Section 2 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.
The Act splits cross-border money movements into two kinds and treats them very differently. Section 2(e) defines a capital account transaction, and section 2(j) defines a current account transaction as anything that is not a capital account transaction. This article explains those two clauses together with the connected terms export (l), import (p), service (zb) and authorised person (c). It is not a general article on definitions; for that, see our post on key definitions under FEMA, section 2.
A capital account transaction is one that alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India, or assets or liabilities in India of persons resident outside India. A current account transaction is any transaction other than a capital account transaction, and the Act lists four kinds that it includes. Section 5 deals with current account transactions and section 6 with capital account transactions.
About this article
This article is based on the consolidated text of the Act consulted (amendments shown up to Act 50 of 2019). Later amendments should be checked. Clauses (c), (e), (j), (l), (p) and (zb) carry no amending footnote in the copy consulted. If you need help classifying a transaction, our FLA return team can help you check how a particular transaction should be classified and reported.
Capital account transaction (section 2(e))
Section 2(e) reads: a "capital account transaction" means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions referred to in sub-section (3) of section 6.
There are three working ideas in that definition.
- Alters assets or liabilities. The test is the effect on the balance sheet, not the label on the payment.
- Both directions are covered. It captures changes in assets or liabilities outside India of residents, and changes in assets or liabilities in India of non-residents. The words "persons resident in India" and "persons resident outside India" are explained in our separate article on residence under the Act.
- Contingent liabilities count. A guarantee given by a resident in respect of an overseas obligation, for example, creates a contingent liability outside India and so falls within the definition.
Drafting point to note. The clause ends by saying it "includes transactions referred to in sub-section (3) of section 6". In the copy consulted, sub-section (3) of section 6 is omitted (shown by asterisks and a footnote recording its omission by Act 20 of 2015, s. 139, with effect from 15-10-2019). The reference in clause (e) is still printed. This article states only that the clause still carries the reference and that the sub-section it points to is shown as omitted.
Current account transaction (section 2(j))
Section 2(j) defines a current account transaction as a transaction other than a capital account transaction and, without prejudice to the generality of that statement, says such a transaction includes:
- payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business;
- payments due as interest on loans and as net income from investments;
- remittances for living expenses of parents, spouse and children residing abroad; and
- expenses in connection with foreign travel, education and medical care of parents, spouse and children.
The definition works by exclusion. If a transaction does not alter assets or liabilities in the sense of clause (e), it is a current account transaction, and the four items are examples, not a closed list. What may be done with a current account transaction, and what restrictions the Central Government may impose, is in section 5, covered in our article on section 5.
| Feature | Capital account transaction | Current account transaction |
|---|---|---|
| Defined in | Section 2(e) | Section 2(j) |
| Core idea | Alters assets or liabilities outside India of residents, or in India of non-residents | Any transaction that is not a capital account transaction |
| Examples in the Act | Transactions referred to in s.6(3) (omitted in the copy) | Trade payments, interest and net investment income, living expenses abroad of family, travel, education and medical expenses |
| Operative section | Section 6 | Section 5 |
| Who sets the detail | Reserve Bank (debt instruments) or Central Government (others), see section 6 | Central Government may impose reasonable restrictions by rules |
Example. Kavita, resident in India, pays her daughter's tuition abroad. The payment is an expense in connection with education of a child, listed in clause (j)(iv), and is a current account transaction. Her company, Orbit Components Private Limited, lends money to its overseas subsidiary. That alters an asset of a resident outside India and is a capital account transaction under clause (e).
Export and import (clauses (l) and (p))
Clause (l) defines "export", with its grammatical variations and cognate expressions, to mean:
- (i) the taking out of India to a place outside India any goods; and
- (ii) provision of services from India to any person outside India.
Clause (p) defines "import", with its grammatical variations and cognate expressions, to mean bringing into India any goods or services. Note that both definitions cover goods and services. The Act's section 7 on exports (with its own article elsewhere on the site, see our post on export realisation under section 7) uses the same terms.
Service (clause (zb))
Clause (zb) defines "service" as service of any description which is made available to potential users. It includes the provision of facilities in connection with banking, financing, insurance, medical assistance, legal assistance, chit fund, real estate, transport, processing, supply of electrical or other energy, boarding or lodging or both, entertainment, amusement or the purveying of news or other information. It excludes the rendering of any service without charge, and any service under a contract of personal service. Whether a particular activity is a service exported or imported depends on this definition.
Authorised person (clause (c))
Clause (c) says "authorised person" means an authorised dealer, money changer, off-shore banking unit or any other person for the time being authorised under sub-section (1) of section 10 to deal in foreign exchange or foreign securities. Sections 5 and 6 let a person sell or draw foreign exchange "to or from an authorised person", so the identity of that person matters. A later article in this series explains how authorisation is given and revoked.
Why the line matters
Section 5 starts from a position that a person may sell or draw foreign exchange for a current account transaction, subject to reasonable restrictions that may be prescribed. Section 6(1) starts from a similar position for capital account transactions but makes it subject to sub-section (2), under which classes of permissible transactions, limits and conditions are specified or prescribed. The Act itself does not print any of those classes or limits. They are in rules under section 46 and regulations under section 47. Read our article on section 6 for the split of powers.
Need help classifying a cross-border payment?
A payment that looks routine can be a capital account transaction, and the label decides which rules apply and which return reports it. If you are unsure, our FLA return team can review the underlying facts and show how the transaction is classified under the Act.
Key takeaways
- A capital account transaction alters assets or liabilities (including contingent liabilities) outside India of residents, or in India of non-residents (section 2(e)).
- A current account transaction is any transaction other than a capital account transaction (section 2(j)), with four kinds listed as inclusions.
- Section 2(e) still refers to section 6(3), which is shown as omitted in the copy consulted.
- Export and import both cover goods and services (clauses (l) and (p)).
- "Service" excludes a service rendered without charge and a contract of personal service (clause (zb)).
- The practical limits and conditions are in rules and regulations, not the Act.
Read next
- Section 5: current account transactions
- Section 6: capital account transactions, debt and non-debt instruments
- Form FLA Return: purpose, applicability and format
- Capital Account Transactions Under FEMA
- Current Account Transactions Under FEMA
Disclaimer: Based on a consolidated text of the Foreign Exchange Management Act, 1999 showing amendments up to Act 50 of 2019, as consulted on 2 October 2026. Limits, forms, timelines and procedures are set by rules, regulations and Reserve Bank directions made under the Act; they change from time to time and are not covered here. Later amendments should be checked. This article is general information, not legal advice; check the official text before acting.