of current account transactions.

Like current account transactions, it also includes changes with respect to the inclusion of credit card transactions, which we had talked about in the case of current account transactions. The same applies to capital account transactions as well.

Further, some updates have recently happened with respect to enhanced reporting and compliance measures. We are going to discuss all these aspects in this lecture.

Talking about the expanded remittance scope to IFSCs:

IFSC means International Financial Services Centres. These are financial services centres located in special economic zones (SEZs) across the globe. For example, in India, we have GIFT City in Gujarat, which is an International Financial Services Centre.

They provide high-quality international trade services and financial products because of their location in special economic zones.

As of July 10th, 2024, the Reserve Bank of India (RBI) has broadened the permissible uses of remittances to International Financial Services Centres (IFSCs), such as GIFT City in Gujarat, under the LRS. Previously, these were limited to investments in securities and payment of fees for specific educational courses.

The scope now includes all current and capital account transactions, as well as access to financial services or products, as per the International Financial Services Centres Authority Act of 2019. By reading this Act, you will get to know all the current and capital account transactions now allowed under LRS.

Talking about the revised TCS:

Similar to what happened in the case of current account transactions, effective October 1st, 2023, the Finance Act of 2023 revised TCS rates for foreign remittances under LRS.

For capital account transactions such as investments in foreign securities or properties, the TCS rate has been increased to 20% for amounts exceeding INR 7 lakh per financial year. This adjustment aims to enhance tax compliance and monitor substantial foreign remittances.

Similar to current account transactions, there have also been updates with respect to the inclusion of credit card transactions in the case of capital account transactions. RBI has clarified that international transactions made using credit cards will now be counted under the LRS annual limit of USD 250,000 per financial year.

This change ensures comprehensive monitoring of foreign exchange outflows and aligns credit card spending with other forms of remittances.

Talking about the enhanced reporting and compliance measures:

To strengthen oversight of capital account transactions under LRS, the RBI has mandated more stringent reporting requirements for authorized dealer banks. Banks are now required to submit detailed transaction reports of capital account transactions, similar to current account transactions, including the purpose and beneficiary details, through the FETERS system we discussed earlier.

This measure aims to improve transparency and regulatory compliance.

These updates reflect RBI's commitment to maintain robust regulatory oversight of foreign exchange transactions under capital accounts, ensuring that capital account remittances under LRS are conducted in a transparent and compliant manner.

Under the provisions of FEMA 1999, residents and non-residents are required to maintain different types of bank accounts depending on their specific needs, particularly under schemes like the Liberalized Remittance Scheme (LRS). These accounts are categorized to ensure compliance with FEMA regulations for foreign exchange transactions. Here are the primary types of accounts:

Accounts for Residents

1. Resident Foreign Currency (Domestic) Account (RFC-D):

   • Allows residents to retain their earnings or funds in foreign currency.

   • Funds can be used for permissible current and capital account transactions without conversion to INR.

2. Foreign Currency Non-Resident Account (FCNR):

   • Primarily for NRIs but allows residents returning to India to park foreign earnings during their stay abroad.

   • Deposits are maintained in designated foreign currencies.

3. Savings and Current Accounts in INR:

   • Used for domestic purposes and for initiating remittances under the LRS.

   • Banks require compliance with KYC norms and submission of Form A2 for foreign remittances.

Accounts for Non-Residents

1. Non-Resident External (NRE) Account:

   • Used by NRIs to remit income earned outside India to India.

   • Funds are freely repatriable, and interest earned is tax-free in India.

2. Non-Resident Ordinary (NRO) Account:

   • Maintains income earned in India, such as rent, dividends, or pension.

   • Repatriation of funds is subject to certain limits.

3. Foreign Currency Non-Resident (Bank) [FCNR(B)] Account:

   • Allows NRIs to hold term deposits in foreign currency.

   • Protects against foreign exchange risk since it eliminates the need for conversion to INR.

Special Accounts for Specific Needs

1. Escrow Accounts:

   • Used for capital account transactions like mergers or acquisitions under RBI approval.

2. Overseas Direct Investment (ODI) Accounts:

   • For resident individuals or entities investing abroad under ODI guidelines.

3. SNRR Account (Special Non-Resident Rupee Account):

   • For foreign investors, foreign companies, and others engaging in specific business transactions in India.

Key Considerations

• Mandatory PAN: Required for residents making remittances under LRS.

• Authorized Dealer Banks (AD Banks): Facilitate transactions under FEMA, ensuring compliance with remittance limits and RBI guidelines.

• Purpose-specific Accounts: Depending on the nature of the transaction (current or capital account), the appropriate account type must be selected.

These accounts ensure smooth transactions and compliance with FEMA, supporting both residents and non-residents in managing foreign exchange needs effectively

Okay, friends, now let us discuss the different types of bank accounts that non-residents and residents, as per the FEMA Act, can maintain.

The idea is to understand what accounts of different types are available in India, which can be operated by non-residents and residents of different categories.

Which categories? What is the purpose of different accounts for residents and non-residents, and what purpose do they serve? What are the features of different accounts, and in what cases is a particular account required to be maintained by a resident or a non-resident?

That is the idea of understanding the details about the different accounts, which, as per the FEMA 1999 Act, are allowed to be maintained in India.

Let us first talk about the types of bank accounts that non-residents can open.

We have a classification of accounts for non-residents that are available for opening in different commercial banks. Predominantly, three types of accounts can be opened and operated by non-residents.

One is the FCNR account.
Second is the NRO account.
Third is the NRE account.

Now, what are these FCNR, NRO, or NRE accounts that can be maintained by non-residents in India?

The FCNR account is the Foreign Currency Non-Resident account. The NRO account is the Non-Resident Ordinary Rupee account.

I will explain how it is connected with foreign exchange and what the meaning of these accounts is.

The rupee account, which is purely a rupee account, can be opened by non-residents in India. There is a requirement for non-residents to keep an account in India in Indian rupees, and this is that account.

Ultimately, the money that will come into the NRE account will actually come in foreign exchange, and it will be converted into Indian rupees. So that link is there between this account and foreign exchange.

All these accounts have some backward, forward, or current integration with foreign exchange. That is the purpose of understanding.

Let us first talk about the FCNR account, Foreign Currency Non-Resident account, which is meant for non-residents.

This account can be maintained in nine foreign currencies: US Dollar, British Pound, Euro, Japanese Yen, Canadian Dollar, Australian Dollar, Singapore Dollar, Hong Kong Dollar, and Swiss Franc.

These are the nine foreign currencies in which this account can be maintained.

This account is held in foreign currency itself; it is not converted into Indian rupees.

Basically, this account is a fixed deposit account. It works more like a fixed deposit. It is not like a savings account where you can put in money and withdraw at will. That is not the purpose.

A fixed deposit account works like a fixed deposit opened for depositing the foreign exchange income earned overseas. That income can be kept in this account, more like a fixed deposit.

What is allowed for withdrawal in this account? The principal and the interest on the fixed deposit. These can be remitted back outside India. It is possible.

The purpose of this account is that if you do not want the money to be converted into Indian rupees—because you do not want to lose on conversion charges, or you want to maintain your overseas income in a foreign exchange account—you can keep the money as it is, like a fixed deposit. It will earn some interest, and both the principal and interest can be remitted outside India.

Debits and credits are the same as in an NRE account.

I will tell you what an NRE account is, and then you will understand what transactions can be debited and what can be credited. We will discuss this later.

Now, friends, let us talk about the Non-Resident Ordinary (NRO) account.

Again, it is meant for non-residents.

Who can open this kind of account? Any non-resident may open a Non-Resident Ordinary account with an authorised dealer or a bank authorised to provide this facility, for the purpose of putting through bona fide transactions denominated in Indian rupees, not involving any violation of the provisions of FEMA and the rules and regulations issued subsequently.

Whatever the rules, notifications, or amendments under FEMA, if there is no violation, a non-resident can keep money in Indian rupees in this kind of account. That is why it is called an "ordinary" account.

The money comes in foreign exchange and gets converted into Indian rupees at the spot rate whenever the money is received.

What are the types of NRO accounts that can be maintained by non-residents? The accounts may be maintained in the form of savings, current, or term deposit accounts.

The benefit of this account is that it has flexibility, which is not available in the Foreign Currency Non-Resident (FCNR) account, which works more like a fixed deposit.

However, if a non-resident opens an NRO account, he has the freedom to maintain it as a savings account, a current account, or a term deposit. That is the purpose.

Now, if we look at the debit and credit transactions allowed in an NRO account, which is meant for non-residents, all local payments have to be done in Indian rupees only. Because it is an ordinary account, it is denominated in Indian rupees.

Although the source of the money is foreign exchange, once credited, it is in rupees. The money can be debited from the account for local payments in Indian rupees only.

It can also be remitted outside India, in the case of current income, like rent or dividends earned in India by the account holder. If a non-resident earns income in India, it can be remitted outside India after being converted into foreign exchange.

The inward money coming in the name of the non-resident arrives in foreign exchange and gets converted into Indian rupees. If the non-resident earns money through rent, securities, or property in India, that income can be deposited in this account and then remitted abroad, where it will be converted into foreign currency.

However, the remittance of such money has a limit. The limit is up to USD 1 million per financial year for all bona fide purposes, subject to the satisfaction of the authorised dealer maintaining the NRO account.

On the credit side, what money can be credited? Foreign exchange proceeds of remittances from outside India through normal banking channels, received in fully convertible foreign currency, can be credited. Only fully convertible currencies are permitted.

Also, foreign currency tendered by the account holder during his temporary visit to India can be credited. If a non-resident visits India and brings bona fide foreign currency, he can deposit that money into the NRO account, which will be converted into Indian rupees.

Transfers from the rupee account of non-resident banks are also permitted. If there are other accounts of the non-resident, money can be transferred. However, if that account holds foreign exchange, it will be converted into Indian rupees before being deposited in the NRO account.

Legitimate dues in India of the account holder can also be credited. Any bona fide dues from legitimate sources can be deposited, but only in Indian rupees.

Once deposited, remittance from this account is permitted up to USD 1 million per financial year.

Now, friends, let us talk about the NRE account. Again, it is for non-residents.

What is an NRE account?

It is a Non-Resident External account in Indian rupees.

Let us see what the features of this account are.

Who can open an account in India? Non-Resident Indians may open this account with authorised banks in India.

A Non-Resident External account (NRE account) is designated in Indian rupees. It is similar to an NRO account, but some differences are there, which I will explain.

This type of account can be maintained in the form of a savings account, current account, or term deposit, very similar to what is possible in an NRO account.

The feature of this account, which is different from the NRO account, is that it can be maintained as a joint account. Opening of NRE accounts jointly in the names of two or more non-residents is permitted, provided all the account holders are persons of Indian nationality or origin.

It must be understood that one feature of this account is that it can be opened as a joint account. Secondly, all the account holders must be Indians. They may be non-residents, but they have to be of Indian nationality. That is another very important aspect of this account.

Now, let us look at the debit and credit transactions allowable in an NRE account.

Money can be debited from the account for local disbursements, again in Indian rupees only. It can also be remitted outside India, very similar to an NRO account. Transfers to NRE or FCNR accounts of the account holder are allowed. Transfers to NRO accounts and FCNR accounts of the account holder are also allowed. Investment in shares, securities, commercial papers of an Indian company, and for the purchase of immovable property in India is also permitted.

This account has several features because the account holder is of Indian origin. These kinds of freedoms are therefore allowed.

What are the credits possible in this account?

Remittances can be made in foreign exchange, which will be converted into Indian rupees. Transfers from another NRE account or an FCNR account are allowed, and transfers from an NRO account are possible as per the provisions. Money received as refunds, when permissible authorised payments were earlier made from the same account, can also be credited back.

Maturity proceeds from government securities, including National Plans, etc., are permitted because the account holder is of Indian origin. The proceeds of foreign currency brought in by the account holder during his temporary visit to India can also be deposited into this account, but the amount will be converted into Indian rupees.

There are certain situations in which residents receiving or earning money from abroad would like to keep that money in the bank in foreign-denominated currency to use it for any lawful current account or capital account transactions later. At the same time, if they wish to use this money in India for any purpose, they also want the flexibility of withdrawing the money in India, even if it is converted to INR when withdrawn at the spot rate on the day of withdrawal. Therefore, given the complexities related to such requirements and the nature of the receipt of the FX earned/received by the resident, the FEMA Act defines three types of FC accounts for residents. In most of these accounts, the account holder does not earn any interest, like in a normal bank account. In the next video, Dr. Vijesh Jain explains these three types of FC bank accounts, which Indian residents can open with any authorized dealer bank.

Now, friends, let us look at the types of bank accounts that residents in India, as per FEMA, can maintain.

There are three types of accounts that residents can maintain in India that have a connection with foreign exchange transactions.

The first is the EEFC.
The second is the RFC.
The third is the RFC (D).

I will explain what these different accounts mean.

EEFC is the Exchange Earner’s Foreign Currency account.
RFC is the Resident Foreign Currency account.
RFC (D) is the Resident Foreign Currency (Domestic) account.

These are the three types of accounts that residents can maintain in India that have a connection with foreign exchange transactions.

Let me explain these three types of accounts, which residents can open, operate, and maintain in India.

First, let us look at the EEFC account, that is, the Exchange Earner’s Foreign Currency account. A person in India can open, hold, and maintain this account with an authorized dealer in India.

The credits possible in this account are only foreign exchange earnings. It is purely 100% foreign exchange earnings that can be credited to this account. That is the limitation of this account.

There is no restriction on withdrawal in Indian rupees. The account is maintained in foreign currency, but when money is withdrawn, it gets converted into Indian rupees at the prevailing rate of exchange. There is full freedom to withdraw money.

Generally, this account is very useful for exporters who also import some inputs. The money they earn from export proceeds or any other earnings in foreign exchange can be put into this account in foreign currency. Whenever required, they can withdraw the money either in Indian rupees or use it directly for imports of inputs for their business. That is the benefit of this account.

Next, the Resident Foreign Currency (RFC) account. A resident in India can open, hold, and maintain this account with an authorized dealer in India out of foreign exchange received as pension, superannuation, or any other monetary benefit from an employer located outside India.

It can also include foreign exchange released on the conversion of any assets held outside India. Additionally, foreign exchange received or acquired as a gift or inheritance from outside India can be deposited here. Proceeds from a life insurance policy settled in foreign currency can also be credited.

Thus, all these types of foreign exchange can be deposited into this account, and the account itself can hold the foreign currency. It is not required to convert it into Indian rupees.

Now, the Resident Foreign Currency (Domestic) account. A resident individual may open, hold, and maintain this account with an authorized dealer in India. It can be funded out of the foreign exchange earned or acquired from an authorized person for travel abroad, representing the unspent amount from such travel.

If any money remains unspent after withdrawal for travel abroad, it can be kept here. Similarly, if the person acquires foreign exchange while visiting any place outside India by way of payment for services—such as a high-profile speaker delivering lectures or training sessions abroad—that foreign exchange can be deposited here.

Additionally, foreign exchange acquired from any non-resident visiting India, whether as honorarium, gift, or payment for services rendered abroad, can also be kept in this account in foreign currency.

Further, foreign exchange earned or acquired in settlement of any lawful obligation from any non-resident person outside India can be deposited in this account.

Now, if we look at the explanation of all these accounts—the three accounts, that is, the EEFC account, RFC (D), and RFC account—let us look at the summary of what we have just learned about resident accounts.

Who can open the account? Exchange earners can maintain the EEFC account. Individuals can maintain the RFC (Domestic) account, and they can also maintain the Resident Foreign Currency (RFC) account.

The joint account possibility in EEFC is allowed jointly with an eligible person or with a resident relative on a former or survivor basis.

The RFC (Domestic) account can be opened jointly with any person eligible to open it. The RFC account has the same conditions as the EEFC account, which means it can be opened jointly with any eligible person or a resident relative on a former or survivor basis.

Now, the types of accounts that can be opened under these three categories are:

• EEFC account: only the current account type can be maintained by the exchange earner in India.

• RFC (Domestic) account: can be opened as a current account.

• RFC account: can be opened as a current account, savings account, or term deposit.

These are the differences.

Now, interest earning: of course, in current accounts, there is no interest earning. In RFC (D) and EEFC accounts, there is no interest earned either. But in the case of the RFC account, where current, savings, and term deposits are possible, it is the prerogative of the authorized dealer or the bank whether to pay interest or not.

Now, permitted debits in these accounts: in an EEFC account, any permissible current or capital account transactions, cost of goods purchased, customs duty, or trade-related loans and advances are allowed. This is why the EEFC account is useful for trading purposes. It is very useful for people who earn foreign exchange from outside and also spend foreign exchange for business purposes.

The debits in the RFC (Domestic) account can be used for any permissible current or capital account transactions. In the case of the RFC account, there are no restrictions on utilization either in or outside India.

As far as the credits are concerned in these three accounts, kindly look at the document provided in the resource section of this lecture, where you will find the complete list of credits possible in all these resident accounts.

Welcome back, friends.

Let us now look at Section 13 of FEMA, the Foreign Exchange Management Act of 1999, which describes contraventions.

If there are contraventions of FEMA, then what are the penalties? What are the consequences?

If you remember, I had already explained to you that there is a difference between the FEMA Act and the FERA Act. The contraventions under FERA were very serious in nature, and the penalties were extremely severe.

But as I had shared with you, under the FEMA Act, the contraventions or any person contravening the provisions of FEMA is liable to pay penalties which are monetary in nature.

Any person contravening FEMA shall be liable, upon adjudication, to a penalty up to three times the sum involved in such contravention, where such an amount is quantifiable.

The first step is to quantify the contravention amount. Once that has been addressed and quantified, and the matter has been raised by RBI and referred to the Enforcement Directorate, the Enforcement Directorate will investigate the matter, examine the facts, the merits or demerits of the case, and only then establish the contravention.

Where the amount is not quantifiable, the maximum penalty is INR 200,000.

In addition, where such contravention is a continuing one, if the contravention is repeated, the person will be liable to a further penalty which may exceed INR 5,000 for every day after the first day during which the contravention continues.

The penalties are monetary in nature. The allegations are not civil in nature; they are financial contraventions.

The contraventions are generally raised by the RBI and referred to the Enforcement Directorate for further probe and investigation. This is the common process normally used by the adjudicating authority.

Now, friends, let us reflect on the different highlights of the Foreign Exchange Management Act (FEMA) and what we have learned in this course.

We will get an idea of the basic understanding required about FEMA when carrying out any international foreign exchange transaction or international trade transaction.

Whatever the requirement may be, the first important highlight of FEMA is that it prohibits foreign exchange dealings undertaken other than through an authorized person. The person should be an authorized dealer; then the withdrawal can be made.

If any foreign exchange is held in any type of account, such as the EEFC account or the RFC account, the amount reflected in the account should correspond to any legitimate inward remittance, which can be from trade, inheritance, or any transaction that cannot be avoided.

We easily talk about transactions that cannot be prohibited. What cannot be prohibited is legitimate. That inward remittance should be reflected in the foreign exchange holding of the person, either in the bank account or otherwise. This is the most important understanding we have gained in this course about the FEMA Act.

The second main highlight of FEMA is about the seven types of current account transactions that are prohibited. That understanding is required. Out of these seven types of current account transactions, some refer to the foreign exchange requirement for lottery, overseas football pools, banned or proscribed magazines, and similar other transactions, one of which we discussed in the case study taken up in this particular episode.

Seven types of current account transactions are prohibited, and the complete list has already been shared with you in the resource section of the corresponding lecture.

Another very interesting part of FEMA that we learned is that many transactions involving residents or non-residents—such as investment, inheritance, or holding of foreign securities—are very natural in nature, and those cannot be prohibited at all.

For that reason, there is a certain amount of freedom to hold, own, transfer, or inherit any foreign security or immovable property situated outside India if it is logically connected or brought in a legitimate manner. The types of transactions listed in FEMA that cannot be prohibited have already been mentioned, and they relate to capital account transactions.

In spite of the fact that many capital account transactions are not permissible, some provisions allow the freedom to hold, own, transfer, or inherit foreign securities or immovable property situated outside India. This kind of freedom is available under FEMA, and it is very comforting.

Another highlight of the Foreign Exchange Management Act is that exchange drawn can also be used for permitted purposes, as allowed under FEMA 1999, even if the foreign exchange was originally drawn for some other purpose.

If the foreign exchange was drawn for a certain purpose that was legitimate and permissible, but for some reason is later required to be used for another purpose that is also permissible, that can be done without any problem.

This particular freedom helps a lot, both residents and non-residents. It is a major highlight of the Foreign Exchange Management Act and is very much welcome.

Now, friends, if we talk about the Foreign Exchange Management Act (FEMA) and international trade, many of the provisions in FEMA apply in a similar form to any international trade transactions, inward transactions, or imports of goods.

Whatever foreign exchange transactions are required, the limits are given there. For normal trading purposes, very high-volume business can be done without any problem.

FEMA regulations have an immense impact on international trade transactions and different modes of payment. RBI regularly releases notifications and circulars outlining clarifications and modifications related to various sections of FEMA.

An interesting topic related to import trade transactions is the Liberalized Trade Credit scheme for international trade, which is basically for import purposes.

Trade credit for imports into India is defined as the credit extended for imports of goods directly by the overseas supplier, bank, or financial institution, for an original maturity of less than three years from the date of shipment.

We have a very liberalized trade credit scheme, with the condition that the maturity is less than three years. No prior permission is required.

The amount and tenure for this scheme are as follows: for imports of all items permissible under the Foreign Trade Policy (except gold), authorised dealers have been permitted to approve trade credits up to USD 20 million per import transaction, with a maturity period from the date of shipment of up to one year. Any interest or charges on this credit line can be paid, subject to prescribed limits, which are also defined.

Authorised dealers have also been permitted to approve trade credits up to USD 20 million per transaction with a maturity period of more than one year and less than three years for the import of capital goods.

These are all capital account transactions, and under the scheme of trade credit for the import of goods into India, these limits are permissible and require no prior approval.

There are ceilings on the trade credit cost that can be paid to the overseas lender. These limits are defined, and you can see the upper ceilings of such costs in the note included in the resource section of this lecture.

Hello, friends.

I wish to congratulate you on completing this very specialized course on the Foreign Exchange Management Act and foreign exchange regulations in India.

I am very sure that you found this course very informative and that you now feel confident about the concepts related to FEMA and foreign exchange management by the Government of India.

You will find that the concepts explained in this course—including residential status, the types of accounts that residents and non-residents can open in India, as well as capital account and current account transactions (what is allowed and what is not allowed)—are very useful.

How to handle different types and natures of international foreign exchange transactions, whether of a personal nature, a commercial nature, or transactions related to an individual, an organization, or a corporate body—everything has been explained in this course step by step.

I also took up a case study where I explained how you can use this knowledge to tackle foreign exchange-related problems. If you are confident about the concepts discussed in this course, I am very sure you can explore good-quality jobs related to foreign exchange management in banks, in authorized foreign exchange dealer companies, or even start your own foreign exchange management company.

You can also start a foreign exchange agency or a research firm. There is a lot you can do. You just need to be innovative. You can provide consultancy on foreign exchange management and foreign exchange transactions for use by individuals and companies. The possibilities are enormous. It is up to you how you want to use the knowledge provided in this course.

You can also benefit further by exploring the different resources included in this course, along with the lectures. In the lectures, I aimed to give you the basic understanding of the concepts, but the exact list of prohibitions, the nature of transactions allowed or not allowed, or the features of the accounts are all included in the information tables and documents provided. Schemes like the Liberalised Remittance Scheme, its inclusions and exclusions, along with other highlights and features of different provisions of the Act, are shared in downloadable files in the resource section or through external links.

It is not just about completing all the videos of this course. If you really want to benefit more, you need to go beyond the videos. You need to check the resources, look at the documents, and explore the information provided in the resource section.

Frequently, I will be adding new resources, improvements to the course, and probably new case studies as well. I will keep you informed about any new additions or updates.

Now you have learned new things, and you are a person who knows about foreign exchange management in India. You know about FEMA, which is great knowledge to have. Spread this message to your contacts and dear ones—let them know what you have learned.

Refer this course to your friends. If you know someone interested in learning about the Foreign Exchange Management Act and foreign exchange regulations in India, and you feel they may benefit, you can definitely recommend this course. You will find the course link in my Udemy profile, along with all my other courses.

Please refer this course to your friends and contacts, and keep in touch with me. You can write to me on the message board or in the Q&A section. It is always good to receive your queries, and I truly enjoy answering your questions and interacting with my students.

I wish you a great future, a successful career, and wonderful days ahead.

Thank you very much. Stay safe.

Hello and welcome, and thank you so much for completing this amazing course.

I truly appreciate the time and effort you have invested in developing all types of skills, whether related to export documentation, compliance, international regulations, logistics, or global marketing strategies.

In this short bonus video lecture, I want to share with you a few optional ways you can continue your learning journey, access additional resources, and stay connected with me for future guidance, all while remaining fully compliant with Udemy policies.

If you want to continue receiving educational content on exports, global compliance updates, HS code classification tips, EU/US regulations, logistics strategies, and real-world case studies, you are welcome to connect with me on LinkedIn.

I regularly post export-related insights, free updates, and practical examples that many learners find very useful.

Again, this is completely optional, but if you would like to connect, this is my LinkedIn profile: LinkedIn.com/in/vijeshjain. Along with my activities on LinkedIn, YouTube, Instagram, and many other social media platforms, I frequently share publicly available articles, guidance notes, and updates related to topics such as documentation and compliance, Indian and international customs rules, labeling requirements, global market trends, and policy changes in the EU, USA, UK, and Middle Eastern regions, as well as best practices for exporters.

These free resources can help you stay informed and confident as your export business grows.

For learners who need personalized clarity on specific export matters, such as HS decisions, regulatory compliance, product classifications, labeling reviews, customs queries, international market strategies, or even Amazon US product launch advisory, I also provide such guidance outside Udemy.

If you ever require any of this tailor-made support, you may contact me directly. My email ID is vijesshjain@gmail.com.

Please note that this is only an optional way to reach me outside Udemy, and it is not required to complete this course. It is also not part of the Udemy purchase for this course, which keeps this message fully compliant with Udemy policies.

In addition, I want to cordially invite you to my Discord Knowledge Hub, which has several channels, including the Q&A section, discussion channel, discussion lounge, video lectures channel, and announcement channel. No registration is required to access this knowledge hub or any of these channels.

Simply click the invite link, which is also provided in the resource section of this lecture, and you can access my Discord Knowledge Hub.

Before I close, I want to sincerely thank you once again for joining this course.

I truly hope that this specialized training has added real value to your knowledge base and to your professional journey in international trade.

My mission is to help learners navigate exports more confidently, whether it is compliance, export documentation, import documentation, logistics, or expanding into global markets.

I wish you tremendous success in your future business endeavors, and I look forward to staying connected with you on your path ahead.

Thank you once again, and all the best in your international journey.

Take care of yourself, and see you in another course in this course series.

Dear Learner,

Thank you for completing this course. I appreciate your time, dedication, and interest in strengthening your knowledge of export documentation, compliance, HS classification, logistics, and global market strategy.

This Bonus Section offers optional ways to continue your learning journey, stay connected, and access additional guidance outside Udemy.
Everything here is completely optional, not required to complete the course, and not included in your Udemy purchase, in full compliance with Udemy policies.

1. Connect With Me on LinkedIn (Optional)

If you'd like to follow my educational posts, updates, and insights on global trade, compliance, and international markets, you can connect with me on LinkedIn:

LinkedIn (Optional):
https://www.linkedin.com/in/vijeshjain/

I regularly share free content, industry news, case studies, and compliance tips useful for exporters and global professionals.

2. Visit My Udemy Instructor Profile (Optional)

If you’d like to explore more of my courses on international trade and global business:

Udemy Instructor Profile (Optional):
https://www.udemy.com/user/vijesh-jain-4/

You can browse additional courses, all focused on simplifying global trade and helping professionals succeed in international markets.

3. Optional Personalized Guidance Outside Udemy

If you ever need individual clarity on export documentation, HS code decisions, customs queries, EU/US/UK/UAE compliance, labeling reviews, market-entry strategy, or Amazon USA marketplace compliance, you may reach out to me directly:

Email (Optional):
vijeshjain@gmail.com

Additional Educational Video Resources at YouTube: https://www.youtube.com/@VijeshJain0506

This is only an optional way to connect and is not required for completing the course.

4. Join the Free Discord Knowledge Hub (No Signup Required)

To support continuous learning, I’ve created an open-access Discord Knowledge Hub for all students.
You can join anytime to access discussions, free resources, shared insights, and regular updates.

Join Discord Knowledge Hub (Optional, No Registration Required):
https://discord.gg/wHgqdYe6tz

This community is free, optional, and designed to help learners share knowledge and stay updated with global trade trends.

5. Free Public Resources for Ongoing Learning

I regularly share publicly accessible updates on topics such as:

• HS classification best practices

• Compliance rules for the USA, EU, UK, and UAE

• Labeling and documentation tips

• Customs procedures

• Market-entry insights

• Global trade risks and opportunities

These resources are available on my social channels and are fully free for learners.

You can also join my optional LinkedIn Newsletter - The Management Playbook at

https://www.linkedin.com/newsletters/the-management-playbook-7065900250162483200/

Thank You & Best Wishes

Thank you once again for learning with me. I hope this course has added clarity and confidence to your global trade journey. I look forward to staying connected and supporting your continued growth.

Wishing you success in all your international business endeavors.

Warm regards,
Vijesh Jain
Export–Import Consultant & Trainer
VJ Global Academy