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

Arjun, an Indian resident, wishes to remit funds abroad under the Liberalised Remittance Scheme (LRS). He plans to use the money for buying shares of a foreign company, and separately to gift money to a friend in Dubai. Which statement correctly reflects the FEMA position on such remittances?

Both remittances can be made by a resident individual only within the LRS limit prescribed by the RBI and the Central Government. Buying foreign shares is a capital account transaction, and the scheme permits such remittances up to the annual cap; it is not unrestricted.

  1. ABoth are current account transactions and need no limit
  2. BBoth are capital account transactions and are permitted to residents only within the LRS limit prescribed by the RBI/Central GovernmentCorrect
  3. CBuying foreign shares is a current account transaction while gifting is a capital account transaction
  4. DNeither is permitted for a resident individual under any circumstance

Explanation

Under FEMA, a capital account transaction alters the assets or liabilities outside India of a resident (or in India of a non-resident). Purchasing foreign shares does so. Gifts are treated within the permissible remittance framework under the LRS, which allows resident individuals to remit up to the prescribed annual limit. Option A is wrong because investment is a capital account transaction.

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