The Foreign Exchange Management Act 1999 (FEMA) classifies foreign exchange transactions into Current Account Transactions and Capital Account Transactions. Current account transactions (relating to trade, payments, and ordinary remittances) are generally permissible, unlike capital account transactions which require RBI approval.
What are Current Account Transactions?
Current account transactions include:
- Payments for imports and exports of goods and services
- Remittances for living expenses of family members abroad
- Transfers related to foreign travel, education, and medical treatment abroad
- Income flows: dividends, interest, profit remittances
- Short-term banking/credit facilities
Capital account transactions (investments, borrowings, loans) are regulated separately.
Three-Schedule Framework Under FEMA (Current Account) Rules 2000
| Schedule | Nature | Approval Required |
|---|---|---|
| Schedule I (Prohibited) | Transactions completely prohibited (lottery tickets, forbidden magazines, etc.) | Not permitted at all |
| Schedule II (Government Approval) | Require prior approval from Central Government (concerned ministry) | Ministry of Finance approval |
| Schedule III (RBI Approval / AD Bank) | Require prior approval from RBI or Authorised Dealer bank | RBI or AD Bank approval within limits |
Schedule III: Common Remittances Requiring AD Bank Approval
Schedule III transactions are permissible through Authorised Dealer (AD) banks up to specified limits:
- Foreign travel: Up to US$25,000 per trip for business travel
- Medical treatment abroad: Actual expenditure or estimate from hospital (no limit if genuine)
- Education abroad: Actual tuition and living expenses (no limit if genuine)
- Gifts and donations: Up to US$5,000 per year
- Maintenance of close relatives abroad: US$1 lakh per year
Liberalised Remittance Scheme (LRS)
LRS allows resident individuals (not companies/firms) to remit up to USD 2,50,000 per financial year for any permissible current or capital account transaction:
- Foreign travel, education, medical treatment
- Investment in foreign securities, property, bank accounts abroad
- Gifts and donations to non-residents
- Maintenance of overseas relatives
LRS cannot be used for: remittances to countries under FATF action, foreign exchange trading/margin trading, lottery.
TCS on LRS Remittances (Finance Act 2023)
Tax Collection at Source (TCS) applies to LRS remittances at the time of remittance:
| Purpose | TCS Rate (above Rs.7 lakh) |
|---|---|
| Education (loan from financial institution) | 0.5% |
| Education (own funds) | 5% |
| Medical treatment | 5% |
| All other LRS purposes (overseas tours, investments) | 20% |
TCS collected is creditable against income tax payable by the remitter. TCS is not an additional tax — it is an advance tax mechanism.
Form A2: Declaration for Current Account Remittances
Persons sending remittances through AD banks must submit Form A2 (Declaration for Remittance) stating:
- Purpose of remittance
- Confirmation that transaction is current account (not prohibited or capital account)
- Amount and currency
- Beneficiary details
AD banks are not required to obtain prior RBI approval for most current account transactions — they act as agents and are responsible for verifying documentation.
Prohibited Transactions (Schedule I)
The following remittances are completely prohibited under Schedule I:
- Remittances for purchase of lottery tickets, sweepstakes, etc.
- Remittances for call-back phone services
- Remittances for banned/obscene material
- Remittances to countries FATF has designated as non-cooperative