What is Current Account Transaction under FEMA? Transactions Permitted and Prohibited under FEMA

Introduction

The Foreign Exchange Management Act of 1999 establishes the legal framework for managing foreign exchange transactions in India. All transactions involving foreign currency have been categorized as either capital or current account transactions under the Foreign Exchange Management Act (FEMA), 1999, which went into effect on June 1, 2000. Current account transactions are all activities made by a resident outside of India that do not change his or her assets, liabilities, or contingent obligations. In this article, we will look into Section 5 of  FEMA Act, Current Account Transaction, Transactions Permitted under FEMA Act, and Transactions Prohibited under FEMA Act.

Section 5 of FEMA Act

In accordance with Section 5 of the FEMA, persons residing in India are free to buy or sell foreign currency for any current account transaction, with the exception of those for which the Central Government has prohibited the Withdrawal of foreign currency. Below are the list of the transactions that are permitted and prohibited under FEMA (Foreign Exchange Management Act). Before going through the list let’s understand “what is Current Account transaction?”

What is Current Account Transaction under FEMA?

Other than capital account transactions, current account transactions include the following:

• Payments payable in conjunction with short-term banking and credit facilities, current business obligations, other current transactions, and international commerce.
• payments required for loan interest and net investment income.
• Transfers to cover the living costs of parents, spouses, and kids who are studying abroad.
• Expenses related to parent, spouse, and kid medical care, education, and international travel.

Transaction Permitted under FEMA (Foreign Exchange Management Act)

• In cases when the Central Government has approved such projects to be carried out in India, persons residing in India are permitted to make or receive payments in foreign currency in relation to international bids.
• Without obtaining the approval of the Ministry of Commerce and Industry, Government of India, an AD (Authorized Dealer) Category I bank may authorize the withdrawal of foreign currency by individuals for the payment of royalties and lump sum payments under technical partnership agreements.
• Without the permission of the RBI, an AD Category I bank may allow a person to withdraw foreign currency for the purchase of a Trademark or Franchise in India.
• On behalf of a resident client who is a service importer, AD Category I banks are allowed to issue a guarantee for up to USD 500,000 or its equivalent in order to secure a direct contractual liability arising out of a contract between a resident and a non-resident.

Transactions Prohibited under FEMA Act

• payments made with lottery winnings.
• Payment for the purchase of lottery tickets, restricted or prohibited periodicals, football pools, and other contests.
• Payment of earnings from racing, riding, or other pastimes.
• commissions on exports used to finance equity investments by Indian enterprises abroad in joint ventures or wholly owned subsidiaries.
• dividend payments made by any business to which the rule of dividend balancing applies.
• Payment of commission on exports via the Rupee State Credit Route, with the exception of commissions up to 10% of the invoice value of tobacco and tea exports.
• Reimbursement for telephone “Call Back Services”.
• Interest payments on money stored in a non-resident special rupee account Scheme.
• It is illegal for anyone to withdraw foreign currency for travel to Nepal, Bhutan, or to conduct business with someone who lives there.

FAQs (Frequently Asked Question)

1. Is the AD needed to determine whether remittances are permissible based on the type of transaction or to approve them based on the remitter’s declaration?

The Authorized Dealer will be directed by the transaction’s nature as stated by the sender in Form A2 and will afterwards certify that the remittance complies with any instructions provided from time to time by the Reserve Bank in this regard. The remitter, however, is ultimately responsible for ensuring compliance with the current FEMA laws and regulations.

2. Is a Permanent Account Number (PAN) needed for residents in order to send outgoing remittances under the Scheme?

Yes, the Permanent Account Number (PAN) of the resident person is required for all LRS transactions carried out by Authorized Persons.

3. Exist any limitations on the types or qualities of debt or equity securities that a person can invest in?

No ratings or rules on the calibre of the investment a person may make have been established under LRS (Liberalized Remittance Scheme) of USD 2,50,000. Individual investors are nevertheless obliged to undertake due diligence when making decisions about the investments they want to make.

Conclusion

Only capital account transactions are subject to FEMA limits. Transactions on a current account are free unless there are stated limitations. If the sale or withdrawal involves a current account transaction, anyone may sell or withdraw foreign currency to or from an authorized person. In the public interest, the Central Government may impose reasonable restrictions on current account transactions after consulting with RBI (Reserve Bank of India).