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

Regulation and Management of Foreign Exchange under FEMA, 1999

Updated 4 October 2026 · Fact-checked

This part of FEMA (sections 3 to 9) controls who may deal in foreign exchange and how. Only authorised persons may deal. Current account transactions are free unless restricted. Capital account transactions are allowed only as permitted. Exporters must declare, and residents owed foreign exchange must realise and repatriate it. Answer by stating the provision, applying facts, then concluding.

Understand Regulation and Management of Foreign Exchange

FEMA 1999 replaced FERA. Its aim is to facilitate external trade and payments and to promote orderly development of the foreign exchange market in India. The approach is liberal: transactions are permitted unless the law restricts them.

Section 3 is the base rule. No person may deal in or transfer foreign exchange or foreign security to anyone who is not an authorised person. No person may make a payment to, or receive a payment from, a person outside India except through an authorised person. The Act also bars foreign exchange or security transactions in a manner other than allowed by the Act, rules or regulations, and bars entering a financial transaction in India as consideration for, or in association with, acquiring a right to receive a foreign exchange or security outside India.

Section 4 restricts holding of assets abroad. Except as otherwise provided in the Act, a person resident in India may not acquire, hold, own, possess or transfer foreign exchange, foreign security or immovable property outside India. There are carve-outs. Under section 6(4), a person resident in India may hold, own, transfer or invest in foreign currency, foreign security or immovable property outside India if it was acquired, held or owned when the person was resident outside India, or was inherited from a person resident outside India. Section 9 and the rules and regulations made under the Act also carve out certain cases. So the two cases in section 6(4) are not the only exceptions.

Authorised person (section 2(c)) means an authorised dealer, money changer, off-shore banking unit or any other person authorised under section 10(1) to deal in foreign exchange or foreign securities. The RBI grants the authority, in writing, and it is subject to the conditions laid down in it. An authorised person must follow the general or special directions the RBI gives. Except with the RBI's previous permission, it must not engage in a transaction that does not conform to the terms of its authorisation.

Before a foreign exchange transaction for any person, the authorised person must require that person to make a declaration and give information that will reasonably satisfy it that the transaction will not involve, and is not designed for, a contravention or evasion of the Act. If the person refuses or complies unsatisfactorily, the authorised person must refuse in writing to undertake the transaction. If it has reason to believe that a contravention or evasion is contemplated, it must report the matter to the RBI.

The RBI may revoke the authorisation at any time if it is satisfied that revocation is in public interest, or that the authorised person has failed to comply with a condition of the authorisation or has contravened the Act or any rule, regulation, notification, direction or order. Where the ground is non-compliance or contravention, the RBI must first give the authorised person a reasonable opportunity of making a representation.

Transactions fall in two groups. Current account transactions (section 2(j)) are those that do not alter the assets or liabilities, including contingent liabilities, outside India of a person resident in India, or in India of a person resident outside India. They include payments due in connection with foreign trade, other current business, services and short-term banking and credit facilities in the ordinary course; interest on loans and net income from investments; remittance for living expenses of parents, spouse and children residing abroad; and expenses in connection with foreign travel, education and medical care of parents, spouse and children. Capital account transactions (section 2(e)) alter assets or liabilities outside India of a person resident in India, or in India of a person resident outside India. They include transactions in the nature of borrowing and lending, investment, and guarantees.

Section 5 says any person may sell or draw foreign exchange to or from an authorised person for a current account transaction, but the Central Government may, in public interest and in consultation with the RBI, impose reasonable restrictions. Section 6 deals with capital account transactions: a person may sell or draw foreign exchange to or from an authorised person for a capital account transaction, subject to what is permitted. The RBI, in consultation with the Central Government, specifies the permissible classes, limits and conditions for transactions involving debt instruments. The Central Government, in consultation with the RBI, prescribes them for transactions not involving debt instruments.

Section 7 deals with export of goods and services, where the exporter must furnish a declaration and information. Section 8 deals with realisation and repatriation. Save as otherwise provided in the Act, where foreign exchange is due or has accrued to any person resident in India, that person must take all reasonable steps to realise and repatriate it to India within the period and in the manner specified by the RBI. Export proceeds are one common application. The section is not limited to exporters. The period and manner are set by RBI regulations.

Section 9 exempts certain specified cases from the operation of sections 4 and 8. The cases, and the limits that go with them, are those the section and the RBI specify. Do not assume the exemption covers every holding or every receipt of foreign exchange.

Key rules to remember

Section 3 prohibition: No dealing in foreign exchange or foreign security except through an authorised person; Also no payment to or from a person outside India except through an authorised person, unless the Act, rules or regulations allow otherwise.
Section 4 restriction: Except as otherwise provided in the Act, a person resident in India may not acquire, hold, own, possess or transfer foreign exchange, foreign security or immovable property outside India; Section 6(4) lets a resident hold such assets if acquired or held when resident outside India, or inherited from a person resident outside India. Section 9 and the rules and regulations also carve out cases.
Authorised person (section 2(c)): Authorised dealer + money changer + offshore banking unit + any other person authorised under section 10(1); Authority is given by the RBI in writing, with conditions. The RBI may revoke it in public interest or for non-compliance or contravention. For the non-compliance or contravention ground, a reasonable opportunity of making a representation must be given first.
Current account transaction (section 2(j)): Transaction that does not alter the assets or liabilities, including contingent liabilities, outside India of a person resident in India, or in India of a person resident outside India; Examples: foreign trade payments, interest, living expenses, travel, education and medical expenses.
Capital account transaction (section 2(e)): Transaction that alters assets or liabilities outside India of a resident, or in India of a non-resident; Examples: borrowing, lending, investment, guarantees. Allowed only as permitted under section 6 by the RBI or the Central Government.
Section 5 rule: Current account: free, subject to reasonable restrictions imposed by the Central Government in consultation with the RBI; Restrictions are set through rules. Schedules to the Current Account Transactions Rules, 2000 list prohibited and permission-linked items, so check the facts for the item.
Section 6 rule: Capital account: only as permitted. Debt instruments: classes and limits specified by the RBI in consultation with the Central Government. Other transactions: prescribed by the Central Government in consultation with the RBI; The default for capital account is permission, not freedom.
Section 7 and 8 duties: Section 7: every exporter furnishes a declaration and information to the RBI or specified authority. Section 8: any resident in India to whom foreign exchange is due or has accrued takes all reasonable steps to realise and repatriate it within the period and manner specified by the RBI; Export proceeds are one application of section 8, which is wider than exporters. Save as otherwise provided in the Act. The period and manner are set by RBI regulations.
Section 9 exemption: Sections 4 and 8 do not apply to the specified cases; Section 9 exempts only the specified cases from sections 4 and 8, and the limits are as specified by the RBI. Do not list the cases or quote limits from memory. State that the exemption applies only to cases specified under the section.

How to solve Regulation and Management of Foreign Exchange questions

Use this method for any question on foreign exchange dealings, authorised persons, current or capital account transactions, or export proceeds.

1Read the facts and identify who the parties are: resident or non-resident, individual or company, authorised person or not.
2Classify the transaction. Ask if it alters assets or liabilities outside India of a resident, or in India of a non-resident. If no, it is current account. If yes, it is capital account.
3State the governing section: section 3 for dealing, section 4 for holding assets abroad, section 5 for current account, section 6 for capital account, section 7 for the exporter's declaration, section 8 for realisation and repatriation, section 10 for authorised persons.
4Apply the default rule. Current account is free unless restricted. Capital account is barred unless permitted. Dealing must be through an authorised person.
5Check for restrictions or exemptions: Central Government restrictions on current account, limits on capital account, the section 6(4) holding rules, and section 9 exemptions from sections 4 and 8.
6Check duties: declaration to the authorised person, export declaration, realisation and repatriation of foreign exchange due, refusal and reporting by the authorised person.
7Write a clear conclusion that answers exactly what the question asked, such as whether the transaction is allowed or whether the person has contravened the Act.

Quickest way: Classify, then apply the default rule

When to use it: Use this for MCQs and for short scenario answers when time is limited.

MCQ: look for the word that decides the answer. 'Authorised person', 'current account' and 'capital account' each point to one section.
Remember the two defaults: current account is free subject to restrictions, capital account needs permission.
Eliminate options that say all current account transactions are fully free with no restrictions, or that capital account is free for residents.
For export questions, look for a declaration to the RBI or authority, and realisation and repatriation within the period specified by the RBI.
Written answer format: Provision, Facts, Conclusion. Give one line on the section, two lines on the application, one line on the conclusion. Each stage earns marks.

Common mistakes in Regulation and Management of Foreign Exchange

Saying current account transactions are completely free.
Students remember 'free' from the liberal approach and forget section 5 allows restrictions.
Fix: Write 'free, subject to reasonable restrictions imposed by the Central Government in consultation with the RBI'.
Treating any loan or investment as current account.
Students focus on the amount or purpose, not on whether assets or liabilities change.
Fix: Apply the statutory test: does it alter assets or liabilities outside India of a resident, or in India of a non-resident? If yes, it is capital account.
Assuming only banks can be authorised persons.
Authorised dealers are the best-known category.
Fix: List all four: authorised dealer, money changer, offshore banking unit, and any other person authorised under section 10(1).
Forgetting that an authorised person has duties, such as obtaining a declaration, refusing in writing and reporting.
Students study section 10 as only a power to be authorised.
Fix: Mention the RBI's directions, the declaration requirement, written refusal where the declaration is refused or unsatisfactory, reporting where contravention is contemplated, and revocation (with a chance to make a representation on the non-compliance or contravention ground).
Saying exporters only need to realise proceeds, with no declaration, or that section 8 applies only to exporters.
Section 8 is remembered separately from section 7, and export proceeds are its best-known example.
Fix: Cover both: declaration or information to the RBI or specified authority under section 7, and under section 8 realisation and repatriation of any foreign exchange due to a resident, within the period and manner specified by the RBI.
Quoting a fixed number of months or an amount limit from memory with no certainty.
Time limits and limits are set by rules and regulations and change over time.
Fix: State the rule in principle, that the period and limits are as specified by the RBI or the rules, unless the question gives the figure.

Worked examples

Example 1

Ravi, a resident of India, pays tuition fees to a foreign university for his son's education abroad through an authorised dealer. Ravi also plans to lend money to a relative living abroad. Classify both transactions and state whether they are permitted under FEMA.

Show the solution

Provision: Section 2(j) defines current account transactions as those that do not alter assets or liabilities outside India of a person resident in India. Expenses for education of children abroad are specifically included.
Facts, first transaction: The tuition fee does not create an asset or liability abroad for Ravi. It is also routed through an authorised dealer, which satisfies section 3.
Section 5 allows drawing foreign exchange for current account transactions from an authorised person, subject to reasonable restrictions. So the tuition payment is permitted, subject to any restrictions or rules.
Facts, second transaction: A loan to a relative abroad creates a financial asset of Ravi outside India. It alters his assets abroad, so it is a capital account transaction under section 2(e), in the nature of lending.
Section 6 allows capital account transactions only as permitted under the rules and regulations made by the Central Government or the RBI, within the classes, limits and conditions specified.
Conclusion for the second transaction: it cannot be done freely. Ravi may lend only if the rules and RBI regulations permit it and within the limits specified.

Answer: The tuition payment is a current account transaction and is permitted through an authorised dealer, subject to restrictions. The loan to the relative is a capital account transaction and is allowed only if permitted under the rules and RBI regulations and within the specified limits.

Example 2

Explain the position of an authorised person under section 10 of FEMA and state what happens if it contravenes the Act or the conditions of its authority.

Show the solution

Provision: Section 2(c) and section 10(1) allow the RBI to authorise a person in writing to deal in foreign exchange or foreign securities as an authorised dealer, money changer, offshore banking unit or other authorised person.
Conditions: The authorisation is subject to the conditions laid down in it. The authorised person must follow the general or special directions the RBI gives, and, except with the RBI's previous permission, must not engage in a transaction not in conformity with its authorisation.
Duty of declaration: Before undertaking a foreign exchange transaction for any person, the authorised person must require that person to make a declaration and give information that reasonably satisfies it that the transaction will not involve, and is not designed for, a contravention or evasion of the Act.
Refusal and reporting: If the person refuses or complies unsatisfactorily, the authorised person must refuse in writing to undertake the transaction. If it has reason to believe that a contravention or evasion is contemplated, it must report the matter to the RBI.
Revocation: The RBI may revoke the authority at any time if it is satisfied that revocation is in public interest, or that the authorised person has failed to comply with a condition or has contravened the Act or any rule, regulation, notification, direction or order. On the non-compliance or contravention ground, it must first give a reasonable opportunity of making a representation.
Conclusion: The RBI may revoke the authority, giving a chance to make a representation where the ground is non-compliance or contravention. Liability for the contravention itself is separately governed by section 13 (penalties) and other provisions of the Act.

Answer: An authorised person deals in foreign exchange under written RBI authority and must follow RBI directions, obtain declarations, refuse transactions where the declaration is refused or unsatisfactory, and report contemplated contraventions or evasion. The RBI may revoke the authority in public interest, or for non-compliance with a condition or contravention of the Act, rules, regulations, notifications, directions or orders. On the contravention ground, a reasonable opportunity of making a representation must be given first. Liability for contravention is separately governed by section 13 (penalties) and other provisions.

Exam tips

Learn the definitions of current account and capital account transaction word for word. The test of altering assets or liabilities is the most examined idea.
In scenario questions, name the section first. Marks often depend on citing sections 3, 5, 6, 8 or 10 correctly, and only when you are certain of the number.
For MCQs, watch absolute words like 'always', 'only' and 'never'. Current account is free subject to restrictions, so 'completely free' is wrong.
Write answers in provision, facts, conclusion order. Even a short answer should end with a clear yes or no on whether the transaction is allowed.
Do not quote time limits or monetary caps from memory unless the question gives them. Say they are as specified by the RBI or the rules.

Practice questions from The Foreign Exchange Management Act, 1999

Regulation and Management of Foreign Exchange in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Regulation and Management of Foreign Exchange: frequently asked questions

What is the difference between current account and capital account transactions under FEMA?

A current account transaction does not alter the assets or liabilities, including contingent liabilities, outside India of a person resident in India, or in India of a person resident outside India. A capital account transaction does alter them. Current account is free subject to restrictions, while capital account is allowed only as permitted.

Who is an authorised person under FEMA?

An authorised person is an authorised dealer, money changer, offshore banking unit or any other person authorised by the RBI under section 10(1) to deal in foreign exchange or foreign securities. The authority is written and conditional. The RBI can revoke it in public interest or for non-compliance or contravention, and on the contravention ground it must first give a reasonable opportunity of making a representation.

Do exporters have to bring export proceeds to India?

Exporters must furnish a declaration or information to the RBI or the specified authority under section 7. Under section 8, any person resident in India to whom foreign exchange is due or has accrued, which includes export proceeds, must take all reasonable steps to realise and repatriate it to India. The period and manner are as specified by RBI regulations.

Can the Central Government restrict current account transactions?

Yes. Section 5 makes current account transactions free, but allows the Central Government, in consultation with the RBI, to impose reasonable restrictions in public interest. These are given in rules made under the Act.