The law governing every cross-border rupee/forex transaction in India — current vs capital account transactions, Authorised Dealers, remittance limits and why FEMA replaced the older, criminal-law-based FERA regime.
The Foreign Exchange Management Act (FEMA), 1999 is the law governing all foreign exchange transactions in India — cross-border trade, investment, and remittances — administered by the RBI, with the Enforcement Directorate handling violations as a civil (not criminal) offence.
FEMA came into force on 1 June 2000, replacing the erstwhile Foreign Exchange Regulation Act (FERA), 1973, as part of India's post-liberalisation shift towards facilitating trade and investment rather than restricting it.
| Aspect | FERA, 1973 | FEMA, 1999 |
|---|---|---|
| Objective | Conservation of scarce forex | Facilitate trade & payments, manage forex reserves |
| Nature of violation | Criminal offence — arrest, imprisonment possible | Civil offence — monetary penalty & compounding |
| Presumption | Accused presumed guilty until proven innocent | Normal civil burden of proof |
| Approach | Restrictive — most transactions needed prior permission | Permissive — most current account transactions are free |
Trade in goods/services, travel, education, medical expenses, and remittances not altering assets/liabilities abroad. Freely permitted, subject to limits notified under the Current Account Transaction Rules.
Transactions altering assets or liabilities outside India — FDI, ODI, ECBs, property purchase abroad. Governed by specific regulations and generally more tightly controlled than current account flows.
All forex transactions must be routed through an Authorised Dealer licensed by RBI:
The Foreign Exchange Dealers' Association of India (FEDAI) issues the rules and codes ADs follow for quoting rates and handling forex business.
Under the LRS, resident individuals can remit up to USD 250,000 per financial year for permitted current or capital account purposes (education, travel, medical treatment, gifting, or investment in shares/property abroad) without prior RBI approval, subject to Tax Collected at Source (TCS) rules and PAN reporting.
Foreign Direct Investment (FDI) into India follows either the Automatic Route (no prior approval, only post-facto RBI reporting) or the Government/Approval Route for sensitive sectors, based on sector-specific caps notified under the FDI Policy. Overseas Direct Investment (ODI) is the mirror-image regime governing Indian entities investing abroad, both administered under FEMA regulations.
Related: See the JAIIB notes on Forex Markets and Forex Remittance for Individuals for exam-focused MCQs.
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