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 prohibitions and permissions in the Act are written in terms of "foreign exchange", "foreign security", "currency" and "security". Each is a defined term in section 2, and the definitions are wider than the everyday meaning. This article covers the money and instrument terms only: clauses (h), (i), (m), (n), (o), (q), (za) and (ze). It is not a general article on definitions, for which see our post on key definitions under FEMA, section 2.
Foreign exchange means foreign currency (any currency other than Indian currency) and also includes foreign-currency deposits and balances and certain drafts, travellers cheques, letters of credit and bills of exchange. "Currency" is a wide term that covers cheques, drafts, cards and similar instruments, while "currency notes" means cash in the form of coins and bank notes. "Security" and "foreign security" are separate definitions, and "transfer" covers sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien.
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. The clauses discussed here carry no amending footnote in the copy consulted, apart from the printing note on clause (za) mentioned below. For the transaction terms, see our article on capital account and current account transactions. For help applying these terms to a structure, our FEMA advisory team can assist.
The terms at a glance
| Clause | Term | What it covers |
|---|---|---|
| 2(h) | currency | All currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments as may be notified by the Reserve Bank |
| 2(i) | currency notes | Cash in the form of coins and bank notes |
| 2(m) | foreign currency | Any currency other than Indian currency |
| 2(n) | foreign exchange | Foreign currency, and three listed categories of deposits, balances and instruments |
| 2(o) | foreign security | Securities denominated or expressed in foreign currency, including those whose return is payable in Indian currency |
| 2(q) | Indian currency | Currency expressed or drawn in Indian rupees, excluding two kinds of special notes |
| 2(za) | security | Shares, stocks, bonds, debentures, Government securities, savings certificates, deposit receipts, units and certificates of title |
| 2(ze) | transfer | Sale, purchase, exchange, mortgage, pledge, gift, loan or other transfer of right, title, possession or lien |
Currency and currency notes (clauses (h) and (i))
Clause (h) defines "currency" to include a long list: currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards, or such other similar instruments as may be notified by the Reserve Bank. The last words give the Reserve Bank a notification power to widen the list. Under section 2(t), "notify" means to notify in the Official Gazette. The Act does not print any further instrument, so the current list of notified instruments has to be checked from the notifications.
Clause (i) is narrower. "Currency notes" means and includes cash in the form of coins and bank notes. So a cheque is "currency" under clause (h) but is not "currency notes" under clause (i). The distinction matters wherever a later provision speaks only of one of them.
Foreign currency and Indian currency (clauses (m) and (q))
Foreign currency is defined by exclusion: any currency other than Indian currency (clause (m)). Indian currency is defined in clause (q) as currency which is expressed or drawn in Indian rupees, but it does not include special bank notes and special one rupee notes issued under section 28A of the Reserve Bank of India Act, 1934 (2 of 1934). The reference is quoted as printed; check the current law for the corresponding provision of that Act.
Foreign exchange (clause (n))
Clause (n) starts from foreign currency and then says foreign exchange "includes":
- deposits, credits and balances payable in any foreign currency;
- drafts, travellers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency; and
- drafts, travellers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency.
The third category is the one many readers miss. An instrument drawn outside India by a bank, institution or person there is within foreign exchange even though it is payable in Indian currency. The test is the place of drawing and the drawer for category 3, and the currency of payment for categories 1 and 2.
Example. A balance of an amount in a foreign-currency account kept by a resident with an authorised person is "deposits, credits and balances payable in any foreign currency", so it is foreign exchange. A draft drawn by an overseas bank in favour of an Indian importer, payable in rupees, falls under the third category. Section 3 then regulates dealing in and transferring such foreign exchange; see our article on section 3.
Foreign security (clause (o))
"Foreign security" means any security, in the form of shares, stocks, bonds, debentures or any other instrument, denominated or expressed in foreign currency. It also includes securities expressed in foreign currency, but where redemption or any form of return such as interest or dividends is payable in Indian currency. The effect is that a security does not stop being a foreign security because its returns are paid in rupees; the question is whether it is denominated or expressed in foreign currency.
Security (clause (za))
"Security" is defined by a list: shares, stocks, bonds and debentures; Government securities as defined in the Public Debt Act, 1944 (18 of 1944); savings certificates to which the Government Savings Certificates Act, 1959 (46 of 1959) applies; deposit receipts in respect of deposits of securities; and units of the Unit Trust of India established under sub-section (1) of section 3 of the Unit Trust of India Act, 1963 (52 of 1963) or of any mutual fund. It includes certificates of title to securities. It does not include bills of exchange or promissory notes other than Government promissory notes, or any other instruments which may be notified by the Reserve Bank as security for the purposes of the Act. Read the sentence carefully: the Reserve Bank's power is to notify other instruments as security.
Printing point. The copy marks the Unit Trust of India Act with an asterisk, and the note is printed as "Now see the Unit Trust of India (transfer of Undertaking of Repeal) Act, 2002 (58 of 2002)". The title in the note is printed as it appears in the copy. Check the current law for the corresponding provision of each Act named in this clause.
Transfer (clause (ze))
"Transfer" includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien. The word "includes" and the closing "any other form" make this a wide definition. A pledge or a loan of foreign exchange, for example, is a transfer for the purposes of the Act even though no ownership changes hands. This is important for section 3(a) (transfer of foreign exchange or foreign security to a person who is not an authorised person) and for section 4, which restricts a resident from acquiring, holding, owning, possessing or transferring foreign exchange, foreign security or immovable property outside India. Our article on section 4 deals with that provision.
What the Act does not say
The Act does not list which currencies are foreign, does not give a value of any holding that is allowed, and does not explain how any instrument is to be reported. Those matters sit in rules made by the Central Government under section 46 and regulations made by the Reserve Bank under section 47, and in notifications of the Reserve Bank under clauses (h) and (za).
Need help classifying an instrument or a holding?
Whether an instrument is "foreign exchange", "foreign security" or "security" decides which provision of the Act applies to it, and mislabelling can lead to a contravention. If a cross-border transaction involves unusual instruments, our FEMA advisory team can read the definitions against the facts and point you to the right rules and regulations.
Key takeaways
- "Currency" is wide and includes cheques, drafts, cards and similar instruments; "currency notes" means only coins and bank notes.
- Foreign currency is any currency other than Indian currency; foreign exchange adds three categories of deposits, balances and instruments.
- A foreign security remains one even if its returns are paid in Indian currency.
- "Security" has a defined list and the Reserve Bank can notify other instruments as security.
- "Transfer" includes sale, purchase, exchange, mortgage, pledge, gift, loan and any other form of transfer of right, title, possession or lien.
- Check later amendments and Reserve Bank notifications, which are outside this copy.
Read next
- Key Definitions Under FEMA: Section 2
- Section 2: capital account and current account transactions
- Section 2: person resident in India and outside India
- Section 3: dealing in foreign exchange and payments to non-residents
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.