Corporate and Other Laws · The Foreign Exchange Management Act, 1999

FEMA 1999 Introduction and Definitions for CA Inter

Updated 4 October 2026 · Fact-checked

FEMA 1999 is the Indian law that governs foreign exchange dealings. Its object is to facilitate external trade and payments and promote orderly development of the foreign exchange market. To answer questions, state the rule, apply the residence test or the transaction type, then conclude.

Understand FEMA 1999 Introduction and Definitions

Before 1999, India had FERA 1973. It was a control law. Almost every foreign exchange dealing was prohibited unless permitted, and breaches were criminal offences. After liberalisation in the early 1990s, India needed a law that supported trade and investment. So Parliament enacted the Foreign Exchange Management Act, 1999, which replaced FERA.

The objective of FEMA is to consolidate and amend the law relating to foreign exchange. It aims to facilitate external trade and payments and to promote the orderly development and maintenance of the foreign exchange market in India. The focus moved from control to management.

FEMA extends to the whole of India. It also applies to all branches, offices and agencies outside India owned or controlled by a person resident in India. It further applies to any contravention committed outside India by a person to whom the Act applies.

FEMA works on two ideas. First, who is involved: a person resident in India or a person resident outside India. Second, what kind of transaction it is: a current account transaction or a capital account transaction. Any person may sell or draw foreign exchange to or from an authorised person for a current account transaction (section 5). But the Central Government may, in public interest and in consultation with the Reserve Bank, impose reasonable restrictions on current account transactions. Capital account dealings are permitted only as section 6 allows: the Reserve Bank (for debt instruments) and the Central Government (for other capital account transactions) specify the permissible classes, limits and conditions.

For an individual, the residence test is the stay in India for more than 182 days during the preceding financial year. Two groups of persons are excluded. Under s.2(v)(i)(A), a person who has gone out of India or stays outside India for or on taking up employment outside India, for carrying on a business or vocation outside India, or for any other purpose indicating an intention to stay outside India for an uncertain period is excluded. Under s.2(v)(i)(B), a person who has come to or stays in India otherwise than for or on taking up employment in India, for carrying on a business or vocation in India, or for any other purpose indicating an intention to stay in India for an uncertain period is also excluded.

In simple terms, a current account transaction is any transaction other than a capital account transaction. A capital account transaction alters the assets or liabilities, including contingent liabilities, outside India of a person resident in India, or assets or liabilities in India of a person resident outside India. Examples of current account are payments due in connection with foreign trade and normal business, short-term banking and credit facilities, interest on loans and net income from investments, remittance for living expenses of parents, spouse and children abroad, and expenses on foreign travel, education and medical care. Borrowing, lending, investing in shares or property abroad are capital account in nature.

Key rules to remember

Object of FEMA: Facilitate external trade and payments + promote orderly development and maintenance of the foreign exchange market in India; Use these words in a descriptive answer on objectives.
Nature of the Act: FERA 1973 = regulation and control (criminal consequences); FEMA 1999 = management and facilitation (civil liability for contravention); Core of the FERA vs FEMA comparison. Under FEMA, contraventions attract civil penalties, not arrest by default.
Extent and applicability: Whole of India + branches, offices and agencies outside India owned or controlled by a person resident in India + contraventions outside India by persons to whom the Act applies; Mention all three limbs.
Person resident in India (individual): s.2(v)(i): A person residing in India for more than 182 days during the preceding financial year, but not including (A) a person who has gone out of India or stays outside India (a) for or on taking up employment outside India, (b) for carrying on outside India a business or vocation, or (c) for any other purpose indicating an intention to stay outside India for an uncertain period; or (B) a person who has come to or stays in India otherwise than (a) for or on taking up employment in India, (b) for carrying on in India a business or vocation, or (c) for any other purpose indicating an intention to stay in India for an uncertain period.; The test combines the length of stay in the preceding financial year with the purpose of stay or departure. Citizenship does not decide residence.
Person resident in India (entities): s.2(v)(ii): a person or body corporate registered or incorporated in India; s.2(v)(iii): an office, branch or agency in India owned or controlled by a person resident outside India; s.2(v)(iv): an office, branch or agency outside India owned or controlled by a person resident in India; Mention each limb separately in a written answer.
Person resident outside India: s.2(w): A person who is not resident in India; Defined by exclusion.
Current account transaction: s.2(j): A transaction other than a capital account transaction; it includes payments due in connection with foreign trade, other current business, services and short-term banking and credit facilities in the ordinary course of business; It also includes payments due as interest on loans and as net income from investments, remittances for living expenses of parents, spouse and children residing abroad, and expenses on foreign travel, education and medical care of parents, spouse and children. Under s.5, any person may sell or draw foreign exchange for a current account transaction, but the Central Government may, in public interest and in consultation with the Reserve Bank, impose reasonable restrictions as prescribed.
Capital account transaction: s.2(e): A transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India, or assets or liabilities in India of persons resident outside India; Section 6 governs these transactions. The Reserve Bank (for debt instruments) and the Central Government (for other transactions) specify the permissible classes, limits and conditions. Typical examples are a resident borrowing from, lending to, or investing in shares or property outside India.

How to solve FEMA 1999 Introduction and Definitions questions

Most FEMA questions in this topic are theory or short case-based. Use one method for every question.

1Identify what is asked: objective, extent, comparison with FERA, a definition, or a case on residence or transaction type.
2State the provision in plain words, using the key phrases of the Act.
3For a residence case, decide whether the person is an individual or an entity and apply the correct test.
4For an individual, check the stay in the preceding financial year and the purpose of stay or departure, including employment, business or vocation, or an uncertain period.
5For a transaction case, first fix the date and the residence status of each party on that date. Then ask whether it changes assets or liabilities outside India of a resident, or in India of a non-resident. If yes, it is capital account. If no, it is current account.
6Apply the rule to the facts, quoting the facts given.
7Write a one-line conclusion that answers the exact question asked.

Quickest way: Residence and transaction type in under a minute

When to use it: For MCQs and short case-based questions where you must label a person or a transaction fast.

For MCQs, first spot the keyword: 'more than 182 days', 'employment outside India', 'alters assets or liabilities', 'civil', 'criminal'.
For an entity, ask: is it registered or incorporated in India? If yes, resident. Also check whether it is an office, branch or agency and who owns or controls it.
For an individual, test the stay and the purpose. A person who has gone out of India or stays outside India for or on taking up employment outside India is excluded from the definition of person resident in India (s.2(v)(i)(A)(a)).
Label a transaction: it is capital account if it alters assets or liabilities outside India of a resident or in India of a non-resident, for example borrowing, lending or investing. Paying for trade, travel, study or medical care is current account.
In a written answer use the format: provision, facts, conclusion. This earns step marks even if the conclusion is debated.

Common mistakes in FEMA 1999 Introduction and Definitions

Saying FEMA is a criminal law like FERA.
Students remember FERA's harsh reputation and assume continuity.
Fix: Write that FEMA contraventions attract civil liability, with monetary penalties, unlike the criminal approach of FERA.
Deciding residence by citizenship.
Income-tax and general ideas of nationality get mixed up.
Fix: FEMA residence depends on stay, purpose and, for entities, registration or incorporation. A foreign citizen living in India can be a resident.
Applying only the 182-day test to an individual.
The number is easy to remember and the exceptions are skipped.
Fix: Check the purpose too. A person who has gone out of or stays outside India for employment, business or vocation outside India, or for any purpose indicating an intention to stay outside India for an uncertain period, is excluded from resident.
Calling every foreign payment a current account transaction.
Students look at the payment and ignore its effect.
Fix: Test whether assets or liabilities outside India of a resident, or in India of a non-resident, change. If yes, it is capital account.
Forgetting that an overseas branch of an Indian company is resident in India.
Students judge by location of the branch.
Fix: An office, branch or agency outside India owned or controlled by a person resident in India is a person resident in India.
Missing the extra-territorial applicability of FEMA.
Students stop at 'extends to the whole of India'.
Fix: Add overseas branches, offices and agencies owned or controlled by residents, and contraventions outside India by persons to whom the Act applies.

Worked examples

Example 1

Distinguish between FERA 1973 and FEMA 1999 in four points.

Show the solution

Object: FERA aimed at regulation and control of foreign exchange. FEMA aims to facilitate external trade and payments and promote orderly development of the foreign exchange market.
Approach: FERA presumed dealings were prohibited unless permitted. FEMA treats current account dealings as generally free, with reasonable restrictions by rules, and regulates capital account dealings.
Nature of liability: FERA contraventions were criminal in nature. FEMA contraventions attract civil liability through penalties.
Orientation: FERA reflected a scarcity-of-foreign-exchange regime. FEMA reflects a liberalised economy and the need to manage rather than control.

Answer: FERA was a control-oriented law with criminal consequences. FEMA is a management-oriented law that facilitates trade and payments, keeps current account largely free, regulates capital account and provides civil penalties.

Example 2

Mr. Mehta, an Indian citizen, has lived in Mumbai for many years and did not go abroad in 2024-25. On 15 January 2026 he remitted ₹8,00,000 to his son, who is studying in London, for tuition fees and living expenses. On the same date he also bought a flat in London for his own use. Is he a person resident in India under FEMA on 15 January 2026? Classify the remittance and the purchase of the flat.

Show the solution

Rule: under s.2(v)(i), a person residing in India for more than 182 days during the preceding financial year is resident in India, unless excluded, for example as a person who has gone out of India for or on taking up employment outside India. For a date in January 2026, the preceding financial year is 2024-25.
Facts: Mr. Mehta lived in Mumbai throughout 2024-25, so he stayed in India for more than 182 days. He has not gone out of India for employment, business or vocation outside India, or for an uncertain stay abroad. No exclusion applies.
Conclusion on residence: on 15 January 2026 Mr. Mehta is a person resident in India.
Remittance of ₹8,00,000 to his son in London: s.2(j) includes remittances for living expenses of children residing abroad (clause iii) and expenses in connection with foreign education of children (clause iv). It does not alter his assets or liabilities outside India in the sense of s.2(e). So it is a current account transaction. Under s.5 he may draw foreign exchange for it from an authorised person, subject to any reasonable restrictions the Central Government prescribes in public interest.
Purchase of a flat in London: Mr. Mehta is a person resident in India and the flat is an immovable property outside India. Buying it alters his assets outside India. So it is a capital account transaction under s.2(e).
Regulation of the flat purchase: capital account transactions are permitted only as section 6 allows, within the classes, limits and conditions specified. The exception in s.6(4) does not help him, because he is buying the flat while resident in India. It covers property acquired when he was resident outside India or inherited from a person resident outside India.

Answer: On 15 January 2026 Mr. Mehta is a person resident in India, because he stayed in India for more than 182 days in 2024-25 and no exclusion applies. The remittance of ₹8,00,000 for his son's tuition and living expenses is a current account transaction under s.2(j)(iii) and (iv). The purchase of the London flat alters his assets outside India, so it is a capital account transaction under s.2(e), permitted only as section 6 allows.

Exam tips

Learn the objective, extent and FERA vs FEMA points as short, numbered lists. They are common 4 to 5 mark theory questions.
For residence cases, always write the rule first, then the facts, then the conclusion. Do not just write 'resident' or 'non-resident'.
In case studies, state the date of each transaction and the person's residence status on that date before you classify the transaction.
Practise MCQs that give a company, a branch, or an NRI and ask for residence status. Use the registration or incorporation test for entities.
Memorise two or three examples of current account and capital account transactions each. Examples make a definition answer complete.
Quote section numbers only when you are certain of them. Otherwise quote the definition in words.

Practice questions from The Foreign Exchange Management Act, 1999

FEMA 1999 Introduction and Definitions: frequently asked questions

What are the main objectives of FEMA 1999?

FEMA aims to facilitate external trade and payments. It also promotes the orderly development and maintenance of the foreign exchange market in India. The Act replaced the control-based FERA.

What is the main difference between FERA and FEMA?

FERA was a control law and its breaches were criminal in nature. FEMA is a management law that facilitates trade and payments, and its contraventions attract civil penalties. FEMA keeps current account largely free, subject to reasonable restrictions, and regulates capital account.

Who is a person resident in India under FEMA?

An individual who resides in India for more than 182 days in the preceding financial year is resident, unless excluded. One exclusion covers a person who has gone out of or stays outside India for employment, business or vocation outside India, or for a purpose indicating an intention to stay outside India for an uncertain period. Another covers a person who has come to or stays in India otherwise than for employment in India, business or vocation in India, or a purpose indicating an intention to stay in India for an uncertain period. A person or body corporate registered or incorporated in India is resident, as are certain offices, branches and agencies depending on who owns or controls them.

How do I tell a capital account transaction from a current account transaction?

Ask whether the transaction alters assets or liabilities, including contingent liabilities, outside India of a resident, or in India of a non-resident. If it does, it is capital account. If not, it is current account, which the Act defines as any transaction other than a capital account transaction.