Overview Of Foreign Exchange Management Act

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The Foreign Exchange Management Act (FEMA) was introduced by the Government of India in 1999. It replaced the previous Foreign Exchange Regulation Act (FERA) of 1973. The FEMA Act was designed to boost external payments and foreign trades in India. FEMA is a civil law against FERA which was a draconian police law.

In essence, FEMA act was a modernization of the Indian economy and created to liberalize and privatize the markets in India. In this article, we’ll take an overview of FEMA act, covering the basics that you need to be aware of.

What Are The Objectives Of FEMA Act?
How Is FEMA Applied In India?
What Prohibitions Are Made Under FEMA Act In India?
What Are The Rules Of Trade for Foreign Exchange Management Act (FEMA) in India?
Why Choose Incorp?
Frequently Asked Questions on FEMA act.

What Are The Objectives Of FEMA Act?

The main aim of introducing the Foreign Exchange Management Act was to liberalize the Indian economy by encouraging external trade and payments. It helped to regulate the Indian forex market.

According to FEMA, the balance of payment is a record of transactions involving products, services, or properties between citizens of two separate countries.

The Government of India has classified FEMA 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.

Thus, creating the structure and measures for all foreign exchange transactions in India.

How Is FEMA Applied In India?

FEMA applies to the whole of India. It also applies to the agencies and offices located outside India that are managed or owned by an Indian citizen. The headquarters is situated in New Delhi and is known as the Enforcement Directorate.

More specifically, FEMA act applies to:

Indian foreign exchange
Indian foreign security
Banking, financial, and insurance services
Exporting of any product and/or services from India to a foreign country
Importing of any product and/or services from outside India
Securities as defined under the Public Debt Act of 1994
Buying, Selling,
Any Indian Entity owned by a person resident outside India
Any citizen of India, residing in India or in a foreign country
and Exchanging of any kind of product/service
Any overseas company owned by a non-resident Indian (NRI)

Current Account transactions listed by FEMA have been classified into three areas:

Transactions prohibited by FEMA Act
A transaction that requires Central Government’s permission
A transaction that requires the Reserve Bank of India’s (RBI’s) permission

What Prohibitions Are Made Under FEMA Act In India?

Sending money which is the result of winning the lottery.
Sending money which is the result of winning horse racing, cricket games, etc.
Sending money to buy 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 percent 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 Foreign Exchange Management Act (FEMA) in India?

According to the RBI, foreign exchange can be undertaken with any authorized dealer via the Prior Approval Route or General Permission Route.

Scenario	Limitations
Visiting privately to any country (except Bhutan and Nepal)	Liberalized Remittance Scheme (LRS) limit of USD 2,50,000/- per year.
Personal donations/gifts by resident individuals	Liberalized Remittance Scheme (LRS) limit of USD 2,50,000/- per year.
Corporate Donations by persons other than resident individual	One per cent of the forex earnings during the preceding three financial years. OR US$ 5,000,000, whichever is less, for a specified purpose.
Leaving India for the purposes of gainful employment	Liberalized Remittance Scheme (LRS) limit of USD 2,50,000/- per year.
Payment for emigration	Liberalized Remittance Scheme (LRS) limit of USD 2,50,000/- per year.
Payment for the care of relatives (only close relatives) outside of India by a person who is resident but not permanently resident in 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. OR 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.
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$10,000,000 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 exceeding US$10,000 by a State Government or its Public Sector Undertaking.
Payment of importation by a Public Sector Undertaking 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. Payment of any sport participated outside of India (other than national/international level sports) if it exceeds US$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.

Why Choose Incorp?

The Foreign Exchange Management Act (FEMA) of India requires a great deal of compliance. We have done our best to provide you with a basic overview of your FEMA responsibilities. However, it is a complicated process for every organization.

At Incorp India, we have a team of experts who will happily assist you in becoming FEMA act compliant. We have an experienced team that will cater to all your legal compliances.

Frequently Asked Questions on FEMA act.

Is FEMA act still in force in India?

Yes, still in force in India. The Foreign Exchange Management Act (FEMA) was introduced in 1999 to replace the outdated Foreign Exchange Regulation Act (FERA) of 1973. FEMA act was a modernization of the Indian economy and created to liberalize and privatize the Indian market.

Where is FEMA act applicable in India?

FEMA act 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 situated in New Delhi and is known as the Enforcement Directorate.

What is FEMA act?

The Foreign Exchange Management Act (FEMA) was introduced in 1999 to replace the outdated Foreign Exchange Regulation Act (FERA) of 1973. FEMA act was a modernization of the Indian economy and created to liberalize and privatize the Indian market.

How FEMA is better than FERA?

The Foreign Exchange Management Act (FEMA) was introduced in 1999 to replace the outdated Foreign Exchange Regulation Act (FERA) of 1973. FEMA is a greater successor to FERA in that it was created to liberalize and privatize the Indian market and was a modernization of the Indian economy. FEMA is a civil law against FERA, which was a harsh police law. All violations under FERA will lead to criminal charges. The violations were criminal in nature and could not be repeated. In comparison to FERA, only major violations are considered major offenses in FEMA.