Current Account Transaction under FEMA

Concept of Current Account Transaction was introduced under Foreign Exchange Management Act, 1999 (“FEMA”) vide section 5 of FEMA. Purpose of introducing concept of current account transaction is to facilitate global migration of individuals and to facilitate transactions in relation such global migration in foreign currency to such individuals.

The primary reason for regulating current account transactions records is to restrict excessive outflow of foreign currency outside India. As India is signatory to WTO Agreement, in terms of article VIII, it has been stated that without the approval of International Monetary Fund, no country can impose any restriction on making of payment and transfer for current account transactions in the international market. Accordingly, current account transactions are generally allowed unless specifically restricted or prohibited.

Current Account transactions are regulated under jurisdiction of Government of India (“GOI”). All the notifications in relation to same are issued by GOI under section 5 of FEMA.

Broadly, current account transaction is a transaction other than capital account transaction. As per section 2(f) of the FEMA, “current account transaction” means a transaction other than a capital account transaction and such transaction includes,

1. payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business;
2. payments due as interest on loans and as net income from investments;
3. remittances for living expenses of parents, spouse and children residing abroad; and
4. expenses in connection with foreign travel, education and medical care of parents, spouse and children.

Current account transactions are governed by Foreign Exchange Management (Current Account Transaction) Rules, 2000 (“Current Account Transaction Rules”).

Under Current Account Transaction Rules, Current Account Transactions are divided into 3 schedules as under: 

• Schedule I – Prohibited Transactions:
  1. Remittance out of lottery winnings;
  2. Remittance of income from racing/riding etc. or any other hobby;
  3. Remittance for purchase of lottery tickets, banned/prescribed magazines, football pools, sweepstakes, etc;
  4. Payment of commission on exports made towards equity investment in Joint Ventures/Wholly Owned Subsidiaries abroad of Indian companies;
  5. Remittance of dividend by any company to which the requirement of dividend balancing is applicable;
  6. Payment of commission on exports under Rupee State Credit Route, except commission up to 10% of invoice value of exports of tea and tobacco;
  7. Payment related to “Call Back Services” of telephones;
  8. Remittance of interest income on funds held in Non-Resident Special Rupee (Account) Scheme.
• Schedule II – Transactions requiring prior approval of Government of India:

Above transactions requires prior approval of government of India. In case, remittance is made from balance in Resident Foreign Currency (“RFC”) account, no approval of government of India is required. Similarly, no approval is required if remittance is made from Exchange Earner Foreign Currency (“EEFC”) of the remitter except for remittance made for membership of P&L club.

• Schedule III – Transactions requiring prior approval of RBI:

For individual, total remittance upto USD 2,50,000 per annum is allowed for following facilities:

1. Private visit to any country (except Nepal and Bhutan);
2. Gift or Donation;
3. Travelling abroad for employment;
4. Emigration;
5. Maintenance of close relatives abroad;
6. Travel for business, or attending a conference or specialised training or for meeting expenses for meeting medical expenses, or check up abroad, or for accompanying as attendant to a patient going abroad for medical treatment / check-up;
7. Expenses in connection with medical treatment abroad;
8. Studies abroad;
9. Any other current account transaction.

In relation to emigration, expenses for medical treatment and studies abroad, remittance in excess of USD 250,000/- is also permissible, if it is pre-requisite for emigrating country or medical institution offering treatment or the university. In all other cases, prior approval of RBI is mandatory for remittance in excess of USD 250,000/-.

In relation to person other than individual, remittances in relation to following facilities require prior approval of RBI:

1. Donation in excess of 1% of their foreign exchange earnings during the three financial years or USD 500,000 whichever is less;
2. Commission per transaction to agents abroad for sale of residential flats or commercial plots in India exceeding USD 25,000 or 5% of inward remittance, whichever is higher;
3. Remittance exceeding USD 10 million per project for any consultancy services in respect of infrastructure projects and USD 1 Million per project for other consultancy services procured from outside India;
4. Remittance exceeding 5% of investment brought into India or USD 1,00,000 whichever is higher for reimbursement of pre-incorporation expenses by entity in India;
5. Payment towards the lumpsum fees or royalties for technology collaborations and license or use of trademark / trade name can be made under the automatic route, without any monetary cap;
6. Advance against exports of goods can be received by an exporter from a buyer or third party named in export declaration;
7. Interest paid on advance payment whereby interest does not exceed LIBOR plus 100 points;
8. Shipment of goods needs to be made within one year from the date of receipt of advance;

Specific prohibition:

Drawal of foreign exchange is prohibited for entering into any current account transactions for,

1. transaction mentioned in Schedule I as above;
2. travel to Nepal and / or Bhutan; and
3. transaction with person resident in Nepal or Bhutan, subject to special approval

As seen from above, there is specific prohibition, restriction and allowance for remittance of foreign exchange which are not covered under Current Account Transactions. However, if remittance for transaction covered under Schedule II and III is made through RFC account, prohibition and restriction does not apply. 

For mode detailed discussion on the above subject, please do not hesitate to connect at contact@devadhaantu.in