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

Mr. Arjun Mehta, a person resident in India, wants to remit funds abroad. Under FEMA, 1999, transactions are classified as current account transactions and capital account transactions. Which of the following is a capital account transaction by its nature under FEMA?

Acquiring shares of a foreign company is a capital account transaction because it creates an asset outside India for a resident. Payments for education, family living expenses and foreign travel are current account transactions under FEMA, as they do not alter assets or liabilities outside India.

  1. APayment of fees to a foreign university for his son's course through a remittance for studies
  2. BRemittance of living expenses to a relative abroad
  3. CAcquisition of shares of a foreign company by him as an investment outside IndiaCorrect
  4. DPayment for foreign travel as a tourist

Explanation

A capital account transaction alters the assets or liabilities, including contingent liabilities, outside India of a person resident in India (or inside India of a person resident outside India). Buying shares of a foreign company creates an asset outside India, so it is a capital account transaction. Education fees, living expenses and travel are payments for current needs and are treated as current account transactions.

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