The Foreign Exchange Management Act (FEMA) was introduced by the Indian Government in 1999, replacing the previous Foreign Exchange Regulation Act (FERA) of 1973.
FEMA was designed to boost external payments and foreign trades. FEMA is a civil law against FERA which was a draconian police law.
In essence, FEMA was a modernization of the Indian economy and created to liberalize and privatize the Indian market.
In this article, we’ll make an overview of FEMA, covering the basics that you need to be aware of in 2021:
- What are the Objectives of FEMA?
- How is FEMA Applied?
- What does FEMA Prohibit?
- What are the Rules of Trade for FEMA?
What Are The Objectives Of FEMA?
The main aim of introducing FEMA was to liberalize the Indian economy by encouraging foreign trade and payments. It helped to regulate the Indian forex market.
According to FEMA, the balance of payment is a record of transactions in products, services, or properties between citizens of two separate countries.
FEMA can be classified into two categories:
- Capital Account Transactions — all capital transactions and the inflow and outflow of money to and from India.
- Current Account Transactions — all trade of merchandise as an indicator of an economy’s status.
Thus, creating the structure and measures for all foreign exchange transactions in India.
How Is FEMA Applied?
FEMA applies to the whole of India. It also applies to the agencies and offices located outside India that are managed or owned by an Indian citizen. The headquarters is situated in New Delhi and is known as the Enforcement Directorate.
More specifically, FEMA applies to:
- Indian foreign exchange
- Indian foreign security
- Banking, financial, and insurance services
- Exporting of any product and/or services from India to a foreign country
- Importing of any product and/or services from outside India
- Securities as defined under the Public Debt Act of 1994
- Buying, Selling,
- Any Indian Entity owned by a person resident outside India
- Any citizen of India, residing in India or in a foreign country
- and Exchanging of any kind of product/service
- Any overseas company owned by a non-resident Indian (NRI)
Current Account transactions listed by FEMA have been classified into three areas:
- Transactions prohibited by FEMA
- A transaction that requires Central Government’s permission
- A transaction that requires the Reserve Bank of India’s (RBI’s) permission
What Are The Prohibitions Under FEMA?
- Sending money which is the result of winning the lottery.
- Sending money which is the result of winning horse racing, cricket games, etc.
- Sending money to buy a lottery ticket, football betting, sweepstakes, banned publications, etc.
- The payment of commission on exports towards equity investment of Indian companies in joint ventures or wholly-owned subsidiaries abroad.
- The sending of a dividend by any company. This is only applicable if dividend balancing is applicable.
- The payment of commission on exports under Rupees State Credit Routes (except commission up to 10 percent of the invoice value of export of tea and tobacco).
- Any payment regarding “Call-back Services” of telephones.
- Any travel to Bhutan and/or Nepal.
- Sending interest income on funds held in Non-resident Special Rupees (NRSR) scheme account.
- A transaction of any kind with a resident of Bhutan or Nepal.
What Are the Rules of Trade for FEMA?
According to the RBI, foreign exchange can be undertaken with any authorized dealer by the Prior Approval Route or General Permission Route.
| Scenario | Limitations |
| Visiting privately to any country (except Bhutan and Nepal) | Liberalized Remittance Scheme (LRS) limit of USD 2,50,000/- per year. |
| Personal donations/gifts by resident individuals | Liberalized Remittance Scheme (LRS) limit of USD 2,50,000/- per year. |
| Corporate Donations by persons other than resident individual | One per cent of the forex earnings during the preceding three financial years. OR US$ 5,000,000, whichever is less, for a specified purpose. |
| Leaving India for the purposes of gainful employment | Liberalized Remittance Scheme (LRS) limit of USD 2,50,000/- per year. |
| Payment for emigration | Liberalized Remittance Scheme (LRS) limit of USD 2,50,000/- per year. |
| Payment for the care of relatives (only close relatives) outside of India by a person who is resident but not permanently resident in India | The salary (after deducting income tax, Provident Fund, and other deductions) of a person not being a permanent resident in India and a citizen of a foreign state other than Pakistan. OR US$2,50,000/- a year per recipient in all other cases. |
| Business travel abroad | US$250,000 per year. |
| Attending a training course or conference | US$250,000 per year. |
| For overseas medical treatment | US$250,000 per year. |
| The care of a patient going for a medical check-up or medical treatment abroad. | US$250,000 per year. |
| The care of a patient going for a medical check-up or medical treatment abroad. | US$250,000 per year. |
| Studying abroad | US$250,000 per academic year or the education institution’s estimation, whichever is higher |
| Meeting the expenses of a person accompanying a patient going for a medical check-up or for medical treatment abroad | US$250,000 per year. |
| Commission payment to an agent outside India for selling of commercial or residential land or property in India | US$25,000 or five percent of the transaction, whichever is higher. |
| Consultancy services from overseas | US$10,000,000 per project (for infrastructure projects). For all other projects, US$1,000,000 per project |
| Pre-incorporation expense reimbursements | US$100,000 or five percent of the investment brought into India, whichever is higher. |
The following foreign transactions require the approval of the Central Government:
- Cultural tours.
- Advertising in foreign print media for any purpose other than promoting tourism, investments exceeding US$10,000 by a State Government or its Public Sector Undertaking.
- Payment of importation by a Public Sector Undertaking on cost, insurance, and freight on ocean transport.
- Payment for chartered freight vessels.
- Payment of shipping container detention charges above the Director-General of Shipping’s (DGS’s) rate.
- Payment of prize money or sponsorship money for any activity or sport participated outside of India (other than national/international level sports) if it exceeds US$1,00,000.
- The payment for hiring transponders for internet service providers or television channels.
- Payment of Protection and Indemnity (P&I) Club membership.
- Payment for multi-model transport operators and their agencies abroad.
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