The Foreign Exchange Management Act, known as FEMA, is the 1999 Indian law that governs how foreign currency moves into and out of the country. It replaced a far stricter 1973 regime and converted most violations from criminal offenses into civil ones, so a paperwork slip today draws a monetary penalty and an administrative hearing rather than a criminal case.1India Code. The Foreign Exchange Management Act, 1999 If you hold Indian assets, send money across the border, or run a business touching India, FEMA sets the rules.
The law’s stated purpose is to facilitate foreign trade and payments and to promote the orderly development of India’s foreign exchange market. Most routine transactions are allowed; some need approval; a short list is prohibited outright.
Who FEMA Applies To
FEMA’s rules turn on whether you count as a “person resident in India.” Under Section 2, you qualify as a resident if you lived in India for more than 182 days during the preceding financial year, which runs April through March. The test is not purely mechanical. Even if you cross the 182-day mark, you are excluded from resident status if you left India to take up employment abroad, start a business overseas, or for any purpose signaling an intention to stay outside India indefinitely. The reverse also applies: someone arriving in India for employment or business with intent to stay is treated as a resident regardless of how recently they got there.1India Code. The Foreign Exchange Management Act, 1999
Anyone who does not meet the definition is a “person resident outside India,” and a different set of rules applies for holding Indian assets, opening bank accounts, and sending funds abroad. The law also reaches corporate entities. A branch, office, or agency located outside India stays subject to FEMA if it is owned or controlled by an Indian resident, which prevents companies from sidestepping domestic rules by parking operations overseas.
Current Account Transactions
Section 5 covers the everyday movement of currency for trade, services, and personal needs. These “current account transactions” include payments for imports and exports, interest on loans, dividends, rent, and ordinary banking activity. The general rule is permissive: anyone can buy or sell foreign exchange through an authorized dealer for a current account purpose without prior approval.2Indian Kanoon. Foreign Exchange Management Act 1999 – Section 5 The Central Government can impose reasonable restrictions in the public interest, but those are the exception.
Certain categories are handled differently based on sensitivity. Some transactions are prohibited outright. You cannot use foreign exchange for lottery winnings, income from racing or riding, lottery tickets, football pools, sweepstakes, or banned publications, and commission payments on exports toward equity investments in overseas joint ventures are also blocked. These prohibitions appear in Schedule I of the Current Account Transaction Rules.3Embassy of India, Washington DC, USA. Foreign Exchange Management (Current Account Transactions) Rules Other transactions, such as cultural tours or travel above certain financial thresholds, require Central Government approval. Remittances for consulting fees or legal expenses that fall outside standard liberalized schemes typically require direct RBI permission.
The layered design lets most routine payments go through without delay while adding scrutiny to large or unusual outflows.
Capital Account Transactions
Capital account transactions change your balance sheet. Section 2(e) defines them as transactions that alter the assets or liabilities, including contingent liabilities, of Indian residents holding assets abroad or non-residents holding assets in India.1India Code. The Foreign Exchange Management Act, 1999 Buying foreign stocks, acquiring real estate abroad, or borrowing from a foreign lender all fall into this category.
Section 6 sets the framework. A 2019 amendment split oversight: the Reserve Bank of India handles capital account transactions involving debt instruments, while the Central Government regulates non-debt transactions such as equity investments.4India Code. Foreign Exchange Management Act 1999 – Section 6 Both regulators can specify which classes of transactions are permissible, set financial limits, and attach conditions. Neither can restrict repayments on existing loans or depreciation of direct investments made in the ordinary course of business.
The Liberalised Remittance Scheme
The Liberalised Remittance Scheme (LRS) is the main channel for individual residents sending money abroad for investment, education, travel, gifts, or property. The annual cap is USD 250,000 per person per financial year and covers both current and capital account purposes. The limit applies across all authorized dealers combined, so splitting transactions among banks does not raise your allowance.5Reserve Bank of India. Liberalised Remittance Scheme Family members can pool their individual limits for a larger purchase, such as property abroad, provided each person independently meets the scheme’s terms.
Tax collected at source (TCS) applies above a threshold. Starting April 1, 2026, no TCS applies to the first ₹10 lakh remitted in a financial year, combined across all purposes and all authorized dealers. Above that, the rate depends on purpose:
- Education funded by a loan from a recognized institution: no TCS, regardless of amount.
- Self-funded education or medical treatment: 2% on amounts exceeding ₹10 lakh.
- All other purposes: 20% on amounts exceeding ₹10 lakh.
The 20% rate on general-purpose remittances catches people off guard. On a USD 100,000 outbound investment the TCS hit is significant. It is refundable against your Indian income tax liability when you file your return, but the cash is tied up until then.
External Commercial Borrowings
Corporate entities borrowing from foreign lenders operate under the External Commercial Borrowing (ECB) framework. As of 2026, most borrowers face a minimum average maturity period of three years, with a shorter window of one to three years available for manufacturing companies whose total outstanding ECB does not exceed USD 150 million. Interest rate ceilings have been removed; the borrowing cost needs to align with prevailing market conditions to the satisfaction of the authorized dealer bank. The RBI maintains a negative list of end-uses the funds cannot be applied to, including real estate speculation, agricultural or plantation activities (with some exceptions), and on-lending for any restricted purpose.
How Transactions Actually Flow: Authorized Dealers
Section 10 requires all foreign exchange transactions to flow through persons authorized by the RBI. These “authorized persons” include commercial banks, licensed money changers, and offshore banking units.6Indian Kanoon. Foreign Exchange Management Act, 1999 – Section 10 When you want to buy or sell foreign currency, you submit an application to your authorized dealer along with declarations confirming the purpose and amount. The dealer verifies that the transaction complies with FEMA before processing.
Dealers are the frontline compliance layer, not just processors. A dealer that pushes through a prohibited transaction shares liability, so banks tend to ask for documentation beyond the bare minimum. After completing a transaction, the dealer reports the details to the RBI, which creates the data trail used to monitor flows and spot violations.
Who Enforces FEMA
Three bodies share enforcement. The RBI is the primary regulator, managing foreign exchange reserves, authorizing dealers, issuing operational regulations for debt-related capital account transactions, and setting the parameters for day-to-day activity. The Central Government sets the broader policy framework, formulates rules for non-debt capital account transactions after the 2019 amendment, and appoints adjudicating authorities for enforcement proceedings. The Directorate of Enforcement investigates suspected violations. Officers at or above the rank of Assistant Director can open investigations under Section 13, and the Directorate holds powers comparable to those of income-tax authorities, including summoning individuals, compelling production of financial documents, and, under Section 37A, seizing assets within India equivalent in value to undisclosed foreign holdings.7IFSCA. Foreign Exchange Management Act 1999
Penalties
Section 13 scales penalties to the size of the violation. Where the amount involved can be calculated, the penalty can reach three times that amount. Where the amount is not quantifiable, the ceiling is ₹2 lakh. If the violation continues, an additional ₹5,000 per day applies for every day after the first.8India Code. India Code – Foreign Exchange Management Act 1999 – Section 13
Section 13(1A) targets undisclosed foreign assets specifically. If you are found holding foreign exchange, foreign securities, or immovable property outside India above a prescribed threshold without proper disclosure, the penalty can reach three times the value involved plus confiscation of equivalent assets located within India.8India Code. India Code – Foreign Exchange Management Act 1999 – Section 13 Failing to pay a penalty within 90 days of being served notice can lead to civil imprisonment under Section 14.7IFSCA. Foreign Exchange Management Act 1999
Settling Violations Through Compounding
Most violations can be settled through “compounding,” a voluntary admission-and-payment process that avoids formal adjudication. The RBI handles compounding for all contraventions except unauthorized dealing in foreign exchange under Section 3(a). You submit an application, either physically or through the RBI’s PRAVAAH portal, with a non-refundable fee of ₹10,000 plus applicable GST and supporting documentation. Before applying, you need to have obtained any required post-facto approvals or unwound any impermissible transactions.
If the RBI accepts the application and sets a compounding amount, you have 15 days to pay. Miss that window and the application is treated as void, which sends the case to the Directorate of Enforcement for formal proceedings. For an inadvertent breach, compounding is almost always faster and cheaper than contesting adjudication.
Appealing a Penalty
If an adjudicating authority imposes a penalty and you disagree, you have 45 days from receipt of the order to appeal. Smaller penalties go to the Special Director (Appeals); other orders go to the Appellate Tribunal. You generally must deposit the full penalty amount with a designated authority when filing the appeal. The Tribunal can waive that deposit if payment would cause undue hardship, but you need to make that case explicitly.9Lawgist.in. Section 19 – The Foreign Exchange Management Act, 1999
The Appellate Tribunal is expected to decide within 180 days. If it cannot meet the deadline, it must record its reasons in writing. The Tribunal can confirm, modify, or set aside the original order.9Lawgist.in. Section 19 – The Foreign Exchange Management Act, 1999
Taking Money Out of India
For non-residents moving money out of India, the rules depend on the type of bank account holding the funds.
Non-Resident Ordinary (NRO) Accounts
NRO accounts hold income earned in India, such as rent, dividends, or proceeds from selling property. Repatriation of the principal is capped at USD 1 million per financial year, and the cap covers sale proceeds from both movable and immovable assets, including inherited property. Authorized dealers require an undertaking from you and a Chartered Accountant certificate confirming that all applicable Indian taxes have been paid.10Reserve Bank of India. Master Circular on Remittance Facilities for Non-Resident Indians Interest earned in the NRO account is fully repatriable without limit, though it is subject to Tax Deducted at Source.
Non-Resident External (NRE) Accounts
NRE accounts hold foreign earnings deposited in Indian rupees. Both principal and interest are freely repatriable with no cap and no special approvals. You submit a request to your bank specifying the amount and destination, along with Form A2, the standard FEMA declaration for outward remittances. The process is simpler than NRO repatriation because the money originated outside India to begin with.
FEMA governs the Indian side of these flows. If you are a US taxpayer holding Indian accounts, separate US reporting obligations (FBAR, FATCA, Form 3520 for large foreign gifts, and foreign tax credit claims on Form 1116) apply independently of anything FEMA requires, and compliance with one does not satisfy the other.