Section 5 FEMA Act 1999: Current Account Transactions

Section 5 of FEMA: Current account transactions

Section 5 therefore starts from a permissive rule for current account transactions, but the permission is not absolute. The transaction must comply with the Foreign Exchange Management (Current Account Transactions) Rules, 2000 and applicable RBI directions.

An authorised person is defined in Section 2(c) of FEMA to include an authorised dealer, money changer, offshore banking unit or any other person authorised under Section 10(1) to deal in foreign exchange or foreign securities.

What is a current account transaction under FEMA?

Section 2(j) defines a current account transaction as a transaction other than a capital account transaction. The definition expressly includes:

• payments connected with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business;
• payments of interest on loans and net income from investments;
• remittances for living expenses of parents, spouse and children residing abroad; and
• expenses relating to foreign travel, education and medical care of parents, spouse and children.

The distinction matters because a capital account transaction is separately defined in Section 2(e) and regulated principally under Section 6. Section 5 deals with transactions that fall on the current account side.

Foreign Exchange Management (Current Account Transactions) Rules, 2000

The Central Government framed the Foreign Exchange Management (Current Account Transactions) Rules, 2000 under FEMA. These Rules place transactions into different regulatory categories and must be checked before foreign exchange is drawn or remitted.

Prohibited and regulated transactions

Rule 3 prohibits drawal of foreign exchange for transactions specified in Schedule I and for certain travel to Nepal or Bhutan and transactions with persons resident there, subject to the wording of the Rules. Other provisions and schedules identify transactions for which Government approval, RBI approval, specified limits or other conditions may apply.

Section 5 and the Liberalised Remittance Scheme

For resident individuals, many permitted current account remittances operate within the RBI Liberalised Remittance Scheme. RBI currently states an overall LRS limit of USD 250,000 per financial year for permitted current account or capital account transactions, or a combination of both, subject to FEMA restrictions and the conditions of the Scheme.

RBI's directions on other remittance facilities explain that current account purposes for resident individuals include private visits, gifts or donations, going abroad for employment, emigration, maintenance of close relatives abroad, business travel, medical treatment and studies abroad. Certain cases may be governed by special rules or permit amounts beyond the ordinary LRS limit where the applicable conditions are met.

International credit card use while outside India

The Central Government amended the Current Account Transaction Rules in 2023. Rule 7 provides that Rule 5 does not apply to the use of an international credit card by a person for making payment towards expenses while that person is on a visit outside India. The amendment was notified on 30 June 2023 and was given effect from 16 May 2023.

This specific rule should be read together with any other applicable FEMA, banking, tax and card-issuer requirements.

Key points about Section 5 FEMA

• Section 5 governs the sale or drawal of foreign exchange for current account transactions.
• The statutory definition is in Section 2(j) of FEMA.
• The Central Government may prescribe reasonable restrictions in public interest after consultation with RBI.
• The Current Account Transaction Rules, 2000 determine important prohibitions, approval requirements and conditions.
• RBI directions govern operational aspects of remittances through authorised persons.
• Resident individuals should also examine the LRS rules and the purpose-specific conditions applicable to their remittance.