FEMA Basics: Capital Account vs Current Account Transactions

The Foreign Exchange Management Act (FEMA), 1999 is the principal law governing foreign exchange transactions in India, replacing the earlier, stricter FERA regime with a more liberalised, management-oriented framework.

Current account transactions. Transactions that do not alter a resident's assets or liabilities abroad — such as trade payments, travel expenses, or remittances for education — are current account transactions, and most are freely permitted, though some categories require RBI or government approval above specified limits.

Capital account transactions. Transactions that alter overseas assets or liabilities — such as investing in foreign shares/property, or a foreign entity investing in India — fall under the capital account and are more closely regulated, since they affect longer-term cross-border balance sheets.

Authorised Dealers. Most individuals and businesses interact with FEMA indirectly, through Authorised Dealer (AD) banks that are licensed to handle foreign exchange transactions on RBI's behalf and are responsible for ensuring transactions comply with FEMA regulations.

LRS as an example. The Liberalised Remittance Scheme is itself a FEMA-governed facility permitting resident individuals a defined annual capital and current account remittance ceiling — illustrating how FEMA's overall framework translates into a specific, commonly used facility.