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With the aim of facilitating external trade and payments to foreign countries and promoting the orderly development of the foreign exchange market in India, the government of India passed the Foreign Exchange Management Act, (FEMA) in 1999. This Act replaced the Foreign Exchange Regulation Act (FERA), which had become unworkable following the pro-liberalisation policies of the government. The new Act enabled a new management regime, which was consistent with the World Trade Organisation. The FEMA also paved the way for the introduction of the Prevention of Money Laundering Act, 2002, which came into existence in July 2005. The FEMA also enabled the Reserve Bank of India (RBI) to pass regulations and rules related to foreign exchanges, in line with the foreign trade policy of India.
What is FEMA?
The Foreign Exchange Management Act was passed by the central government, to encourage cross-border trade and payments. It outlines the rules and procedures for all foreign exchange transactions that happen in India. There are two types of foreign exchange (forex) transactions: capital account and current account. Capital account transactions involve all money-related transactions while current account comprises trade of merchandise.
See also: Can an NRI purchase or own a property in India?
Where is FEMA applicable?
The FEMA is applicable to all agencies and offices owned by an Indian citizen in India or in a location outside India. The Enforcement Directorate is an economic-intelligence wing responsible for enforcing the FEMA act.
What is prohibited under FEMA?
The following are foreign exchanges is prohibited under the FEMA:
- Remittance out of winning lotteries, income on racing/riding, football pools, sweepstakes, banned/prescribed magazines, etc.
- Commission payment on exports towards equity investment of Indian companies in joint ventures/wholly-owned subsidiaries abroad.
- Payment regarding telephonic ‘call-back services’.
- Remittance of interest earned on funds held in NRSR Account (Non-resident Special Rupees Scheme Account).
See also: Important guidelines for buying a property outside India
Things to know about FEMA
Payments to any person outside India or receipts from such persons, along with the deals in foreign exchange and foreign security, are restricted. It is the FEMA that gives the central government the power to impose the restrictions.
The central government can restrict foreign exchange deals under the current account by an authorised person, based on public interest generally.
Residents of India will be allowed to transact in foreign exchange, foreign security or to own or hold immovable properties abroad, if it was owned or acquired when they were living outside India, or when it was inherited by them from someone living outside India.
See also: How to buy and finance a property outside India
The FEMA empowers the RBI to subject the capital account transactions to a number of restrictions.
Transactions involving foreign security or foreign exchange and payments from outside the country to India, should only be made through authorised persons.
FAQs
What FEMA means?
The FEMA stands for the Foreign Exchange Management Act, which regulates foreign exchange in India.
What are the FEMA guidelines?
FEMA guidelines are mentioned in this article.
What are the objectives of FEMA?
The main objective of the FEMA is to encourage external trade and development and maintenance of the foreign exchange market in India.
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