The Foreign Exchange Regulation Act (FERA) of 1973 and the Foreign Exchange Management Act (FEMA) of 1999 serve different goals. FERA was enacted when India’s forex reserves were low, viewing foreign exchange as a scarce resource and imposing strict controls to conserve it. By contrast, FEMA treats forex as an asset and promotes its orderly management, liberalizing cross-border flows to facilitate trade and investment. Key contrasts include:

• Enactment: FERA (46 of 1973) came into force on Jan 1, 1974; FEMA (42 of 1999) was passed on Dec 29, 1999 and effective June 1, 2000.
• Objective: FERA’s objective was conservation of foreign exchange, whereas FEMA aims at management and promotion of external trade and payments.
• Nature of Penalties: Under FERA, violations were criminal offenses with strict penalties. FEMA, in contrast, makes violations civil offences with monetary fines (up to triple the contravening amount) and, only if fines go unpaid, possible imprisonment.
• Legal Procedure: FERA had no provision for appeal tribunals (appeals went directly to High Courts), whereas FEMA provides a Special Tribunal for enforcement matters.
• Authorized Persons: FERA defined “Authorized Dealers” narrowly; FEMA expanded this definition (e.g. banks became authorized dealers).

In short, FERA was restrictive and punitive, focusing on preventing outflow of scarce reserves, while FEMA is liberal and facilitative, focusing on compliance and regulatory management of forex.

What is the FEMA Act in India?

The Foreign Exchange Management Act, 1999 (FEMA) is the current law governing foreign exchange in India. Enacted on Dec 29, 1999 and effective June 2000, FEMA replaced FERA to modernize India’s forex regime. Under FEMA, all transactions involving foreign exchange are classified as capital account or current account transactions. The Act empowers the Reserve Bank of India (RBI) to regulate foreign exchange and issue related regulations. Its primary objectives are to facilitate external trade and payments and to promote the orderly development of the foreign exchange market in India.

Key features of FEMA include:

• Liberalization: It generally allows free conversion and transfer of foreign currency for current account transactions (like trade payments, education, medical expenses, etc.), subject only to prohibited items.
• Regulatory Authority: FEMA empowers RBI (and Central Government) to make rules on forex. Under Section 5, residents are free to buy/sell foreign exchange for current transactions except a short list of disallowed cases (e.g. lottery winnings, prohibited publications).
• Authorized Dealers (ADs): Only banks or entities licensed by RBI can deal in forex and service FEMA transactions. All companies and individuals must transact through these ADs.

In practice, FEMA makes it easier for businesses and individuals to engage in cross-border deals by replacing the prior stringent controls with a system of reporting and approvals.

Why FERA Was Replaced by FEMA?

FERA was a product of its time (the 1970s oil shock era) when India’s economy was much more closed. It assumed that any foreign exchange earned by Indians belonged to the Government, which proved too rigid. Over time, FERA’s stringent licensing and criminal penalties hindered foreign investment and trade, delaying economic growth. As the Indian economy liberalized in the 1990s, FERA was seen as outdated.

By 1999, it was clear FERA did not achieve its intended effect; India’s forex reserves remained low and international business was choked by paperwork. For example, even after years of FERA controls India’s economy continued to struggle, prompting a shift in policy. FEMA was introduced to liberalize and rationalize forex rules. It removed unnecessary restrictions (no more blanket asset seizure), made all violations non-cognizable civil offences, and aligned India’s forex laws with global trends. In essence, FEMA replaced FERA to promote foreign trade and investment rather than just restrict it.

Objectives and Scope of FEMA

FEMA’s overarching goal is orderly management of India’s foreign exchange. Specifically, FEMA seeks to:

• Facilitate External Trade: Make it easy to pay for imports and receive payments for exports, subject to RBI oversight.
• Promote Foreign Investment: Simplify procedures for Foreign Direct Investment (FDI) and External Commercial Borrowings (ECBs) into India.
• Maintain Market Stability: Provide a clear legal framework so that India’s forex market functions efficiently with transparency.

Under FEMA, most current account transactions are freely allowed; only a small set of transactions (like lotteries, prohibited overseas donations, gambling) are barred. Capital account transactions (e.g. issue of shares to non-residents, overseas investments by Indians) are regulated and generally require either prior approval or post-facto reporting to the RBI. The Act ensures that all foreign exchange flows – inwards or outwards – occur via authorized channels, thus helping India integrate with global markets while keeping oversight.

History of Foreign Exchange Laws in India

India’s approach to forex regulation has evolved over decades. The Foreign Exchange Regulation Act of 1947 was the first law (as a temporary measure post-independence). By 1973, India consolidated and tightened rules under FERA 1973. FERA remained in force (with many amendments) until 1999. Its Statement of Objects explicitly says it was enacted “…for the conservation of the foreign exchange resources of the country and the proper utilisation thereof in the interests of the economic development of the country.”.

FERA was repealed in late 1999, and FEMA was enacted in its place on Dec 29, 1999 (effective June 1, 2000). Thus, history line-up is:

• 1947: First Act (temporary), eventually on statute book.
• 1973: FERA enacted (strict control era).
• 1999: FEMA enacted, repealing FERA.

This transition marks India’s shift from a closed-economy mindset to a more liberal, globalization-ready framework.

FEMA Compliance Checklist for Businesses

Companies involved in import-export, foreign investment or cross-border finance must comply with FEMA rules at every step, or face penalties. A practical FEMA compliance checklist typically includes:

• Identify Regulated Transactions: Determine which activities fall under FEMA – e.g. current account transactions (trade payments, business travel, royalties) vs capital account (FDI inflows, ODI, foreign loans).
• Foreign Investment Compliance: For any Foreign Direct Investment (FDI) into an Indian company, file an Advance Reporting Form (ARF) within 30 days of receiving funds, and then Form FC-GPR within 30 days of allotment of shares to the foreign investor. Ensure the investment matches sectoral caps and is routed via automatic or government approval route as applicable.
• ECB/ODI Guidelines: If taking foreign loans (ECBs) or investing abroad (ODI), follow RBI’s ECB regulations (eligible lenders, minimum maturity, all-in-cost caps) and report via the required forms (e.g. Form ECB-2 for monthly tracking).
• Reporting & Returns: Maintain accurate records and submit mandatory reports: Annual FLA Return (Foreign Liabilities and Assets) by July 15 each year, Form FC-TRS for any resident-to-nonresident share transfers, and periodic ECB/ODI reports.
• Regular Audits & Controls: Conduct internal audits of FEMA compliance, check all forex remittances have correct purpose codes and documentation, and ensure authorized dealer declarations are in order.

By systematically following these steps, businesses can avoid costly fines and business disruptions.

FEMA Rules for Individuals Sending Money Abroad

For resident individuals, FEMA allows outward remittances for approved purposes, mainly under RBI’s Liberalised Remittance Scheme (LRS). Currently, an Indian resident can remit up to USD 250,000 per financial year for education, travel, medical treatment, gifts, investments overseas, etc.. This limit is enforced by RBI through banks; each transaction requires a purpose code and Form A2 submission.

For NRIs (Non-Resident Indians), FEMA governs how they send money overseas:

• NRE/FCNR Accounts: Money held in Non-Resident External (NRE) and Foreign Currency Non-Resident (FCNR) accounts (forex-denominated term deposits) is fully repatriable. Both principal and interest can be freely transferred abroad. Interest earned in NRE/FCNR accounts is tax-exempt in India.
• NRO Accounts: Funds in an NRO account (rupee account for Indian income like rent or dividends) can be repatriated up to USD 1 million per year, subject to tax clearance. Interest in NRO accounts is subject to Indian income tax.

In summary, under FEMA and RBI rules, most personal and family remittances are permitted (within LRS limits), and NRIs have clear guidelines on which accounts to use and how much they can send abroad.

FEMA Violations and Penalties

Non-compliance with FEMA attracts heavy penalties. Unlike FERA’s criminal seizures, FEMA violations are dealt with civil enforcement. The Enforcement Directorate (ED) investigates breaches and can impose fines up to three times the transaction value, plus daily penalties for continuing violations. A famous case: Flipkart was reported to face a penalty of around ₹1,000 crore for alleged FEMA violations in its WS Retail dealings. This shows that even top companies can be hit with massive fines if FEMA norms (e.g. FDI conditions) are broken.

Typically, FEMA penalties include monetary fines and confiscation of forex. If a person fails to pay the imposed fine within 90 days, only then can imprisonment be considered. In practice, authorities emphasize compliance education first, but they will enforce rules strictly if violations persist.

RBI’s Role Under FEMA

The Reserve Bank of India (RBI) is FEMA’s chief regulator. It issues rules, notifications and FAQs to implement FEMA. RBI authorizes banks as Authorized Dealers who alone can deal in foreign exchange. All cross-border transactions must go through RBI-authorized banks, which in turn must comply with FEMA/DMA notifications.

RBI’s powers under FEMA include granting or revoking licences to deal in forex, examining compliance, and attaching assets for contraventions. Section 5 of FEMA explicitly grants residents freedom to buy/sell forex for current transactions, subject to RBI directives. In enforcement, RBI works with the Ministry of Finance’s ED; while RBI monitors and reports infractions, ED carries out investigations under FEMA. In sum, FEMA empowers the RBI to maintain India’s forex ecosystem, with ED ensuring penalties for non-compliance.

FEMA Reporting Requirements

Companies and individuals must file specific forms for foreign exchange dealings. Key requirements include:

• Form A2: An individual or business remitting forex must submit Form A2 (with purpose code) to their bank, declaring the reason and value of transaction.
• ARF & FC-GPR: Foreign investors into India file the Advance Reporting Form (ARF) and, after shares are allotted, Form FC-GPR within deadlines.
• Form FC-TRS: Whenever shares are transferred between residents and non-residents, banks file this form to RBI.
• ECB-2 Return: Borrowers under the ECB scheme must submit a monthly ECB-2 return to the RBI’s DEPR (Department of External Debt and Policy) detailing disbursements.
• FLA (Foreign Liabilities & Assets) Return: Companies with FDI/ODI must file an annual FLA return by July 15, disclosing foreign shareholding and overseas assets.

Maintaining these filings accurately and on time is crucial. RBI may levy penalties for late or incorrect reports. Adhering to the reporting calendar ensures smooth foreign transactions.

FEMA Rules for NRIs (Accounts, Investments, Property)

Under FEMA, NRIs enjoy certain privileges but also face restrictions:

• Accounts: NRIs cannot hold regular resident savings accounts. They must use NRE, NRO or FCNR accounts. Money in NRE/FCNR accounts (foreign income) is fully repatriable and tax-free. NRO accounts (Indian income) allow up to USD 1 million/year remittance (with tax clearance) and earn taxable interest.
• Investments: NRIs can invest in Indian stock markets (via Portfolio Investment Scheme) and in government securities, subject to a 5% cap on individual shareholding (10% in long-term). They cannot invest in small savings schemes or PPF.
• Property: NRIs may buy residential and commercial real estate in India. However, agricultural land, farmhouses or plantation property are prohibited. On selling up to two properties, NRIs can repatriate proceeds (capped at $1M per sale if inherited).
• Repatriation: FEMA permits NRIs to remit funds earned and saved in India (via NRE/NRO) abroad under the above limits.

By law, NRIs must follow these account and investment rules, else their accounts can be frozen by the government. Understanding and complying with FEMA norms is thus essential for NRIs to manage their India holdings safely.

NRE vs NRO Accounts Under FEMA

NRE (Non-Resident External) Account: Used to park income earned abroad. Funds and interest in an NRE account are fully repatriable (you can transfer them out anytime) and tax-exempt in India.

NRO (Non-Resident Ordinary) Account: For income earned in India (rent, dividends, pension). Repatriation from an NRO account is restricted: up to USD 1 million per year after paying applicable taxes. Interest earned in NRO accounts is taxable.

FCNR (Foreign Currency Non-Resident) Account: A term deposit denominated in foreign currency (USD, EUR, etc.). Like NRE, FCNR deposits are fully repatriable and interest is tax-free.

The table below summarizes the differences:

• Currency: NRE/NRO are in INR; FCNR is in foreign currency (USD/EUR/etc).
• Repatriation: NRE/FCNR – fully repatriable. NRO – repatriable up to USD 1M/yr (with RBI certificate).
• Taxation: NRE/FCNR – interest tax-free in India. NRO – interest is taxable.

NRIs must choose the right account based on income source. For example, if salary is paid from overseas, use an NRE account; if they receive rent or dividends from India, deposit in an NRO account.

Foreign Direct Investment (FDI) and FEMA Guidelines

Foreign investment into India is regulated under FEMA and the FDI Policy. Most sectors allow FDI via the automatic route (no prior approval), but others require government (or RBI) approval. Key FEMA requirements for FDI include:

• Reporting: Any FDI inflow must be reported to RBI. After receiving foreign funds, the Indian company must file the ARF (Advance Reporting Form) within 30 days, and then FC-GPR within 30 days of allotting equity to the foreign investor. These filings record the price and details of investment.
• Pricing: FEMA requires that share purchases/issue to non-residents follow RBI-prescribed pricing norms to prevent money laundering. Premium on shares and valuations must be disclosed in FC-GPR.
• Sector Caps: The RBI enforces foreign equity caps for each sector (as notified by the government). For example, 100% FDI is allowed in certain sectors (e.g. telecom infrastructure) but maybe only 74% in others. Any FDI exceeding the automatic route limit requires prior Govt approval (like defence, media, etc.).
• FDI Restrictions: Some sectors remain closed. For instance, FDI in e-commerce (inventory-based) is not permitted. In 2014, ED alleged Flipkart violated FEMA/FDI norms via its wholesale arm (WS Retail) and sought heavy penalties.

RBI closely monitors these investments. FDI inflows must also comply with company law (minority caps, pricing regulations) in addition to FEMA.

Property Purchase in India by NRIs – FEMA Rules

Under FEMA, NRIs can buy real estate with some limits:

• Allowed: NRIs may acquire residential or commercial properties in India (either direct purchase or inheritance).
• Prohibited: Buying agricultural land, plantation, or farmhouses is not allowed for NRIs. These restrictions are to curb speculative foreign purchases of farmland.
• Repatriation: An NRI can repatriate the proceeds on sale of up to two properties (per individual). The total repatriated amount is limited to USD 1M per property sale (for properties purchased or inherited) under RBI approval.

These rules mean an NRI can invest in homes or shops, but must avoid rural or plantation land. Before purchasing, NRIs generally file form A2 with the bank. On sale, they obtain an RBI certificate to repatriate the sale price (subject to the limit).

Repatriation of Funds Under FEMA

Repatriation refers to moving money across borders. FEMA specifies limits:

• From NRE/FCNR Accounts: NRIs enjoy full repatriability. There is no cap on sending these funds abroad (principal and interest).
• From NRO Accounts: NRIs can remit up to USD 1 million per financial year from NRO accounts, subject to tax clearance and documentation.
• Sale of Property: On selling an Indian property, an NRI can repatriate proceeds (maximum of two properties) up to $1M each. Inherited property sales are combined within the $1M repatriation limit.
• LRS for Residents: Indian residents (including NRIs who become residents again) can remi­t up to US$250,000 per year abroad for approved purposes under LRS.

These repatriation rules ensure funds originating in India can flow out, but within controlled limits. All transfers must go through authorized banks with RBI permission as needed.

FEMA Guidelines for Startups Receiving Foreign Funding

Startups attracting foreign capital (via VC or angel investors abroad) must observe FEMA rules:

• They must report any foreign equity infusion using the same ARF and FC-GPR process applicable to other FDI recipients.
• Equity-based crowdfunding (via global platforms) is treated as FDI, so similar filings and pricing norms apply.
• If a startup raises foreign debt (from overseas lender), it is treated as ECB and must comply with ECB guidelines (eligible lender, all-in-cost, etc.) and file Form ECB-2.
• Compliance with FEMA (and the FDI policy) builds foreign investor confidence and avoids legal issues.

In short, foreign funding into startups is permitted (often via the automatic route), but every round must be documented with RBI through the prescribed FEMA forms.

Cross-Border Transactions Under FEMA

FEMA governs all cross-border transactions. It broadly classifies them:

• Current Account Transactions: These include import-export payments, travel remittances, education fees, service fees, etc. Under Section 5 of FEMA, residents are free to carry out these transactions through AD banks, except a short list (lottery, betting, etc.). In practice, RBI does not require approvals for most trade payments.
• Capital Account Transactions: These include investments (FDI, ODI), loans (ECB), acquisition of assets abroad, etc. Such transactions are regulated. Many can be done under automatic routes or liberalized schemes, but some require RBI approval (e.g. overseas direct investment beyond USD 1 million).

Every foreign exchange transaction must go through an Authorized Dealer (bank). For example, an exporter receives foreign currency and reports it via a repatriation certificate; an importer applies for forex from their bank under the import-export code. FEMA ensures these flows are recorded and conform to policy.

External Commercial Borrowings (ECB) Rules

External Commercial Borrowings (foreign loans/credits to Indian borrowers) are covered under FEMA’s Borrowing and Lending Regulations. Key points:

• Eligible Borrowers: Companies and specified entities (e.g. ports, SEZ units, NBFCs) that are allowed FDI can also raise ECBs.
• Recognized Lenders: Generally, only overseas institutions meeting certain criteria can lend (banks, foreign equity holders, development institutions). However, recent drafts are liberalizing this (including IFSC-based lending).
• Caps: Currently, an eligible borrower can raise up to US$750 million per financial year under the automatic route. Beyond that, government approval is needed. Some entities (like certain NBFCs) have separate caps.
• Conditions: ECBs have minimum average maturity (usually 3, 5 or 10 years depending on purpose), all-in-cost ceilings, and end-use restrictions (e.g. no equity investment).

In summary, ECB rules under FEMA allow Indian firms to borrow abroad for permissible purposes (like capital expenditure), with safeguards on amounts and terms.

Import-Export Payments and FEMA

FEMA facilitates international trade payments. Imports and exports are treated as current account transactions. Key points:

• Imports: Indian importers pay foreign suppliers by buying foreign currency via AD banks. They must submit import documentation and purpose codes, but generally no RBI approval is needed.
• Exports: Exporters receive foreign currency. Banks issue foreign inward remittance certificates (FIRCs), and FEMA mandates these transactions be repatriated and recorded.
• Trade Financing: Letters of credit, forex forward contracts, etc., all operate under RBI’s framework set by FEMA.

Overall, FEMA’s liberal stance means legitimate trade payments (e.g. paying suppliers) are handled smoothly through banking channels, subject to record-keeping and occasional RBI limits (like Electronic Data Interchange for LCs).

Mergers & Acquisitions with Foreign Entities – FEMA Impact

Cross-border M&A transactions trigger FEMA compliance:

• If a foreign firm acquires an Indian company’s shares, it may need RBI approval (if sector caps apply) or, at least, pricing compliance (FC-GPR filing). The Indian company will file Form FC-TRS to record the share purchase by the non-resident.
• Conversely, when an Indian company buys shares abroad, it is treated as Overseas Direct Investment (ODI) under FEMA. This requires RBI reporting (Form ODI) and adherence to RBI’s ODI scheme.
• Mergers between Indian and foreign entities thus involve steps like share valuation per FEMA rules and reporting through AD banks.

In all cases, FEMA mandates that an Authorized Dealer bank be involved, and that the exchange of shares or assets comply with pricing guidelines. Proper FEMA filings (e.g. FC-TRS, ODI forms) are crucial to validate the transaction under Indian law.

Common FEMA Mistakes Companies Make

Even well-meaning businesses can slip up on FEMA compliance. Common pitfalls include:

• Using the Wrong Bank Account: For instance, an NRI director may incorrectly use an ordinary savings account instead of an NRE/NRO account – a clear FEMA violation.
• Skipping Filings: Failing to submit ARF/FC-GPR after raising FDI, or neglecting FC-TRS when transferring shares to a non-resident, can attract penalties.
• Exceeding Limits Unknowingly: Not tracking the $1M NRO repatriation limit or the $250k LRS limit can breach FEMA provisions.
• Improper Documentation: Missing Form A2, incorrect purpose codes, or not obtaining RBI certificates on time can invalidate transactions.

In short, ignorance is no excuse – FEMA rules are technical. Regular audits and expert guidance help companies avoid these mistakes and demonstrate compliance.

How FEMA Affects International Freelancers

International freelancers (e.g. Indian professionals earning from overseas clients) are subject to FEMA when receiving foreign payments. Key effects:

• Rupee Accounts: Freelancers must receive foreign fees into a bank through an Authorized Dealer. Typically, this means using their resident savings account (subject to LRS) or, if they later become NRI, their NRE account.
• Purpose Codes: Even for freelance earnings, a purpose code is needed (e.g. S0502 – technical professional fee). Form A2 may be needed if foreign currency is purchased.
• Tax vs FEMA: FEMA cares about flow of funds, not taxes. Freelancers still pay income tax on their earnings, but under FEMA they ensure the foreign currency receipt is legitimized via banking channels.

In practice, many freelancers use the Liberalised Remittance Scheme (LRS): they remit abroad as residents (for instance, paying platforms) or receive into their bank via Normal Route. The same $250k annual limit applies to each individual. Keeping invoices and purpose codes handy ensures FEMA compliance without hassle.

FEMA vs Income Tax Rules – Difference

It’s important to understand that FEMA and Income Tax are separate laws:

• Regulator: FEMA is enforced by RBI/ED; Income Tax is enforced by the CBDT (Finance Ministry).
• Scope: FEMA deals with foreign exchange transactions (accounts, remittances, investments), whereas the Income Tax Act deals with taxation of income earned in or from India.
• Accounts: FEMA permits NRE/NRO/FCNR accounts for NRIs. Income Tax law then determines how interest on these is taxed (interest on NRO accounts is taxable; on NRE/FCNR is not).
• Documentation: FEMA requires forex forms (A2, 15CA/CB for remittances). Income Tax requires PAN, filing returns, and possibly the same Form 15CA/15CB for verifying tax on foreign remittances.

In essence, FEMA governs the mechanics of money flow, while Income Tax governs the taxation of earnings. A transaction can be compliant under FEMA but still taxable under IT Act, or vice versa. Non-residents must satisfy both sets of rules when dealing with cross-border income.

Case Study: FEMA Violation Example

A notable example is Flipkart’s FEMA case (2014). ED alleged Flipkart violated FEMA by channelling overseas funding through its affiliate WS Retail, in breach of e-commerce FDI rules. The investigation reportedly found evidence of FEMA contravention and sought around ₹1,000 crore in penalties. This highlights two lessons: (1) even large companies must heed FEMA’s FDI norms; (2) FEMA penalties can be enormous.

Other cases (not publicized) often involve undervaluation of shares, booking of fictitious loans, or neglecting to repatriate export proceeds. Together, they underscore that FEMA is enforced actively and that all foreign transactions should be fully documented.

Step-by-Step FEMA Filing Process

A simplified FEMA compliance process might follow these steps:

1. Transaction Identification: Determine if the deal is current or capital account (e.g. goods import vs issue of shares).
2. Deal through AD Bank: All foreign payments or receipts go through an RBI-authorized bank, which will assist with forms.
3. Form A2 (for remittances): Fill out Form A2 detailing purpose and amount for any forex purchase. Attach KYC (passport, PAN) and quotes/contracts.
4. FDI (Equity): Foreign investor wires money into India → Company files ARF within 30 days of funds receipt. After allotting shares, file Form FC-GPR (with pricing details) within 30 days.
5. ODI (Investment Abroad): Company fills Form ODI to RBI, submits necessary docs (e.g. Board resolution, valuation, overseas bank details). Then follow ODI guidelines.
6. FC-TRS (Share Transfer): If transferring shares between resident and non-resident, the AD bank files FC-TRS with RBI.
7. ECBs (External Borrowing): Borrower submits letter of undertaking to RBI and then files ECB-2 returns monthly to RBI.
8. Annual FLA: Every May-July, file the Foreign Liabilities & Assets Return detailing share capital owned by residents and non-residents.
9. Keep Records: Retain bank advices, invoices, contracts for at least 8 years. These may be requested in audits.

Each form has a specified timeline and documentation. Working with a chartered accountant or forex expert (and the Authorized Dealer) helps ensure no step is missed. Meticulous compliance “closes the loop” on FEMA and avoids enforcement action.

Frequently Asked Questions (FAQ)

Q: What is the difference between FERA and FEMA?
A: FERA (Foreign Exchange Regulation Act) of 1973 was a restrictive law aimed at conserving India’s foreign exchange; violations were criminal offenses. FEMA (Foreign Exchange Management Act) of 1999 replaced FERA with a more liberal regime, treating forex as an asset. FEMA focuses on management and facilitation of foreign exchange, imposing civil penalties for breaches. In short, FERA controlled forex; FEMA regulates it.

Q: Why was FERA repealed and FEMA introduced?
A: FERA was repealed because it was too stringent for a liberalized economy. Introduced in 1973 during a forex crisis, FERA did not adapt to India’s 1990s economic reforms. FEMA was enacted to simplify forex rules and encourage trade and investment. The change shifted from punitive control to regulated management under RBI oversight.

Q: What is the full form of FERA and FEMA?
A: FERA stands for Foreign Exchange Regulation Act. FEMA stands for Foreign Exchange Management Act.

Q: What are the main objectives of FEMA?
A: FEMA’s objectives are to facilitate external trade and payments and to promote the orderly development of India’s foreign exchange market. It aims to remove barriers to forex flows (with safeguards) and ensure stability in the forex system.

Q: As an individual, how much money can I send abroad?
A: Under RBI’s Liberalised Remittance Scheme (LRS) governed by FEMA, an Indian resident can remit up to USD 250,000 per financial year for approved purposes (education, travel, investment, etc.). NRIs sending money abroad use their NRE accounts (unlimited repatriation) or NRO accounts (up to USD 1 million per year, with tax clearance).

Q: Can an NRI buy agricultural land or farmhouses in India?
A: No. FEMA prohibits NRIs from purchasing agricultural land, plantation properties, or farmhouses in India. NRIs may only buy residential or commercial property. This restriction is strictly enforced.

Q: What are the penalties for violating FEMA?
A: FEMA violations attract civil penalties, typically up to three times the value of the transaction. For example, the ED sought about ₹1,000 crore from Flipkart for FEMA breaches. Additional fines (₹5,000 per day) can apply for ongoing violations. Unlike FERA’s criminal approach, FEMA mainly uses fines, with imprisonment only if fines remain unpaid.

Q: How is FEMA different from income tax laws?
A: FEMA (administered by RBI) regulates foreign exchange and cross-border transactions; income tax laws (administered by CBDT) regulate taxation of income. For instance, FEMA allows NRE/NRO accounts for NRIs, while income tax rules say interest on NRO accounts is taxable. Both must be satisfied separately: one governs how money moves, the other how income is taxed.

Q: What forms do I need to file under FEMA?
A: Common forms include:

• Form A2 for forex purchase/remittance (individuals/companies).ARF and FC-GPR for foreign equity inflows (company reports to RBI).Form FC-TRS for share transfers between resident and non-resident.ODI Form for investments abroad.ECB-2 monthly return for external borrowings.FLA Return annually for company’s foreign liabilities/assets.

Your bank or FEMA consultant can guide you through each filing.

Q: What happens if I file late or incorrectly?
A: Late or incorrect FEMA filings can lead to penalties by RBI/ED. Penalties can include fines (and interest) and possible directions to rectify the violation. It is best to correct mistakes promptly or seek extension in writing from authorities.

Q: Can a resident individual keep foreign currency outside India?
A: A resident going abroad must convert foreign currency holdings to INR before returning (or surrender excess). Under FEMA (and Customs rules), travelers have limits on carrying currency. Long-term residents must also account for foreign assets.