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Economic, Commercial and Intellectual Property Laws · Law relating to Foreign Exchange Management

FEMA 1999: Introduction, Objectives and Definitions for CS Executive

Updated 11 October 2026 · Fact-checked

FEMA 1999 is the Act that regulates foreign exchange in India. It extends to the whole of India and also applies to Indian-owned branches, offices and agencies abroad. Learn its objective of facilitating external trade and payments, then master the definitions: person resident in India, current account and capital account transactions, and authorised person.

Understand FEMA 1999: Introduction, Objectives and Definitions

The Foreign Exchange Management Act, 1999 is the law that governs how foreign exchange is bought, sold, held and used in India. It came into force on 1 June 2000 by a notification dated 1 May 2000. It replaced the older FERA, 1973.

The long title and preamble of the Act speak of facilitating external trade and payments and promoting the orderly development and maintenance of the foreign exchange market in India. Learn this objective in your own words. The older FERA was a control-oriented law. FEMA is a management-oriented law. Under FEMA, transactions are free unless restricted; that is the broad shift of approach. For the full list of differences between FERA and FEMA, follow the ICSI study material, since the official text supplied here does not list them.

Section 1 fixes the reach of the Act. It 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 any person to whom the Act applies. Commencement is by Central Government notification, and different dates may be appointed for different provisions.

Section 2 holds the definitions. The two most tested are person resident in India and the split between current account transaction and capital account transaction. FEMA decides residence by the Act's own test, not by citizenship. A foreign national can be resident in India, and an Indian citizen can be resident outside India.

The split matters because the freedom differs. Under section 5, any person may sell or draw foreign exchange to or from an authorised person for a current account transaction, subject to reasonable restrictions the Central Government may impose in public interest in consultation with the Reserve Bank. Under section 6, capital account transactions are permitted only as specified by the Reserve Bank or prescribed by the Central Government, within the limits and conditions they set.

Key rules to remember

Extent (s 1(2))
Extends to the whole of India
Section 1(3) adds application to branches, offices and agencies outside India owned or controlled by a person resident in India, and to contraventions committed outside India by persons to whom the Act applies.
Person resident in India: individual test (s 2(v)(i))
Residing in India for more than 182 days during the preceding financial year
Excludes a person who has gone out or stays outside India for taking up employment, carrying on business or vocation outside India, or for any other purpose indicating intention to stay outside India for an uncertain period. A person who came to or stays in India other than for employment, business or vocation in India, or with intention to stay for an uncertain period, is also excluded.
Person resident in India: other categories (s 2(v)(ii) to (iv))
Any person or body corporate registered or incorporated in India; an office, branch or agency in India owned or controlled by a person resident outside India; an office, branch or agency outside India owned or controlled by a person resident in India
Companies are resident by registration or incorporation in India, not by the 182-day test.
Person resident outside India (s 2(w))
A person who is not resident in India
It is a residual definition.
Current account transaction (s 2(j))
A transaction other than a capital account transaction
Includes payments for foreign trade, current business, services and short-term banking and credit facilities in the ordinary course; interest on loans and net income from investments; remittances for living expenses of parents, spouse and children abroad; expenses for foreign travel, education and medical care of parents, spouse and children.
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
Includes transactions referred to in section 6(3).
Freedom rules (ss 5 and 6)
Current account: free, subject to reasonable restrictions. Capital account: permitted as specified or prescribed
Under s 6(2), the Reserve Bank specifies permissible classes involving debt instruments, limits and conditions. Under s 6(2A), the Central Government prescribes for transactions not involving debt instruments.
Foreign exchange (s 2(n))
Foreign currency, plus deposits, credits and balances payable in foreign currency, and specified drafts, travellers cheques, letters of credit and bills of exchange
Foreign currency means any currency other than Indian currency (s 2(m)).

How to solve FEMA 1999: Introduction, Objectives and Definitions questions

Use this method for a theory question or a case-based question on FEMA's introduction and definitions.

  1. 1Identify what is asked: objective, extent, a definition, or classification of a transaction.
  2. 2State the provision first: name the Act and the section, for example section 2(v) for residence.
  3. 3For residence questions, check the category: individual, company or body corporate, or office, branch or agency. Apply only the test for that category.
  4. 4For an individual, apply the 182-day test for the preceding financial year, then check the exclusions based on employment, business, vocation or uncertain stay.
  5. 5For a transaction, ask whether it alters assets or liabilities outside India of a resident, or in India of a non-resident. If yes, it is capital account. Otherwise it is current account.
  6. 6Apply the consequence: section 5 for current account, section 6 for capital account.
  7. 7Write a clear conclusion in one line that answers the question asked.

Quickest way: Three-question check

When to use it: When you have little time and a short fact pattern asks about residence or the type of transaction.

  1. Who is the person: individual, company or branch? Pick the matching limb of section 2(v).
  2. Is it a company or branch? Then registration, incorporation or ownership decides residence. Stop there.
  3. For a payment, ask: does it change assets or liabilities across borders? If not, say current account under section 5 and conclude.

Common mistakes in FEMA 1999: Introduction, Objectives and Definitions

  • Applying the 182-day test to a company.

    Students remember only the individual test.

    Fix: A company registered or incorporated in India is resident under section 2(v)(ii). Use the 182-day test only for individuals.

  • Treating citizenship as the test of residence.

    Everyday language links residence with nationality.

    Fix: Residence under FEMA depends on stay, purpose and intention, or on registration for entities. Nationality is not the test.

  • Forgetting the exclusions in the individual test.

    Students stop after the 182 days.

    Fix: Always check whether the person went out or stays outside for employment, business or an uncertain period, and the mirror rule for persons coming to India.

  • Saying capital account transactions are prohibited.

    Confusing regulation with prohibition.

    Fix: Section 6 permits them as specified by the Reserve Bank or prescribed by the Central Government, with limits and conditions.

  • Missing the extra-territorial reach of the Act.

    Students write only 'extends to the whole of India'.

    Fix: Add section 1(3): the Act also applies to branches, offices and agencies outside India owned or controlled by a resident, and to contraventions outside India.

  • Defining current account as a closed list.

    Students memorise the four examples as the full definition.

    Fix: Give the definition first: a transaction other than a capital account transaction. The listed items are inclusive.

Worked examples

Example 1

Meridian Exports Pvt Ltd is incorporated in Mumbai. Its branch in Dubai is wholly owned by it. State, with reasons, whether the company and the Dubai branch are persons resident in India under FEMA, 1999.

Show the solution
  1. Provision: section 2(v) defines person resident in India. Clause (ii) covers any person or body corporate registered or incorporated in India. Clause (iv) covers an office, branch or agency outside India owned or controlled by a person resident in India.
  2. Analysis for the company: it is incorporated in India, so it falls within clause (ii). The 182-day test does not apply to it.
  3. Analysis for the branch: it is outside India but owned by the company, which is a resident. So it falls within clause (iv).
  4. Link to application: section 1(3) also applies the Act to branches, offices and agencies outside India owned or controlled by a person resident in India.

Answer: Both the company and its Dubai branch are persons resident in India under section 2(v)(ii) and (iv), and the Act applies to the branch under section 1(3).

Example 2

Classify the following as current account or capital account transactions under FEMA, 1999: (a) a resident pays ₹4,50,000 to a foreign university for his daughter's tuition; (b) a resident acquires immovable property abroad by purchase.

Show the solution
  1. Provision: section 2(j) defines a current account transaction as one other than a capital account transaction. Section 2(e) says a capital account transaction alters assets or liabilities outside India of residents, or in India of non-residents.
  2. Item (a): expenses for education of children are expressly listed in section 2(j)(iv). It is a current account transaction. Under section 5, a person may sell or draw foreign exchange from an authorised person for it, subject to reasonable restrictions the Central Government may impose.
  3. Item (b): buying immovable property abroad creates a new asset outside India for a resident. It alters assets outside India, so it is a capital account transaction.
  4. Consequence for (b): section 6 applies. It is permissible as the Reserve Bank or the Central Government specifies or prescribes, within their limits and conditions.

Answer: (a) is a current account transaction under section 2(j)(iv) governed by section 5. (b) is a capital account transaction under section 2(e) governed by section 6.

Exam tips

  • Write the section number with each definition. Examiners reward the provision followed by application and a conclusion.
  • For 'residence' questions, name the category of person first. This shows structure and avoids losing marks to the wrong test.
  • In extent questions, give both limbs: the whole of India, and the extra-territorial application under section 1(3).
  • Learn the four listed current account items by heart, but state the general definition first.
  • Where a question asks for FERA versus FEMA, use the ICSI study material for the comparison points and write them in a two-column style using short lines.

Practice questions from Law relating to Foreign Exchange Management

FEMA 1999: Introduction, Objectives and Definitions: frequently asked questions

What is the main objective of FEMA 1999?

The Act aims to facilitate external trade and payments and to promote the orderly development and maintenance of the foreign exchange market in India. It manages foreign exchange rather than controlling it as FERA did.

Does FEMA apply outside India?

Yes, in a limited way. Section 1(3) applies the Act to branches, offices and agencies outside India owned or controlled by a person resident in India. It also applies to contraventions committed outside India by any person to whom the Act applies.

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, subject to the exclusions in section 2(v)(i). Also any person or body corporate registered or incorporated in India, and certain offices, branches and agencies in India or abroad, depending on who owns or controls them.

What is the difference between current and capital account transactions?

A capital account transaction alters assets or liabilities outside India of residents, or in India of non-residents. A current account transaction is any other transaction, such as trade payments, interest, living expenses and education or medical expenses. Current account transactions are freer under section 5, while capital account transactions follow section 6.