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

FEMA Current Account and Capital Account Transactions Explained

Updated 11 October 2026 · Fact-checked

Under FEMA, no person may deal in foreign exchange except through an authorised person, unless the Act, rules or RBI permits (Section 3). Current account transactions are generally free (Section 5). Capital account transactions are allowed only as permitted (Section 6). Exporters must declare values (Section 7), and residents must realise and repatriate foreign exchange (Section 8).

Understand Regulation and Management of Foreign Exchange

FEMA regulates how money moves between India and the rest of the world. The starting point is a prohibition. Section 3 says that, save as otherwise provided in the Act, rules or regulations, or with RBI's general or special permission, no person may deal in or transfer foreign exchange or foreign security to anyone who is not an authorised person. Everything else in this topic is a permission or a duty built on that base.

Section 3 has four limbs. No person may: (a) deal in or transfer foreign exchange or foreign security to a 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; (d) enter into a financial transaction in India as consideration for, or in association with, acquiring or creating a right to acquire an asset outside India. An authorised person is someone authorised by RBI to deal in foreign exchange, such as an authorised dealer bank. Learn the idea: foreign exchange flows through authorised channels.

The Explanation to Section 3(c) is a favourite. If a person in India receives a payment on behalf of a person resident outside India through any other person (even an authorised person) without a corresponding inward remittance from outside India, the receipt is deemed to be otherwise than through an authorised person. This targets hawala-style set-offs.

Transactions are split in two. A current account transaction is the day-to-day kind. Under Section 5, any person may sell or draw foreign exchange to or from an authorised person for it. The Central Government may, in public interest and in consultation with RBI, impose reasonable restrictions. A capital account transaction changes assets or liabilities. Under Section 6(1), any person may sell or draw foreign exchange for it, but subject to Section 6(2) and (2A). RBI specifies permissible classes involving debt instruments, limits and conditions. The Central Government prescribes classes not involving debt instruments. Remember the rule: current account is free unless restricted; capital account is regulated unless permitted.

Two duties follow for earners of foreign exchange. Section 7 requires every exporter of goods to furnish a declaration to RBI or another authority, with true and correct particulars including the full export value. Section 8 requires a resident to take all reasonable steps to realise and repatriate foreign exchange due or accrued, within the period and in the manner RBI specifies. Section 9 exempts certain cases, such as possession of foreign currency up to RBI limits, from Sections 4 and 8.

Key rules to remember

Section 3 prohibition
No dealing in or transfer of foreign exchange or foreign security to a non-authorised person; no payment to a non-resident; no receipt except through an authorised person; no financial transaction for an asset outside India
Applies save as otherwise provided in the Act, rules or regulations, or with RBI's general or special permission.
Section 3(c) Explanation
Receipt on behalf of a non-resident without a corresponding inward remittance = deemed received otherwise than through an authorised person
Applies even if the payment came through an authorised person.
Current account (Section 5)
Any person may sell or draw foreign exchange to or from an authorised person for a current account transaction
Central Government may impose reasonable restrictions in public interest, in consultation with RBI.
Capital account (Section 6)
Permitted subject to Section 6(2) and 6(2A): RBI for debt instruments, Central Government for non-debt instruments
Each may specify classes, limits and conditions. No restriction on drawal for loan amortisation or depreciation of direct investment in the ordinary course of business.
Export of goods (Section 7(1))
Declaration to RBI or other authority with true and correct particulars, including full export value
If value is not ascertainable, state the value the exporter expects to receive on sale in a market outside India.
Export of services (Section 7(3))
Declaration with true and correct material particulars relating to payment for services
Form and manner are as specified.
Realisation and repatriation (Section 8)
Resident must take all reasonable steps to realise and repatriate foreign exchange within the period and manner specified by RBI
Section 9 gives exemptions.
Rule and regulation powers
Section 46: Central Government makes rules. Section 47: RBI makes regulations
Section 46(2)(a) covers restrictions on current account transactions; Section 47(2)(c) covers the repatriation period and manner.

How to solve Regulation and Management of Foreign Exchange questions

Use this method for any question on foreign exchange dealing, account type or export proceeds.

  1. 1Identify what moves: foreign exchange, a payment to or from a non-resident, an export, or an asset outside India.
  2. 2Check Section 3: is the person dealing with an authorised person, or is there a permission from RBI, the Act, rules or regulations?
  3. 3Classify the transaction as current account or capital account. Day-to-day payments are current; changes in assets or liabilities are capital.
  4. 4Apply the matching section: Section 5 (free unless restricted) or Section 6 (permitted classes, limits and conditions).
  5. 5If it is an export, apply Section 7 (declaration) and Section 8 (realise and repatriate within RBI's period).
  6. 6Check Section 9 for an exemption, such as holding foreign currency up to RBI's limit.
  7. 7State who makes the law: Central Government by rules (Section 46), RBI by regulations (Section 47).
  8. 8Write a clear conclusion: permitted, restricted, or contravention.

Quickest way: Section 3 to 9 five-line check

When to use it: Use for short case-based questions when you have only a few minutes.

  1. Write the rule: Section 3 prohibits unless permitted.
  2. Name the account type and its section: 5 for current, 6 for capital.
  3. Name the duty if an export or receipt: Section 7 declaration, Section 8 repatriation.
  4. Mention the Section 9 exemption only if the facts show a limit or special case.
  5. Close with a one-line conclusion tied to the facts.

Common mistakes in Regulation and Management of Foreign Exchange

  • Saying all foreign exchange dealing is banned.

    Students stop reading Section 3 at the prohibition.

    Fix: Always add the opening words: save as otherwise provided, or with RBI's general or special permission.

  • Treating capital account transactions as prohibited.

    They are regulated, so students assume they are banned.

    Fix: Quote Section 6(1): any person may sell or draw foreign exchange for them, subject to Section 6(2) and (2A).

  • Saying RBI alone decides all capital account classes.

    Students ignore the 2019 split in Section 6.

    Fix: RBI specifies classes involving debt instruments; the Central Government prescribes classes not involving debt instruments.

  • Missing the Explanation to Section 3(c).

    It sits below the clause and looks minor.

    Fix: Remember: receipt for a non-resident without a corresponding inward remittance is deemed received otherwise than through an authorised person.

  • Mixing up Section 7 and Section 8.

    Both deal with export proceeds.

    Fix: Section 7 is the exporter's declaration of value. Section 8 is the resident's duty to realise and repatriate.

  • Confusing rules with regulations.

    Both sound like delegated law.

    Fix: Section 46 gives rule-making to the Central Government. Section 47 gives regulation-making to RBI.

Worked examples

Example 1

Mehta Exports Pvt Ltd, Surat, exports goods to a buyer in Dubai. Advise the company on its obligations under FEMA regarding the export value and the proceeds.

Show the solution
  1. Provision: Section 7(1)(a) requires every exporter of goods to furnish to RBI or another authority a declaration, in the specified form and manner, with true and correct material particulars, including the full export value.
  2. If the full value is not ascertainable at the time of export, it must state the value it expects to receive on sale in a market outside India, having regard to prevailing market conditions.
  3. Section 7(1)(b) requires it to furnish other information RBI requires to ensure realisation of export proceeds. Under Section 7(2), RBI may direct the exporter to comply with requirements it considers fit so that the full export value is received without delay.
  4. Section 8 requires the company, as a person resident in India, to take all reasonable steps to realise and repatriate the foreign exchange due within the period and manner specified by RBI.

Answer: Mehta Exports must file a true and correct declaration under Section 7, including full export value or the expected value, and must take all reasonable steps to realise and repatriate the proceeds within RBI's specified period under Section 8.

Example 2

Ravi, resident in India, wants to pay ₹5,00,000 to a foreign supplier for imported software through a friend, who will hand over cash to the supplier's agent in Mumbai. Examine under FEMA.

Show the solution
  1. Provision: Section 3 says that, unless permitted by the Act, rules, regulations or RBI, no person may deal in or transfer foreign exchange to a person who is not an authorised person, or make any payment to or for the credit of a person resident outside India in any manner.
  2. Facts: the payment is meant for a non-resident supplier and is routed through a friend and an agent, not an authorised person.
  3. Analysis: a payment for imported software is a current account transaction. Section 5 lets Ravi sell or draw foreign exchange to or from an authorised person for it, so the lawful route is through an authorised person such as a bank. Payment outside that route is not covered by this permission.
  4. Conclusion: the arrangement breaches Section 3, as it is a payment to a non-resident outside authorised channels without permission.

Answer: The proposed payment contravenes Section 3. Ravi should pay through an authorised person, as Section 5 permits for current account transactions.

Exam tips

  • Learn Sections 3, 5, 6, 7, 8 and 9 in order; questions often test one section, so quote its words.
  • In case studies, first classify as current or capital account, then cite the section.
  • Write the rule-versus-regulation point: Section 46 (Central Government rules) and Section 47 (RBI regulations).
  • Do not quote numeric limits or time periods for repatriation. The Act leaves them to RBI.
  • End every answer with a one-line conclusion tied to the facts.

Practice questions from Law relating to Foreign Exchange Management

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?

Current account transactions are day-to-day dealings, and under Section 5 any person may sell or draw foreign exchange for them through an authorised person, subject to reasonable restrictions the Central Government may impose. Capital account transactions change assets or liabilities, and Section 6 permits them subject to classes, limits and conditions specified by RBI or prescribed by the Central Government.

Who is an authorised person under FEMA?

An authorised person is one authorised by RBI to deal in foreign exchange or foreign securities, such as an authorised dealer bank. Section 3 requires dealings in foreign exchange to be with such a person unless permission exists.

What does Section 8 of FEMA require?

Where foreign exchange is due or has accrued to a person resident in India, that person must take all reasonable steps to realise and repatriate it to India. The period and manner are specified by RBI.

Can the government restrict current account transactions?

Yes. The proviso to Section 5 allows the Central Government, in public interest and in consultation with RBI, to impose reasonable restrictions as prescribed. Section 46(2)(a) provides for such rules.