The Foreign Exchange Management Act (FEMA) was introduced by the Indian Government in 1999, replacing the older Foreign Exchange Regulation Act (FERA) of 1973. FEMA was designed to encourage external payments and foreign trades, while filling all of the loopholes found in FERA.
In essence, FEMA was a modernisation of the Indian economy and created to liberalise and deregulate the Indian market.
In this article, we’ll make an overview of FEMA, covering the basics of its structure:
- 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?
FEMA was primarily introduced to liberalise the Indian economy by encouraging foreign trade and payments. To a lesser extent, it was also created to assist in developing the Indian forex market.
FEMA states that the balance of payment is the record of dealings between two different countries’ citizens in goods, services, or assets.
Creating the structure and procedures for all foreign exchange transactions in India, FEMA’s classifications for foreign exchange go 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.
Also read: 2021 Guide to setting up a company in India
How Is FEMA Applied?
FEMA applies to all of India and the agencies and offices located outside of India that are managed or owned by an Indian citizen. The headquarters of FEMA is located 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
- The exporting of any commodity and/or services from India to a foreign country
- The importing of any commodity and/or services from outside India
- Securities as defined under the Public Debt Act of 1994
- The purchase, sale, and exchange of any kind
- Any overseas company owned by a non-resident Indian (NRI)
- Any citizen of India, residing in India or in a foreign country
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 Does FEMA Prohibit?
- Sending money that is the result of winning the lottery.
- Sending money that is the result of winning horse racing, cricket games, etc.
- Sending money for the purpose of buying 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 per cent 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 authorised dealer by the Prior Approval Route or General Permission Route.
|Visiting privately to any country (except Bhutan and Nepal)||Liberalised Remittance Scheme (LRS) limit of USD 2,50,000/- per year.|
|Personal donations/gifts||Liberalised Remittance Scheme (LRS) limit of USD 2,50,000/- per year.|
|Corporate Donations||One percent of the forex earnings during the preceding three financial years.
US$5,000,000, whichever is less, for a specified purpose.
|Leaving India for the purposes of gainful employment||Liberalised Remittance Scheme (LRS) limit of USD 2,50,000/- per year.|
|Payment for emigration||Liberalised Remittance Scheme (LRS) limit of USD 2,50,000/- per year.|
|Payment for the care of relatives (only close relatives) outside of 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.
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.|
|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$10,00,000 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 over US$10,000 by a State Government or its Public Sector Units.
- Payment of importation by a Public Sector Unit 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 $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.
Conclusion — What’s Next for Adhering to Your FEMA Obligations?
While we have done our best to provide you with a basic overview of your FEMA responsibilities, it is far from a simple process for any organisation.
If you don’t have the time or resources to organise FEMA compliance (or any of your tax obligations for that matter), we have an expert team of FEMA specialists who are more than happy to help you with getting FEMA compliant.
If you have any questions about how to find a trustworthy partner to help with your FEMA compliance or other tax responsibilities in India, please do contact us — it’s both our job and pleasure to assist.
FAQs in FEMA
- Yes, still in force in India. The Foreign Exchange Management Act (FEMA) was created in 1999 to replace the outdated Foreign Exchange Regulation Act (FERA) of 1973. FEMA was a modernisation of the Indian economy and created to liberalise and deregulate the Indian market.
- FEMA applies to all of India and the agencies and offices located outside of India that are managed or owned by an Indian citizen. The headquarters of FEMA is located in New Delhi and is known as the Enforcement Directorate.
- The Foreign Exchange Management Act (FEMA) was created in 1999 to replace the outdated Foreign Exchange Regulation Act (FERA) of 1973. FEMA was a modernisation of the Indian economy and created to liberalise and deregulate the Indian market.
- The Foreign Exchange Management Act (FEMA) was created in 1999 to replace the outdated Foreign Exchange Regulation Act (FERA) of 1973. FEMA is a better successor to FERA in that it was a modernisation of the Indian economy and created to liberalise and deregulate the Indian market. FEMA is a civil law as against FERA which was a draconian police law. All violations under FERA would attract prosecutions. The violations were criminal offences and were not compoundable as well. As against FERA, only major violations in FEMA are considered as severe offences.