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

Ravi, a resident individual in India, wishes to remit funds abroad. Under FEMA, 1999, transactions are classified as current account and capital account transactions. Which of the following is a capital account transaction?

Purchase of shares of a foreign company by a resident is a capital account transaction because it creates an asset outside India. Payments such as interest on loans, education fees and travel expenses are current account transactions that do not alter assets or liabilities abroad.

  1. APayment of fees to a foreign university for his daughter's studies, treated as a current account remittance
  2. BRemittance of interest on a loan due to a foreign lender as a payment due in connection with foreign trade
  3. CPurchase of shares of a foreign company by Ravi as an investment abroadCorrect
  4. DRemittance of living expenses for a short visit abroad

Explanation

A capital account transaction alters the assets or liabilities, including contingent liabilities, outside India of a resident or in India of a non-resident. Buying foreign company shares creates an asset abroad, so it is a capital account transaction. Interest on a loan, education and travel expenses are current account transactions. The interest option is the tempting distractor, but it is a payment of a current nature.

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