FEMA Explained (Part 1): What It Is, Who It Covers and the Rules Every Business Must Know
FEMA made simple: what the Foreign Exchange Management Act, 1999 covers, who is resident, current vs capital account, key sections and an A to Z glossary.
A founder near Kondapur gets a term sheet from a US fund. An exporter in Gachibowli invoices a buyer in Dubai. A family in Hyderabad wants to pay a daughter’s university fees in Toronto. Three stories, one law: the Foreign Exchange Management Act, 1999 (FEMA).
- Part 1: What FEMA is, who it covers, the rule book (you are here)
- Part 2: Money coming in: FDI, FC-GPR, FC-TRS, FLA
- Part 3: Money going out: LRS, ODI, ECB
- Part 4: Trade and people: exports, imports, NRIs
- Part 5: Penalties, compounding, appeals, calendar
1. Who does FEMA apply to?
FEMA extends to the whole of India. It also applies to branches, offices and agencies outside India that are owned or controlled by a person resident in India, and to contraventions committed outside India by any person to whom the Act applies (Section 1).
What matters most is whether you are a person resident in India or a person resident outside India (Section 2(v) and 2(w)). Under Section 2(v), a person who has stayed in India for more than 182 days in the preceding financial year is generally resident, with carve-outs for those who left India for employment, business or an indefinite stay abroad. Companies and firms are resident if registered or incorporated in India.
| Term | Plain meaning | Why it matters |
|---|---|---|
| Resident in India | Person staying in India as per Section 2(v); Indian companies and firms | Can remit abroad only through permitted routes such as LRS or Overseas Investment |
| NRI | Indian citizen resident outside India | Eligible for NRE, NRO and FCNR(B) accounts and special investment routes |
| OCI | Foreign citizen holding an Overseas Citizen of India card | Treated like an NRI for many investment and property purposes |
| Person resident outside India | Anyone not resident in India, including foreign companies | Their investments in India follow the Non-debt Instruments Rules |
| Authorised Person / AD Bank | Banks and entities authorised under Section 10 | Process and report almost every cross-border transaction |
2. The two big buckets: current account and capital account
Every FEMA transaction falls in one of two buckets. Knowing the bucket tells you the default rule.
| Current account | Capital account | |
|---|---|---|
| What it covers | Day-to-day flows: trade in goods and services, travel, education fees, medical expenses, gifts, interest, remittance of salary | Changes in assets and liabilities: shares, loans, property, overseas investments, borrowings |
| Default rule | Free, unless restricted (Section 5) | Restricted, unless permitted (Section 6) |
| Controlling instruments | Current Account Transactions Rules, 2000: Schedule I (prohibited), Schedule II (Central Government approval), Schedule III (RBI approval above limits) | NDI Rules 2019, Overseas Investment Rules 2022, Borrowing and Lending Regulations 2018 and others |
| Typical examples | Export proceeds, import payment, studying abroad, medical treatment | FDI in a startup, overseas subsidiary, ECB loan, buying property abroad |
3. How the FEMA rule book is built
Think of a four-layer pyramid. Each layer must stay within the one above it.
| Authority | Role |
|---|---|
| Reserve Bank of India | Regulations, Master Directions, reporting, compounding of most contraventions |
| Ministry of Finance (Department of Economic Affairs) | Rules for non-debt instruments and overseas investment |
| DPIIT | FDI policy and Press Notes, for example on investment from land-bordering countries |
| Directorate of Enforcement | Investigates and adjudicates contraventions; compounds contraventions of Section 3(a) |
| Appellate bodies | Special Director (Appeals), Appellate Tribunal and the High Court |
4. Sections you should recognise
| Section | What it says in plain words |
|---|---|
| 3 | Do not deal in foreign exchange except through an authorised person |
| 4 | Residents cannot acquire or hold foreign exchange, foreign security or immovable property abroad, except as permitted |
| 5 | Current account transactions are free, subject to reasonable restrictions |
| 6 | Capital account transactions are permitted only as notified by the RBI or the Central Government |
| 7 and 8 | Exporters must furnish declarations and realise and repatriate export proceeds |
| 10 and 11 | Authorised persons and RBI directions to them |
| 13 | Penalties for contravention |
| 14 | Enforcement of penalty orders, including civil imprisonment in specified cases (confirm period) |
| 15 | Compounding of contraventions |
| 16, 17, 19, 35 | Adjudication and the appeal ladder |
| 37A | Seizure and recovery of foreign assets held in contravention of Section 4 |
| 42 | Liability of company officers in charge of business |
5. FEMA from A to Z: a layman glossary
| Term | Meaning |
|---|---|
| AD Bank | Authorised Dealer bank through which you remit, receive and report |
| APR | Annual Performance Report for overseas direct investment, due by 31 December |
| ECB | External Commercial Borrowing: a loan from a non-resident lender |
| EDF | Export Declaration Form, now relevant for services exports as well |
| FC-GPR | Report of shares issued to a non-resident, within 30 days of allotment |
| FC-TRS | Report of share transfer between resident and non-resident, within 60 days |
| FDI | Foreign Direct Investment into an Indian company |
| FIRMS / SMF | RBI portal and Single Master Form used to file investment reports |
| FLA Return | Annual Return on Foreign Liabilities and Assets, due by 15 July |
| LRS | Liberalised Remittance Scheme: USD 250,000 per financial year for resident individuals |
| LSF | Late Submission Fee for delayed reporting |
| NDI | Non-debt Instruments such as equity shares and convertible instruments |
| NRE / NRO / FCNR(B) | The three main NRI bank accounts |
| ODI / OPI | Overseas Direct Investment and Overseas Portfolio Investment |
| UIN | Unique Identification Number given for an overseas investment |
6. Myths versus facts
| Myth | Fact |
|---|---|
| FEMA is a criminal law like FERA | Contraventions under Section 13 are civil penalties. Separate laws may apply to related conduct. |
| My bank files everything, so I am safe | The bank is a gateway, but the responsibility to comply and report is yours or your company’s. |
| Small delays do not matter | Late reporting attracts Late Submission Fee and can escalate to compounding if left unregularised. |
| FEMA only concerns foreign companies | Resident individuals, startups, exporters, NRIs and families are all covered. |
| Tax compliance and FEMA compliance are the same | They are separate. A transaction can be tax-compliant and FEMA non-compliant. |
7. Five common mistakes
- Assuming Income-tax residency decides FEMA residency.
- Receiving or sending money outside banking channels, or through third parties without permission.
- Treating reporting as optional because the transaction itself was permitted.
- Ignoring annual returns (FLA, APR) when there was no fresh transaction in the year.
- Relying on old circulars. Several frameworks were rewritten in 2026, including export-import and external commercial borrowing.
8. The recurring dates at a glance
Part 5 pulls every deadline, penalty and appeal period into one calendar.
Why work with ComplianceKart
ComplianceKart is a boutique practice bringing Chartered Accountants, Company Secretaries and advocates under one roof. Think of a multi-speciality hospital: the physician, the radiologist and the pharmacist read from one patient file, so you never carry reports between buildings. FEMA questions rarely sit in one box: a funding round touches company law, valuation, tax and RBI reporting at once. Having these specialists work from one file is what keeps a deadline from slipping between them.
Frequently Asked Questions
Is FEMA a criminal law?
No. Contraventions are dealt with as civil liabilities under Section 13, with penalties, compounding and a three-tier appeal system. Enforcement of penalty orders can lead to civil imprisonment in specified cases.
Who is the main regulator under FEMA?
The Reserve Bank of India frames regulations and directions, the Central Government frames rules for non-debt instruments and overseas investment, and the Directorate of Enforcement handles investigation and adjudication.
What is the difference between current account and capital account transactions?
Current account transactions such as trade and travel are free unless restricted. Capital account transactions such as investments and borrowings are restricted unless permitted.
Does FEMA apply to a small Indian startup?
Yes. If it receives foreign investment, exports services, borrows from abroad or invests overseas, it must follow the relevant FEMA reporting and compliance rules.
What if I think I have missed a FEMA filing?
List the transaction, date and amount, identify the form and due date, and regularise through your AD bank with the applicable late submission fee. Part 5 explains compounding for larger delays or substantive contraventions.
Sources
- Foreign Exchange Management Act, 1999 (Sections 1 to 19, 35, 37A, 42)
- FEM (Non-debt Instruments) Rules, 2019 and Mode of Payment and Reporting Regulations, 2019 (FEMA 395/2019-RB)
- FEM (Overseas Investment) Rules and Regulations, 2022 (FEMA 400/2022-RB)
- RBI FEM (Export and Import of Goods and Services) Regulations, 2026 (FEMA 23(R)/2026-RB)
Website: FEMA and NRI compliance services
Email: team@compliancekart.com
Phone: 9959536391
Educational article, last updated 11 November 2026. It is general information, not advice on a specific transaction. FEMA directions change often; confirm the position on the date you act. Items marked (confirm) were reported by secondary sources and should be checked against the RBI or Gazette text.
Need this done for your business?
Send us one message. A CA, CS or Advocate replies within a working day — no forms, no obligation.