FEMA Act
The Foreign Exchange Management Act (FEMA), 1999 is the legislation that regulates foreign exchange transactions in India. It governs how Indian residents can hold, transact, and transfer foreign currency, replacing the older and stricter Foreign Exchange Regulation Act (FERA), 1973.
What Is FEMA?
FEMA was enacted to facilitate external trade and payments and to promote orderly development and maintenance of India’s foreign exchange market. It liberalised many transactions compared to FERA while maintaining oversight over capital flows.
Under FEMA:
– Current account transactions are generally free (trade, travel, education, medical)
– Capital account transactions require RBI permission or follow prescribed rules
Current Account vs Capital Account under FEMA
**Current account transactions** (generally free):
– Import and export of goods and services
– Foreign travel, education, medical expenses
– Remittances for family maintenance
**Capital account transactions** (regulated):
– Foreign investment in India (FDI, FPI)
– Indian investment abroad (ODI)
– External commercial borrowings
– Acquisition of property abroad
Key FEMA Rules
– Indian residents can remit up to $250,000 per year under the Liberalised Remittance Scheme (LRS) for education, travel, investment abroad
– Companies can borrow externally (ECBs) under specific RBI guidelines
– FPI inflows are allowed subject to sectoral limits and registration requirements
FEMA vs FERA
| Feature | FEMA | FERA |
|———|——|——|
| Approach | Civil law; presumed innocent | Criminal law; accused presumed guilty |
| Enforcement | Enforcement Directorate (civil) | ED with criminal powers |
| Penalties | Confiscation, fines | Imprisonment, confiscation |
| Philosophy | Liberalisation | Control |
Practical Example
Priya wants to send money to her daughter studying in the UK. Under FEMA’s LRS, she can remit up to $250,000 per year for educational expenses by submitting Form A2 to her bank. The bank processes the remittance within FEMA guidelines without special RBI approval.
Key Takeaways
– FEMA, 1999 regulates foreign exchange transactions in India; replaced the stricter FERA, 1973
– Current account transactions (trade, travel, remittances) are largely free under FEMA
– Capital account transactions (FDI, overseas investment, borrowings) require RBI approval or follow prescribed limits
– LRS allows individuals to remit up to $250,000 per year for personal and investment purposes
– FEMA violations are civil offences (not criminal); the Enforcement Directorate investigates violations
