written by | May 13, 2022

Foreign Exchange Management Act (FEMA) - Objectives, Procedures and Penalties

To facilitate the flow of payments and trade to foreign countries and promote the smooth development of the market for foreign exchange in India, the Government of India adopted the Foreign Exchange Management Act (FEMA) 1999.

The Act was a replacement for the FERA (Foreign Exchange Regulation Act), which was ineffective due to the liberalisation practices of India's government. The new Act allowed for a new management system in line with the World Trade Organisation.

The FEMA also set the stage in the direction of the Prevention of Money Laundering Act 2002, which was passed at the end of July. The FEMA also allowed the Reserve Bank of India to establish regulations and guidelines about foreign exchanges, which conform with India's foreign trade policies.

Did you know?

Before FEMA, FERA was in action in India, but FERA had many loopholes. FERA failed to cope with post-liberalisation policies. FERA had many big advantages, too. Still, the negatives were not acceptable.

Also Read: What is the Sovereign Gold Bond Scheme?

What Is the FEMA Act?

The central government developed the FEMA to promote cross-border trade and foreign exchange payments. It was first introduced in 1999 to replace FERA, and FEMA is useful to fix all loopholes and shortcomings of FERA. Thus, the FEMA Act(Foreign Exchange Management Act) added several big modifications.

The FEMA is an act of the government that consolidated and modified the laws governing India's foreign exchange market. This FEMA Act's objective was to promote external payments, orderly development and the maintenance of the markets for foreign exchange in India.

A foreign investor or an Indian investor invests outside of India. Also, the investor must meet India's Foreign Exchange Regulations. The Directorate of Foreign Trade and the RBI has formed these regulations. These regulations introduced foreign exchange compliance to keep an eye on the increasing flow of outbound and inbound funds.

Facts to Know Regarding the FEMA Act 1999

Receipts from any individual outside India or payments to such persons, besides the deals in foreign security and foreign exchange, are permitted. The FEMA grants the central government authority to make the restrictions.

The central government can restrict transactions in foreign exchange under the current account of an authorised person in the general public interest.

Residents of India can engage in foreign securities and foreign exchange transactions or possess or own immovable property outside of India. This property should be acquired or owned by them when they lived in a different country than India or were developed by someone outside of India.

The FEMA gives the RBI to subject cash transactions in the capital account to various limitations.

The transactions that involve foreign exchange, foreign security or payments made in foreign currencies to India should be done through authorised persons.

The Characteristics and Objectives of FEMA

  • The FEMA Act does not permit foreign security transfers or foreign exchange dealings for the unauthorised. 
  • FEMA doesn't allow those who reside outside of India.
  • Facilitating the exchange of foreign currency and accounts for payments to fulfil the FEMA Act's primary responsibility and modification and consolidation of laws on foreign exchange. The Indian government implemented this law to promote orderly development and maintain the foreign exchange market in India.
  • The FEMA Act 1999 requires that any person living in India receive the proceeds of a Forex payment without an equivalent remittance inward from overseas. The person concerned will be deemed to have accepted the payment from an unauthorised source.
  • Certain prescribed limits were increased following the introduction of the FEMA Act 1999.
  • There are seven types of transactions forbidden in the current account. This includes transactions related to lotteries, banned magazines, football pools and others.
  • Foreign exchange management act 1999's stringent rules greatly impacted international trade transactions. The Act enticed foreign exchange and different payment options. Regularly, RBI releases notifications and circulars describing the changes made to certain sections of the FEMA Act.
  • A resident of India can have securities, shares and property he bought during his time as a resident or inherits these properties from the resident.
  • FEMA gives you the freedom to own or transfer any security outside India.

Which Type of Foreign Exchange Transactions Have Permission Under the FEMA Act 1999?

The formalities and procedures for falling and dying with every single forex transaction in India are now simpler, and all that is thanks to the FEMA Act. Also, foreign exchange transactions are segmented into two categories. As per the FEMA Act, you must record the actual balance payment in the commercial assets of the services or goods. Additionally, the transactions are conducted between citizens of any other country with India. Also, without a proper strategy, don't invest. You can learn how to write a business plan to attain success.

How Is the Foreign Exchange Management Act Applied?

The FEMA Act is available to the entirety of India, and the agencies and offices located outside of India are run as owned or operated by an Indian citizen. The FEMA's headquarters is in New Delhi, and we call it the Enforcement Directorate.

In particular, the FEMA Act 1999 applies to:

  • Financial, banking and insurance services
  • Exporting any product/service in India to some other country
  • Indian foreign exchange
  • Indian foreign security
  • The purchase, exchange or sale of any nature
  • Any company in the world owned by a Non-Resident Indian (NRI)
  • Importing any product or service from outside India
  • Securities as per the Public Debt Act of 1994
  • Any person who is a citizen of India who lives or resides in India or a different country

The current account transactions reported by the FEMA Act 1999 are classified into three categories:

  1. Transactions are not allowed by FEMA.
  2. A transaction that needs approval from the RBI.
  3. A deal that requires the central government's approval.

Also Read: Getting Foreign Funds for NGOs in India: The FCRA Registration Process

Current Account Transactions

It consists of the flow and outflow of funds from specific countries that are not part of India during the year. The transaction occurs due to trade or rendering commodities, services or income exchange between these countries. After that, such transactions are classified into three different parts by foreign exchange regulations. They include:

  • Transactions that FEMA does not permit.
  • The transaction requires RBI's prior approval.
  • The transaction requires prior permission from the central government.

The Restrictions on Dealing With Foreign Exchange

The restrictions on dealing with foreign exchange are outlined in section 3 of the Act. The section reads as follows:

  1. An authorised person can deal with the transfer of any security or currency to anyone.
  2. It isn't advisable to make any payments to or on behalf of any resident who is not from India.
  3. Only an authorised person can accept any order payment for any other person living outside of India.

Furthermore, Section 4 of the Act stipulates that no Indian resident can acquire or be an owner, hold, transfer or possess foreign currency/security or any immovable property outside India.

What Are the Transactions of the Capital Account?

The capital account identifies any domestic investments inside the foreign assets, and a capital account checks foreign assets with domestic investments and vice versa. The FEMA Act states that the transactions of capital accounts change the liabilities/assets of an individual who lives inside or outside of India or liabilities/assets in India of the individual living outside India.

What Are the Penalties Under FEMA?

Suppose a taxpayer has committed an offence under this law in their tax evasion. In that case, they will be liable to pay the penalty equivalent to thrice the amount resulting from this default if the amount is quantifiable or the sum of ₹2 lakhs isn't quantifiable.

If the taxpayer continues to commit the offence, the penalty amount could be up to ₹5000 per day for every day that they are in non-payment. The authority in charge is authorised to seize the currency, security or additional property owned by the person being assessed. Additionally, the officer has the power to transfer the money earned by the defaulter in foreign exchange to India.


The FEMA Act only allows an authorised person to trade in foreign currency/securities ( shares, bonds, stocks, etc.). The FEMA Act 1999 was the need of the moment to replace the older Act - FERA because FERA was strict, whereas FEMA is more flexible than FERA.

The principal objective of FEMA was to streamline and modify the laws that govern foreign exchange to make it easier for foreign payments and trade. Its target is to ensure the protection of the market for foreign exchange in India. FEMA's substitution with FERA has helped the Indian economy because it's adaptable.
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Q: What are the penalties under FEMA?


In case of offending this law, the penalty the offender has to pay is triple the amount of the non-quantifiable amount.

Q: Have FEMA objectives been attained?


Yes, the FEMA Act 1999 has done far better than the FERA act, which it replaced. You get foreign trade facilitation in India better than ever today.

Q: Is the Foreign Exchange Management Act still in force?


Yes, Foreign Exchange Management Act 1999 is still in force.

Q: What is FEMA?


The FEMA Act 1999 is an act from the Indian parliament to strengthen a law for foreign exchange to facilitate foreign external trade and payments. It also plays a vital role in maintaining the foreign exchange market in India.

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