The Foreign Exchange Management Act, 1999

Based on the Foreign Exchange Management Act, 1999 — in force from 1.6.2000 [G.S.R.371(E) dated 1.5.2000] — as amended, per the May 2026 syllabus. Section numbers are FEMA, 1999 unless stated.

How the chapter fits together

FEMA, 1999 replaced FERA, 1973 — the lineage runs Defence of India Rules 1939 → FERA 1947 → FERA 1973 → FEMA 1999 (mnemonic: D-F-F-F). The philosophy flipped with the 1991 liberalisation: “MANAGE, not RESTRICT.” FEMA is a civil law — presumption of innocence, bailable — where FERA was criminal and restrictive, with the person presumed guilty.

The Act has 7 Chapters and 49 Sections: I Preliminary (1–2) · II Regulation & Management of FX (3–9) · III Authorised Person (10–12) · IV Contravention & Penalty (13–15) · V Adjudication & Appeal (16–35) · VI Directorate of Enforcement (36–38) · VII Miscellaneous (39–49). Instrument hierarchy: Act → Rules (MoF) & Regulations (RBI) → Notifications/Circulars → Master Directions → FAQs. The RBI has overall control of forex; the Directorate of Enforcement [Sec 36] does the enforcing — a commonly confused agency-roles question.

Nine salient features frame everything else:

Scope note: these notes cover the substantive detail of Sections 1–6 (Chapters I–II), with Section 36 by reference only — Sections 7–49 (export realisation, Authorised Persons, contravention and penalties, adjudication and appeal, ED, miscellaneous) sit in the structure table above and are not elaborated further.

Extent and definitions — Sections 1 and 2

Section 1 extends FEMA to the whole of India, plus branches, offices and agencies OUTSIDE India that are OWNED or CONTROLLED by a person resident in India, plus contraventions committed outside India — an extra-territorial reach. Commencement: 1.6.2000.

Section 2 defines 14 key terms, each “unless the context otherwise requires”. The five most exam-critical:

The remaining defined terms, with their traps:

Residential status — PRII vs PROI

The first limb is an objective day-count: residing in India for more than 182 days in the PRECEDING financial year — not the current year. Two purpose-based clauses then override the day-count for individuals only (not HUF/AOP/artificial juridical persons):

Beyond individuals:

• Automatic PRII: a body corporate registered or incorporated in India — the 182-day test is irrelevant.
• Branch/office/agency IN India owned or controlled by a PROI = PRII; branch/office/agency OUTSIDE India owned or controlled by a PRII = PRII (prevents FEMA avoidance via foreign branches).
• “Owned or controlled” — either trigger suffices. Control alone is enough (Illustration 3: a Dubai branch controlled-but-not-owned by a Pune PRII unit is still PRII).
• Students going abroad = PROI per RBI AP Circular No. 45 dated 8.12.2003 — an administrative override of the bare text, and a high-yield trap.

Regulation of forex — Sections 3 to 6

GOLDEN RULE: CAT = free unless prohibited | KAT = prohibited unless permitted.

Section 3 — dealing in forex. A blanket prohibition with four clauses: (a) dealing in or transferring FX/foreign security with a non-Authorised Person; (b) making any payment to or for the credit of a PROI; (c) receiving any payment otherwise than through an AP on behalf of a PROI (deemed receipt if there is no corresponding inward remittance); (d) the Hawala bar — entering a financial transaction as consideration for acquiring an asset outside India. Exceptions: “as otherwise provided in this Act” or with RBI general/special permission.

Section 4 — holding of forex. A PRII cannot acquire, hold, own, possess or transfer FX, foreign security or immovable property situated outside India — excepted where separate RBI notifications permit, subject to conditions (e.g., the Section 6(4) acquired-while-PROI/inherited route).

Section 5 — current account transactions. Free through an AP, but the Central Government may impose reasonable restrictions in consultation with RBI: Schedule I (prohibited) / Schedule II (Government approval) / Schedule III (RBI approval), plus the LRS ceiling of USD 250,000.

Section 6 — capital account transactions, sub-section by sub-section:

The KAT framework runs on schedules: Schedule I (KAT permissible for PRII) / Schedule II (KAT permissible for PROI) / no-restriction items / prohibited items (a)–(d). RBI AP(DIR) Circular No. 90 dated 9.1.2014 clarifies the scope of Section 6(4); the Permissible KAT Regulations are FEMA Notification 1/2000-RB dated 3.5.2000.

Exceptions, LRS and approval thresholds

The exceptions are where MCQs live. On the current account (Schedule) side:

• Schedule I item (vi): commission on exports under the Rupee State Credit Route is banned — EXCEPT up to 10% of invoice value for tea and tobacco exports.
• Schedule III LRS purposes (iv) Emigration, (vii) Medical treatment, (viii) Studies abroad may exceed USD 250,000 WITHOUT RBI approval if required per the estimate of the emigration country, medical institute or university.
• “Resident but not permanently resident” proviso: a foreign citizen (not of Pakistan), or an Indian citizen on deputation for a specified duration of ≤3 years, may remit up to net salary (after tax, PF and other deductions).
• RFC account: Schedule II/III remittances without RBI/Government approval — a blanket exemption.
• EEFC account: Schedule II/III remittances without approval EXCEPT: (a) P&I Club membership; (b) real-estate agent commission beyond USD 25,000/5%; (c) pre-incorporation reimbursement beyond 5%/USD 100,000 — these still need approval even from EEFC.
• International credit card used abroad: Schedule III expenditure needs no approval.

On the capital account side:

• Proviso to KAT-prohibited item (a): a resident individual may draw up to USD 250,000 per FY for Schedule I KAT — the Schedule III item-1 drawal is SUBSUMED within this limit, not additive. Further proviso: none of this USD 250,000 may go to FATF non-cooperative countries.
• No-restriction items — RBI/CG cannot restrict: (1) amortisation of loan repayment instalments; (2) depreciation of direct investments in the ordinary course of business [proviso to S.6(2)].
• Chit funds [prohibited item (b)(i)]: PROI investment barred — EXCEPT the Registrar of Chits (with the State Government) may permit NRI subscription via banking channel, on a non-repatriation basis, without limit, subject to RBI conditions.
• Real estate business [prohibited item (b)(iv)]: the ban excludes townships, residential/commercial premises construction, roads/bridges, and SEBI-registered REITs — not an absolute ban.
• DPRK [items (c)–(d)]: KAT with DPRK prohibited per MEA Order S.O.1549(E) dated 21.4.2017, though the CG may specifically approve continuation; existing investments must be closed/liquidated within 180 days unless the CG approves an extension.
• LRS family consolidation: allowed for CAT/KAT jointly — EXCEPT clubbing is not permitted for KAT (bank account, investment, property) if other family members are not co-owners/co-partners.
• Gift logic: PRII→PROI gift remitted abroad = CAT; PRII gifts a PROI in India in ₹ = KAT (creates an asset in India for the PROI); PROI gift to a PRII remitted in India = no restriction; PROI gift funds retained abroad by a PRII = not allowed — must repatriate (S.4/S.8 link).

LRS in one box:

Approval thresholds (substantive penalties under Sections 13–15, Chapter IV, are not covered in these notes — the figures below are regulatory limits that trigger approval):

KEY TRAP: once a threshold is crossed (e.g., 7% commission against the 5%/USD 25,000 limit), approval is needed for the ENTIRE remittance, not merely the excess portion — a classic MCQ.

Key timelines

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