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

Mr. Arjun Mehta, a person resident in India, wishes to remit funds abroad during the year. Under FEMA, 1999, which of the following transactions is classified as a capital account transaction?

Acquiring shares of a US company is a capital account transaction because it creates an asset outside India for a resident. Tuition fees, salary payments and trademark royalty are current account items, since they do not alter assets or liabilities abroad.

  1. APayment of fees to a foreign university for his daughter's tuition
  2. BRemittance of salary to a foreign employee working in his Mumbai office
  3. CAcquisition of shares of a company incorporated in the United StatesCorrect
  4. DPayment of royalty to a foreign firm for using its trademark

Explanation

A capital account transaction alters the assets or liabilities, including contingent liabilities, outside India of a resident person (or in India of a non-resident). Buying shares of a US company creates an overseas asset, so it is a capital account transaction. Tuition fees, salary and royalty are payments in the nature of current account transactions, as they do not create assets or liabilities abroad.

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