Current Account Transactions and Capital Account Transactions are two categories that classify different types of transactions under the Foreign Exchange Management Act, 1999 (FEMA) in India.

Current Account Transactions (Section 2(j))

These transactions involve the movement of goods, services, and payments between residents and non-residents. Examples include trade in goods and services, remittances, travel expenses, and more. Current account transactions are generally unrestricted and do not require prior approval from the Reserve Bank of India (RBI). However, certain specified transactions may have limitations or guidelines imposed by the RBI.

(These are usually transactions for non-business purposes)

Capital Account Transactions (Section 2(e))

These transactions involve the movement of capital or investments between residents and non-residents. It includes activities such as foreign direct investments (FDI), foreign portfolio investments (FPI), external commercial borrowings (ECB), acquisition and transfer of immovable property, and more. Capital account transactions are regulated and subject to specific rules, regulations, and approvals from the RBI.

Regulations: The RBI, under the powers granted by FEMA, has issued various regulations and notifications to govern current account and capital account transactions. These include the Foreign Exchange Management (Current Account Transactions) Rules, 2000, and the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, among others.

(These are usually transactions for non-business purposes)

Foreign Exchange Management (Current Account Transactions) Rules, 2000

The Foreign Exchange Management (Current Account Transactions) Rules, 2000 is a set of rules issued under the Foreign Exchange Management Act, 1999 (FEMA) by the Reserve Bank of India (RBI). These rules provide guidelines and regulations regarding current account transactions, which involve the movement of goods, services, and payments between residents and non-residents.

The rules outline various provisions related to current account transactions, including permissible activities, limitations, and reporting requirements. They cover a wide range of transactions such as trade in goods and services, remittances, travel expenses, gifts, donations, and more.

Under these rules, certain transactions may require prior approval or specific documentation as prescribed by the RBI. The rules aim to facilitate smooth cross-border transactions while maintaining financial stability, monitoring fund flows, and ensuring compliance with regulatory norms.

Key Provisions under the Foreign Exchange Management (Current Account Transactions) Rules, 2000

1. Rule 3 – General permission for current account transactions.
2. Rule 4 – Prohibited transactions.
3. Rule 5 – Reporting of certain transactions.
4. Rule 6 – Maintenance of records.

Key Principles

1. Trade in Goods and Services: The rules permit current account transactions related to the import and export of goods and services, subject to compliance with applicable trade and customs regulations.
2. Remittances: The rules specify the conditions and limits for remittances of funds abroad for various purposes such as travel, education, medical expenses, family maintenance, gifts, etc.
3. Travel: The rules outline the provisions for foreign exchange transactions related to travel, including allowances for foreign exchange, expenses during foreign travel, and purchase of foreign currency.
4. Gifts and Donations: The rules provide guidelines for the transfer of gifts and donations to non-residents, including monetary gifts and other forms of movable property.
5. Loans and Investments: The rules govern certain types of loans and investments between residents and non-residents, including borrowings and lending transactions, subject to prescribed limits and conditions.

Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000

The Foreign Exchange Management (Permissible Capital Account Transactions) Regulations are regulations issued by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act, 1999 (FEMA). These regulations govern capital account transactions, which involve the movement of capital or investments between residents and non-residents.

The regulations define the permissible capital account transactions and provide guidelines, conditions, and procedures for conducting such transactions. They cover areas such as foreign direct investments (FDI), foreign portfolio investments (FPI), external commercial borrowings (ECB), acquisition and transfer of immovable property, and more.

These regulations outline the eligibility criteria, sector-specific restrictions, reporting requirements, and compliance procedures for various capital account transactions. They aim to regulate and monitor capital movements to safeguard the country’s economic stability, manage external liabilities, and promote orderly capital flows.

It is essential for individuals, businesses, and financial institutions engaging in capital account transactions to adhere to these regulations, seek necessary approvals, and comply with reporting obligations to ensure compliance with the legal framework and contribute to a well-regulated financial system.

Key Provisions under the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000

1. Regulation 3 – General permission for capital account transactions.
2. Regulation 4 – Prohibited transactions.
3. Regulation 5 – Reporting of certain transactions.
4. Regulation 6 – Acquisition and transfer of immovable property by a person resident outside India.
5. Regulation 7 – External commercial borrowings.
6. Regulation 8 – Foreign direct investment.
7. Regulation 9 – Foreign portfolio investment.
8. Regulation 10 – Overseas direct investment.
9. Regulation 11 – Investment by a person resident in India in a foreign currency denominated security issued in India.
10. Regulation 12 – Foreign currency accounts of residents.

Key Principles

1. Foreign Direct Investment (FDI): The regulations specify the conditions and procedures for foreign direct investment, including sector-specific restrictions, eligibility criteria, and reporting obligations.
2. External Commercial Borrowings (ECB): The regulations govern the borrowing of funds by residents from non-residents, subject to specified limits, conditions, and reporting requirements.
3. Foreign Portfolio Investment (FPI): The regulations outline the framework for foreign portfolio investments in India, including investment limits, registration requirements, and reporting obligations for foreign institutional investors and qualified foreign investors.
4. Acquisition and Transfer of Immovable Property: The regulations prescribe the conditions and restrictions on the acquisition and transfer of immovable property by non-residents in India, including residential and commercial properties.
5. Offshore Investments and Deposits: The regulations cover offshore investments and deposits by residents, including opening and maintenance of foreign currency accounts, overseas investments, and repatriation of funds.