Foreign Exchange Fundamentals and the FEMA Framework
Why FEMA classification matters
FEMA 1999 replaced FERA and shifted India from exchange control to exchange management. The exam tests whether you can route a retail request correctly: current or capital account, permitted or prohibited, LRS or prior approval, and which authorised person can act.
The core rules
- Current account transactions - trade, services, interest, travel, education, medical treatment, family maintenance - are freely permitted unless the Current Account Transactions Rules 2000 restrict them: Schedule I prohibits (for example lottery-related remittances), Schedule II needs prior RBI approval, Schedule III needs AD approval.
- Capital account transactions - property, investments, loans, guarantees - need specific FEMA permission.
- The Liberalised Remittance Scheme (LRS) lets a resident individual remit up to USD 250,000 per financial year for permitted purposes. PAN, a bank account and Form A2 cum LRS declaration are mandatory; the cap is per person, per financial year, across all banks.
- FEDAI sets interbank market conventions; RBI regulates; AD Category I banks and FFMCs serve retail customers.
Worked example
A parent asks to remit USD 30,000 for a child’s tuition. Classify: education is a current account purpose, permitted under LRS. Check the parent’s financial-year aggregate, obtain the admission/fee document, PAN, A2 declaration and correct purpose code; apply TCS above the prescribed threshold. The amount alone does not make it capital account.
Traps
- Calling a large education remittance capital account because it is large.
- Treating LRS as a per-bank limit.
- Quoting FEDAI as the regulator.
- Ignoring Schedule I, II and III restrictions.