Rule 3 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rule 3 says that no person may draw foreign exchange for a transaction listed in Schedule I, for travel to Nepal or Bhutan, or for a transaction with a person resident in Nepal or Bhutan. Schedule I lists eight such transactions, from lottery winnings to "Call Back Services". This article reads rules 1 to 3 and Schedule I as they stand today and explains what the other three provisions of the Rules do, so that you know which of the next articles to read. If you want a transaction checked against these Rules before you instruct the bank, our FEMA advisory desk can do that.
Rule 3 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 prohibits the drawal of foreign exchange for any transaction in Schedule I, for a trip to Nepal or Bhutan, and for a transaction with a person resident in Nepal or Bhutan. The Reserve Bank can exempt only the Nepal and Bhutan transaction limb, by special or general order. It applies to every person, and a bank (an authorised person) cannot lawfully release the exchange.
Which text is being explained
The Rules are made by the Central Government under section 5 and sub-section (1) and clause (a) of sub-section (2) of section 46 of the Foreign Exchange Management Act, 1999, in consultation with the Reserve Bank. Read our articles on section 5 (current account transactions) and section 46 (the power of the Central Government to make rules) with this one.
The text used here is the one reproduced by the Reserve Bank in Annex 1 of its Master Direction - Other Remittance Facilities, updated as on May 06, 2026. The Annex describes the Rules as Notification No. G.S.R. 381(E) dated May 3, 2000, "as amended from time to time". Later amendments and circulars should be checked on the Reserve Bank and Gazette sites. Rule 1 names the Rules and says they came into effect on 1 June 2000.
What "drawal" means
Rule 2(b) defines "drawal" as drawal of foreign exchange from an authorised person. The definition goes further than a cash purchase of dollars. It includes opening a letter of credit, and use of an international credit card, an international debit card, an ATM card "or any other thing by whatever name called" that has the effect of creating a foreign exchange liability. So a prohibition on drawal reaches a card swipe abroad just as it reaches a wire from an account in India. Rule 2(d) adds that words not defined in the Rules but defined in the Act carry the Act's meaning; see our article on section 2 of the Act.
What rule 3 prohibits
Rule 3 prohibits drawal of foreign exchange by any person for three purposes:
- a transaction specified in Schedule I;
- a travel to Nepal and/or Bhutan; or
- a transaction with a person resident in Nepal or Bhutan.
There is one proviso: the prohibition in clause (c), the transaction with a person resident in Nepal or Bhutan, may be exempted by the Reserve Bank, on such terms and conditions as it considers necessary, by special or general order. The proviso does not mention clause (a) or clause (b), so Schedule I items and travel to Nepal or Bhutan are not covered by that exemption power as the text is printed.
Schedule I: the eight prohibited transactions
Schedule I, headed "Transactions which are Prohibited (see Rule 3)", is printed as follows (shortened only in layout):
| No. | Prohibited transaction as printed |
|---|---|
| 1 | Remittance out of lottery winnings |
| 2 | Remittance of income from racing, riding or any other hobby |
| 3 | Remittance for purchase of lottery tickets, banned or proscribed magazines, football pools, sweepstakes, etc. |
| 4 | Payment of commission on exports made towards equity investment in Joint Ventures or Wholly Owned Subsidiaries abroad of Indian companies |
| 5 | Remittance of dividend by any company to which the requirement of dividend balancing is applicable |
| 6 | Payment of commission on exports under the Rupee State Credit Route, except commission up to 10% of invoice value of exports of tea and tobacco |
| 7 | Payment related to "Call Back Services" of telephones |
| 8 | Remittance of interest income on funds held in Non-Resident Special Rupee (Account) Scheme |
Three points deserve attention. First, items 4 and 6 are about commission on exports. Item 4 bars commission paid on exports that are made as an equity investment in a joint venture or wholly owned subsidiary abroad; item 6 bars commission on exports under the Rupee State Credit Route, with one carve-out for tea and tobacco as printed. Second, item 5 depends on "the requirement of dividend balancing", and the Rules do not explain that expression; the text is silent, so check the sector or scheme that imposes it. Third, item 8 is the only item that deals with interest on a special rupee account scheme, and the Rules print it without any exception.
Example
Mehta Trade Links Pvt Ltd, a company in Pune, plans to pay an overseas agent a sales commission on exports that it is making as an equity investment into its wholly owned subsidiary in a foreign country. The bank will look at item 4 of Schedule I. Because the commission is on exports made towards equity investment in a wholly owned subsidiary abroad, rule 3 prohibits the drawal, and the bank cannot release the exchange. By contrast, if the same company simply wanted to pay a foreign agent a commission on ordinary exports, item 4 would not be the relevant provision; the company would have to check the other Schedules and the Master Direction.
In a second illustration, Anita, a resident individual, wins a prize in a lottery and asks her bank to send the winnings abroad. Item 1 of Schedule I prohibits that remittance. The Rules print no way to obtain approval for a Schedule I item.
How Schedule I fits with the other provisions
Rule 3 is the first of the filters in the Rules. The others work as follows:
- Rule 4 and Schedule II require the prior approval of the Government of India for the transactions listed there. See our article on remittances needing Central Government approval.
- Rule 5 and Schedule III deal with the facilities for individuals, with limits and proceduralised approvals from the Reserve Bank. See remittance limit for individuals and remittances by companies and firms.
- Rule 6 makes an exception for funds held in an Exchange Earners' Foreign Currency account, and rule 7 deals with use of an international credit card while outside India.
The Schedule I prohibition is the strictest of the lot, because the other two Schedules allow the drawal after approval or within a limit.
Common mistakes
- Treating a card payment as outside the Rules. Rule 2(b) puts cards inside "drawal".
- Assuming that the Nepal and Bhutan prohibition is absolute. The proviso lets the Reserve Bank exempt clause (c) by order; look for the order before declining the transaction, and note that the proviso does not extend to travel to those countries.
- Assuming that a transaction outside Schedule I is automatically allowed. It may sit in Schedule II or III, and the Reserve Bank's Master Directions add procedure. See our wider guides on current account transactions under FEMA and restricted transactions under FEMA.
Need help with a remittance that may be prohibited?
If you are not sure whether a payment falls in Schedule I or in one of the permitted lists, our FEMA advisory team can read the facts against the Rules and tell you what the bank is likely to require before you instruct it. Getting this wrong after the event is far costlier than checking first.
Key takeaways
- Rule 3 prohibits the drawal of foreign exchange for Schedule I transactions, travel to Nepal and/or Bhutan, and transactions with a person resident in Nepal or Bhutan.
- Schedule I lists eight items; item 6 has a printed exception for tea and tobacco commission up to 10% of invoice value.
- "Drawal" includes letters of credit and international cards, not only cash purchases of foreign exchange.
- Only the Nepal/Bhutan transaction limb can be exempted by the Reserve Bank, by special or general order.
- Rules 4 to 7 and Schedules II and III deal with approvals and limits for everything else.
Read next
- Remittances needing Central Government approval: rule 4 and Schedule II
- Remittance limit for individuals: rule 5 and Schedule III
- FEMA current account transactions: permissible payments and remittances
- Section 5 of FEMA: current account transactions
Disclaimer: Based on the rules, regulations and Reserve Bank Master Directions under the Foreign Exchange Management Act, 1999 that this article names, each in the version and up to the date stated in the article, as consulted on 2 October 2026. Some texts are third-party copies or older prints and are identified as such. Limits, forms and time limits change by amendment and circular; later changes should be checked on the Reserve Bank and Gazette sites. This article is general information, not legal advice; check the official text before acting.