Current Account transactions under FEMA

Current Account transactions under FEMA

Current Account Transaction means all transactions, which are not capital account transactions, it includes:

  • Business transactions between residents and non-residents.
  • Short-term banking and credit facilities in the ordinary course of business.
  • Payments towards interest on loans
  • Income from investments.
  • Payment of expenses of parents, spouse or children for living abroad
  • Payment of expenses of parents, spouse or children on their foreign travel, medical and education.

The definition is ‘inclusive’ i.e. besides aforesaid expenses, any expenditure which is not a ‘capital account transaction’ will be a current account transaction.  

Example- Own expenses on foreign travel, education, medical care, expenses are covered as ‘current account transaction’ even if not specified above.

1. Routes of approval for Current Account Transactions under FEMA

Legal Provisions relating to approval routes for investment in India are given as follows:

  1. Various remittance facility are given under section 5 of Foreign Exchange Management (Current Account Transactions) Rules, 2000 (“CAT Rules”)
  2. RBI has issued master directions No. 8/2015-16 dated 01-01-2016 on “Other Remittance Facilities”.
  3. Provisions related to reporting are given under Master Directions on reporting No. 18 dated 01.01.2016.

Therefore, following 3 routes are provided for approval of transactions:

  1. Automatic Route: For transactions/Investing activities under this category requires no prior approval of the government or Reserve Bank of India.
  2. Approval Route: It covers those transactions/Investing activities for which prior approval is required either from the Central Government or Reserve Bank of India.
  3. Prohibited Items: It includes those transactions/Investing activities  where transaction in foreign currency is not at all permitted.

As per General principle, Capital Account transactions are considered as prohibited unless permitted, whereas, current Account transactions are considered as permitted unless prohibited.

2 Routes of approval of current account transactions

As per FEM (CAT) Rules 2000, following are routes of approvals for different types of transactions:

Nature of TransactionsRoute of Approval
Transactions given under Schedule I of FEM (CAT) Rules 2000Expressly Prohibited
Transactions given under Schedule II of FEM (CAT) Rules 2000Permitted by Authorised Dealer Banks provided that applicant has secured approval from Governments.
Transactions given under Schedule III of FEM (CAT) Rules 2000Upto threshold limit of USD 2,50,000 (Per Financial year), approved by Authorised Dealer Bank. For an amount exceeding threshold limit, prior approval of RBI is required.

3. Prohibited current account Transactions under FEMA

Drawal of foreign exchange is specifically prohibited for following transactions:

  1. Transactions given in Schedule I of FEM (CAT) Rules,
  2. Travel to Nepal/Bhutan
  3. Transaction with person resident in Nepal & Bhutan
  4. Lottery, Money circulation schemes or remittance for prize money
  • As per Para 1.3 of RBI FED Master Directions No. 8/2015-16 dated 01.01.2016, release of foreign exchange is not allowed for travelling to Nepal and Bhutan and for transactions with residents of Nepal and Bhutan. However, transactions with residents of Nepal and Bhutan may be exempted by RBI.
  • Release of foreign exchange is prohibited for participation in Lottery like schemes called by different names such as Money circulation schemes or remittance for the purpose of securing prize money/award- Para 1.4 of RBI FED Master Directions No. 8/2015-16 dated 01.01.2016.
  • As per Schedule I read with Rule 3 of FEM (CAT) rules, withdrawal of exchange for the following transactions is prohibited:
    • Remittance out of lottery winnings.
    • Remittance of income from racing/riding etc., or any other hobby.
    • Remittance for purchases of lottery tickets, banned/prescribed magazines, football pools, sweepstakes, etc.
    • Payment of commission on exports made towards equity investment in Joint Ventures/Wholly Owned Subsidiaries abroad of Indian companies.
    • Remittance of dividend by any company to which requirement of dividend balancing is applicable.
    • Payment of commission on exports under Rupee State Credit Route except for commission upto 10% of the invoice value of export of tea and tobacco..
    • Payment related to “Call Back Services” of telephones,
    • Remittance of interest income on funds held in Non-Resident Special Rupee (NRSR) account scheme.

4 Current account transactions with requires prior approval of Central Government – Schedule II

As per Rule 4 to FEM (CAT) Rules, There are certain current account transactions which are included in Schedule II for which prior approval of the Central Government is required.

Transaction Ministry/Department of which prior approval is required
Cultural tours,Ministry of Human Resource Development (Department of Education and Culture)
Advertisements in foreign print media for the purpose other than promotion of tourism, foreign investment and International bidding exceeding INR 10,000 by state government of its PSUsMinistry of Finance- Department of Economic Affairs
Remittance of freight of vessel chartered by PSUMinistry of Surface Transport (Chatering Wing)
Payment for import by a government  Department or a PSU on CIF basis (i.e. other than FOB or FAS basis)Ministry of Surface Transport, (Chartering Wing) 
Multi-modal transport operators making remittance to their agents abroad Registration Certificate from the Director General of Shipping 
Remittance of hiring charges of transponders by TV Channels Internet Service providers 
Ministry of Information and Broadcasting Ministry of Communication and Information Technology 
Remittance of container detention charges exceeding the rate prescribed by Director General of Shipping Ministry of Surface Transport (Director General of Shipping) 
Remittances under technical collaboration agreements where payment of royalty exceeds 5% on local sales and 8% on exports and lumpsum payment exceeds USD 2 million Ministry of Commerce and Industry
Remittance of prize money/sponsorship of sports activity abroad by a person other than International / National / State Level sports bodies, if the amount involved exceeds USD 100,000.Ministry of Human Resources Development (Department of Youth Affairs and Sports)
Remittance for membership of P& I Club Ministry of Finance, (Insurance Division)

However, this Rule does not apply where the payment is made out of funds held in Resident Foreign Currency (RFC) Account or Exchange Earners’ Foreign Currency (EEFC) Account of the remitter.

5 Current account transactions which requires prior approval of RBI – Schedule III

As per Rule 5 to FEM (CAT) Rules, transactions given in Schedule III requires approval of Authorised Dealer Banks upto the threshold limit mentioned. 

For amounts beyond the threshold limit, prior approval of RBI was required. Different threshold limits were provided for different nature of payments.

With effect from 4th Feb, 2004, Liberalisation Remittance Scheme (“LRS”) was introduced wide A.P. (DIR Series) Circular No. 64 dated February 4, 2004 wherein all residents were permitted to freely remit funds upto specified limit* for permitted Capital Account or Current Account transaction or any combination thereof. For remittance beyond specified limit, prior approval of RBI was required.

*Limited for free remittance has been amended over the period of time. With effect from 5th May, 2016, such limit has been increased to USD 250000. Therefore, for permitted capital account or current account transaction for aggregate upto USD 250000, no prior approval of RBI is required.

Read more about LRS Scheme

6. Current Account Transactions permitted under LRS Scheme

  1. Private visits abroad other than Nepal and Bhutan. Amount can be obtained upto aggregate of USD 2,50,000 irrespective of number of visits.
  2. Gift/Donation to person/organisation outside of India
  3. Going abroad for employment.
  4. For the purpose of Emigration, a person can draw upto amount prescribed by country of emigration or USD 250000. 
  5. Transfer for maintenance of close relatives
  6. Business trips- Visits by individuals in connection with attending of an international conference, seminar, specialised training, apprentice training, etc., are treated as business visits.
  7. For Medical treatment abroad, an amount upto USD 250000 can be drawn without any estimate from the hospital. For an amount exceeding the above limit, Authorised Dealers may release foreign exchange under general permission based on the estimate from the doctor in India or hospital/ doctor abroad.
  8. Foreign currency upto USD 2,50,000 or its equivalent can be released to resident individuals for studies abroad without any estimate from the foreign University. However, an amount exceeding USD 2,50,000 can be released based on the estimate received from the institution abroad.

This Rule does not apply where the payment is made out of funds held in Resident Foreign Currency (RFC) Account or Exchange Earners’ Foreign Currency (EEFC) Account of the remitter. 

7. Frequently Asked Questions

1. What is the difference between the Automatic Route and the Government Route?

Automatic Route: Drawal of Foreign exchange from authorised dealers is allowed without prior approval of the Central Government or the Reserve Bank of India, in all activities/sectors.

Government Route: Drawal of Foreign exchange is subject to the prior approval of Central Government or Reserve bank of India.

2. For the purpose of travel abroad, can payment for foreign exchange made in cash?

Foreign exchange for travel abroad can be purchased from an authorized person in cash for foreign exchange less then INR 50,000.

However, if the equivalent amount is INR 50,000/- and above, the entire payment should be made by way of a crossed cheque/banker’s cheque/pay order/demand draft/debit card/credit card.

3. Can a resident open a foreign currency denominated account in India?

Persons resident in India are permitted to maintain foreign currency accounts in India under the following three Schemes:

A.  Exchange Earners Foreign Currency Accounts: – Funds held in EEFC account can be utilized for all permissible current account transactions and for approved capital account transactions as specified by the extant Rules/Regulations/ Notifications/ Directives issued by the Government/RBI from time to time. The account is maintained in the form of a non-interest-bearing current account.

B. Resident Foreign Currency Accounts : – A person resident in India may open, hold and maintain with an Authorized Dealer in India a Resident Foreign Currency (RFC) Account to keep their foreign currency assets which were held outside India at the time of return can be credited to such accounts.

C. Resident Foreign Currency (Domestic) Account:– A resident Individual may open, hold and maintain with an Authorized Dealer in India, a Resident Foreign Currency (Domestic) Account, out of foreign exchange acquired in the form of currency notes, Bank notes and travellers cheques, from any of the sources like, payment for services rendered abroad, as honorarium, gift, services rendered or in settlement of any lawful obligation from any person not resident in India. The account may also be credited with/opened out of foreign exchange earned abroad like proceeds of export of goods and/or services, royalty, honorarium, etc., and/or gifts received from close relatives (as defined in the Companies Act) and repatriated to India through normal banking channels. The account shall be maintained in the form of Current Account and shall not bear any interest.

4. Is there any time-frame for a traveller who has returned to India to surrender foreign exchange?

On return from a foreign trip, travellers are required to surrender unspent foreign exchange held in the form of currency notes and travellers cheques within 180 days of return. However, they are free to retain foreign exchange up to USD 2,000, in the form of foreign currency notes.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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