Corporate and Economic Laws · Foreign Exchange Management Act, 1999

Regulation and Management of Foreign Exchange under FEMA

Updated 11 October 2026 · Fact-checked

FEMA 1999 bars dealings in foreign exchange except through authorised persons or with RBI permission. Section 3 restricts dealing, payments to non-residents and receipts. Section 4 bars residents from holding foreign exchange or foreign property. Sections 5 and 6 free current account transactions and regulate capital account transactions.

Understand Regulation and Management of Foreign Exchange

FEMA starts from a simple idea: foreign exchange is controlled, and you may deal in it only in the ways the law allows. The ways are: through an authorised person, under the Act, rules or regulations, or with the general or special permission of the Reserve Bank (RBI).

Section 3 says that, save as otherwise provided, no person shall (a) deal in or transfer any foreign exchange or foreign security to any person who is not an authorised person; (b) make any payment to or for the credit of a person resident outside India in any manner; (c) receive, otherwise than through an authorised person, any payment by order or on behalf of a person resident outside India; or (d) enter into any financial transaction in India as consideration for, or in association with, acquiring or creating (or transferring a right to acquire) an asset outside India.

Two explanations matter. Under clause (c), if a person in India receives a payment on behalf of a non-resident through any other person, even an authorised person, without a corresponding inward remittance from outside India, it is deemed received otherwise than through an authorised person. This catches set-off and hawala-type arrangements. Under clause (d), a financial transaction means making or receiving payment, drawing, issuing or negotiating a bill of exchange or promissory note, transferring a security or acknowledging a debt.

Section 4 is about holding. Save as otherwise provided in the Act, no person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India. Section 6(4) is a main exception: a resident may hold such currency, security or property if it was acquired, held or owned when he was resident outside India, or inherited from a person resident outside India. Section 6(5) gives the mirror rule for non-residents holding Indian assets.

The Act then splits transactions in two. Current account transactions (Section 5): any person may sell or draw foreign exchange to or from an authorised person for these. The Central Government may, in public interest and in consultation with the RBI, impose reasonable restrictions. Capital account transactions (Section 6): any person may sell or draw foreign exchange for these too, but subject to sub-section (2). Under it, the RBI, in consultation with the Central Government, specifies permissible classes involving debt instruments, limits and conditions. The Central Government, in consultation with the RBI, does the same for those not involving debt instruments (Section 6(2A)). So current account is free unless restricted; capital account is permitted only as prescribed.

Rules and regulations come from two sources. The Central Government makes rules (Section 46), including on current account restrictions and on capital account transactions not involving debt instruments. The RBI makes regulations (Section 47), including on capital account transactions involving debt instruments, and limits on holding foreign currency.

Key rules to remember

Section 3 prohibitions: No dealing with non-authorised person (a) | No payment to or for credit of non-resident (b) | No receipt except through authorised person (c) | No financial transaction for foreign asset (d); Applies save as otherwise provided, or with general or special RBI permission.
Section 4 holding rule: Resident in India cannot acquire, hold, own, possess or transfer foreign exchange, foreign security or foreign immovable property; Applies save as otherwise provided in the Act. Section 6(4) exception covers assets acquired while non-resident or inherited from a non-resident.
Section 5 current account: Free sale or drawal through authorised person, subject to reasonable restrictions by Central Government; Restrictions are in public interest and in consultation with RBI.
Section 6 capital account: Permitted per RBI (debt instruments) or Central Government (non-debt) specification of classes, limits, conditions; Section 6(2) proviso: no restriction on drawal for loan amortisation or depreciation of direct investments in the ordinary course of business.
Deemed receipt (Section 3(c) Explanation): Payment received for non-resident through any person without corresponding inward remittance = received otherwise than through authorised person; Even if the intermediary is an authorised person.
Rule-making split: Rules: Central Government (Section 46) | Regulations: RBI (Section 47); Non-debt capital account: Central Government. Debt-instrument capital account: RBI.

How to solve Regulation and Management of Foreign Exchange questions

Use this method for any case or theory question on regulation of foreign exchange under FEMA.

1Identify the facts: who is the person (resident in India or outside), what is being done (dealing, paying, receiving, holding), and who is the counterparty.
2Classify the act: dealing or transfer (Section 3(a)), payment to a non-resident (3(b)), receipt (3(c)), financial transaction for a foreign asset (3(d)), or holding (Section 4).
3Check the counterparty: is it an authorised person? If not, Section 3(a) is attacked unless RBI permission exists.
4Classify the transaction as current account or capital account. Current account falls under Section 5, capital account under Section 6.
5Look for exceptions: Act, rules or regulations permitting it, RBI general or special permission, or the Section 6(4) and 6(5) exceptions for assets held as a non-resident or inherited.
6State the conclusion in one line: permitted, permitted with conditions, or prohibited.
7Name the authority: Central Government for rules, RBI for regulations, and give the Section number for each point.

Quickest way: Four-question filter

When to use it: Use for MCQs and short case scenarios when you have under two minutes.

Ask: is a resident holding foreign exchange or foreign assets? Think Section 4 and the Section 6(4) exception.
Ask: is money going to or coming from a non-resident? Think Section 3(b) or 3(c), and check for a missing inward remittance.
Ask: is an authorised person involved? If not, Section 3(a) or 3(c).
Ask: current or capital account? Current is free unless restricted. Capital needs a specified class, limit and condition.

Common mistakes in Regulation and Management of Foreign Exchange

Saying Section 3 bans all foreign exchange dealings absolutely.
Students skip the opening words of the section.
Fix: Always write 'save as otherwise provided in the Act, rules or regulations, or with general or special permission of the RBI'.
Saying a resident can never hold foreign currency or foreign property.
Section 4 is memorised without Section 6(4).
Fix: Add the exception: assets acquired or held while resident outside India, or inherited from a non-resident, may be held.
Treating payment through an authorised person as always compliant under Section 3(c).
The Explanation is overlooked.
Fix: If payment on behalf of a non-resident is received without a corresponding inward remittance, it is deemed received otherwise than through an authorised person.
Saying the RBI alone prescribes all capital account rules.
Students ignore the 2015 amendment split.
Fix: RBI covers debt instruments (Section 6(2)); the Central Government covers non-debt instruments (Section 6(2A)).
Saying current account transactions are completely unrestricted.
Section 5 is read without its proviso.
Fix: Current account drawal is allowed, but the Central Government may impose reasonable restrictions in public interest in consultation with the RBI.
Confusing rules (Section 46) with regulations (Section 47).
Both sound alike.
Fix: Rules are made by the Central Government; regulations by the RBI.

Worked examples

Example 1

Mr. Rao, resident in India, receives ₹8,00,000 in India from a local trader on instruction of his brother, resident in Dubai, for settling a debt. No money was remitted into India from abroad. The trader's payment goes through Mr. Rao's bank, an authorised person. Examine the position under FEMA.

Show the solution

Facts: Mr. Rao in India receives payment on behalf of a person resident outside India.
Provision: Section 3(c) bars receiving, otherwise than through an authorised person, any payment by order or on behalf of a non-resident.
Explanation: where such payment is received through any other person, including an authorised person, without a corresponding inward remittance from outside India, it is deemed received otherwise than through an authorised person.
Application: the bank is an authorised person, but there was no inward remittance from abroad, so the deeming rule applies.
Check exceptions: no RBI permission or provision in the Act, rules or regulations is stated.

Answer: The receipt of ₹8,00,000 is deemed to be received otherwise than through an authorised person and contravenes Section 3(c), unless the RBI's general or special permission or a provision of the Act, rules or regulations applies.

Example 2

Ms. Meera, resident in India, inherited a house in London from her father, who was resident outside India. She also bought a flat in Paris using savings from her salary in India. Can she hold these properties?

Show the solution

Rule: Section 4 prohibits a resident in India from acquiring, holding, owning, possessing or transferring foreign immovable property, save as otherwise provided.
London house: Section 6(4) permits a resident to hold such property if inherited from a person resident outside India. Her father was a non-resident, so the exception applies.
Paris flat: acquired by her while resident in India, using funds from India. It was not held while she was a non-resident and was not inherited, so the Section 6(4) exception does not apply.
Section 3(d) also bars a financial transaction in India as consideration for acquiring an asset outside India, save as permitted.

Answer: She may hold the London house under Section 6(4). The Paris flat is not covered by that exception, so holding it contravenes Section 4 unless the Act, rules, regulations or RBI permission allow it.

Exam tips

Quote the opening words of Sections 3 and 4: 'save as otherwise provided' and the RBI permission. Examiners look for the exception.
In case scenarios, check the authorised-person element and the inward-remittance Explanation first.
For current vs capital account questions, give the section, the default position (free or controlled) and who prescribes (Central Government or RBI).
List the four limbs of Section 3 as (a) to (d) in a short answer. This is an easy 3-4 mark structure.
Do not quote a monetary limit unless the question gives it.

Practice questions from 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 does Section 3 of FEMA 1999 prohibit?

It prohibits dealing in or transferring foreign exchange or foreign security to a person who is not an authorised person. It also bars payments to non-residents, receipts otherwise than through an authorised person, and financial transactions in India for acquiring assets outside India. All of this applies unless the Act, rules, regulations or RBI permission provide otherwise.

Can a resident hold foreign currency or property abroad under Section 4?

Section 4 bars it, save as otherwise provided in the Act. Under Section 6(4), a resident may hold foreign currency, security or immovable property abroad if it was acquired or held while he was resident outside India, or inherited from a person resident outside India.

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

Under Section 5, any person may sell or draw foreign exchange through an authorised person for a current account transaction, subject to reasonable restrictions by the Central Government. Under Section 6, a capital account transaction is allowed subject to classes, limits and conditions specified by the RBI or Central Government.

Who makes rules and regulations under FEMA?

The Central Government makes rules under Section 46, for example on current account restrictions. The RBI makes regulations under Section 47, for example on capital account transactions involving debt instruments and holding limits for foreign currency.