Section 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.
Section 3 is the Act's basic prohibition. Unless the Act, the rules or regulations, or the Reserve Bank's general or special permission allow it, no person may deal in foreign exchange outside the channel of authorised persons, pay a person resident outside India, receive payment from one other than through an authorised person, or enter into certain financial transactions linked to assets outside India. Everything else in Chapter II is read against this default.
Section 3 says no person may do any of four things unless an exception applies: (a) deal in or transfer foreign exchange or foreign security to anyone who is not an authorised person; (b) make any payment to or for the credit of a person resident outside India; (c) receive, otherwise than through an authorised person, any payment by order or on behalf of such a person; or (d) enter into a financial transaction in India as consideration for an asset outside India. The exceptions are the Act, the rules or regulations, and the Reserve Bank's general or special permission.
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. Section 3 carries no amending footnote in the copy consulted. For help working out whether a payment needs permission, our FEMA advisory team can look at your transaction against the Act and the instruments made under it.
The opening words: the exceptions
Section 3 begins: "Save as otherwise provided in this Act, rules or regulations made thereunder, or with the general or special permission of the Reserve Bank, no person shall". Three routes are open:
- The Act itself. Several later sections allow transactions, for example section 5 for current account transactions and section 6 for capital account transactions.
- Rules or regulations made under the Act. Rules come from the Central Government under section 46 (the detail the Act calls "prescribed") and regulations from the Reserve Bank under section 47 (the detail the Act calls "specified").
- General or special permission of the Reserve Bank. The Act leaves it to the Reserve Bank to give permission to a class of persons (general) or to a particular person (special). The Act does not print the terms, forms or conditions of either.
The section is a prohibition with these exceptions built in. The practical rules, limits and procedures are not in the Act; they sit in rules, regulations and Reserve Bank directions and must be checked there. See also our explanation of authorised persons and AD banks.
The four prohibitions, clause by clause
| Clause | What no person may do (unless excepted) | Key terms |
|---|---|---|
| (a) | Deal in or transfer any foreign exchange or foreign security to any person not being an authorised person | "Foreign exchange", "foreign security", "transfer", "authorised person" (section 2) |
| (b) | Make any payment to or for the credit of any person resident outside India in any manner | "Person resident outside India" (section 2(w)) |
| (c) | Receive, otherwise through an authorised person, any payment by order or on behalf of any person resident outside India in any manner | Explanation: deemed receipt otherwise than through an authorised person |
| (d) | Enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person | Explanation: "financial transaction" defined |
Clause (a): dealing and transferring
Clause (a) bars dealing in or transferring foreign exchange or foreign security to anyone who is not an authorised person. "Transfer" is wide in section 2(ze): it covers sale, purchase, exchange, mortgage, pledge, gift, loan and any other form of transfer of right, title, possession or lien. Our article on the money and instrument terms of section 2 explains those words. The effect of clause (a) is that foreign exchange is meant to move through authorised persons (authorised dealers, money changers, off-shore banking units and others authorised under section 10(1)).
Clause (b): payments to or for the credit of non-residents
Clause (b) bars making any payment to or for the credit of any person resident outside India "in any manner". The words "in any manner" mean that the form of the payment (cash, cheque, set-off, credit in an account) does not take it out of the clause. A payment for a current account purpose is not a contravention when it is allowed by the Act, by the rules or regulations, or with Reserve Bank permission; section 5 is the Act's own allowance.
Clause (c): receiving payments
Clause (c) is printed as "receive otherwise through an authorised person, any payment by order or on behalf of any person resident outside India in any manner". Drafting point: the copy prints "receive otherwise through an authorised person" with no comma after "receive"; it is quoted here as printed. The Explanation to this clause adds a deeming rule. Where any person in, or resident in, India receives any payment by order or on behalf of any person resident outside India through any other person (including an authorised person) without a corresponding inward remittance from any place outside India, that person is deemed to have received the payment otherwise than through an authorised person.
This is the rule that catches set-off arrangements and payments routed through a third party. The mere fact that an authorised person is involved does not save the transaction if there is no corresponding inward remittance from outside India.
Example. Delmar Exports Private Limited, resident in India, is owed an amount by an overseas buyer. A friend of the buyer, who is in India, pays Delmar in rupees in India on the buyer's behalf, and nothing is remitted from abroad. Under the Explanation, Delmar is deemed to have received the payment otherwise than through an authorised person. Whether any permission could apply depends on the opening words, so the facts must be checked against the Act, the rules and regulations and any Reserve Bank permission.
Clause (d): financial transactions linked to assets outside India
Clause (d) prohibits entering into any financial transaction in India as consideration for, or in association with, the acquisition or creation or transfer of a right to acquire, any asset outside India by any person. The Explanation to clause (d) defines "financial transaction" as:
- making any payment to, or for the credit of any person;
- receiving any payment for, by order or on behalf of any person;
- drawing, issuing or negotiating any bill of exchange or promissory note;
- transferring any security; or
- acknowledging any debt.
This is deliberately broad. A payment in India, a negotiated bill, a transfer of a security or an acknowledgement of debt can each be a "financial transaction", and if it is linked to the acquisition, creation or transfer of a right to acquire an asset outside India, clause (d) applies unless an exception covers it. Section 4 separately restricts a resident from acquiring or holding assets outside India; see our article on section 4.
What happens if section 3 is breached
Section 3 states the prohibition; the consequence of a contravention is in section 13, which has its own post. See our guide on contravention and penalties under section 13. This article does not restate the amounts, because the Act's penalty provisions are covered there.
What the Act leaves to rules and regulations
The Act uses three expressions in this section that point to other instruments. The exceptions "rules or regulations made thereunder" are the rules made by the Central Government under section 46 and the regulations made by the Reserve Bank under section 47. For current account transactions, the Foreign Exchange Management (Current Account Transactions) Rules, 2000, as amended from time to time, are made under section 5 and section 46(2)(a); the contents of those rules are not set out here. "General or special permission" is the Reserve Bank's own power and needs no rule.
Need help with a payment or receipt that crosses the border?
Section 3 catches payments and receipts that look ordinary, such as a settlement arranged through a third party. If you are unsure whether a cross-border payment or receipt needs permission, our FEMA advisory team can review the structure and the documents with you before the money moves.
Key takeaways
- Section 3 is a default prohibition with exceptions: the Act, rules or regulations, or the Reserve Bank's general or special permission.
- Clause (a) bars dealing in or transferring foreign exchange or foreign security to a person who is not an authorised person.
- Clause (b) bars any payment to or for the credit of a person resident outside India, in any manner.
- Clause (c), with its Explanation, treats a receipt as made otherwise than through an authorised person where there is no corresponding inward remittance from outside India.
- Clause (d), with its Explanation, covers payments, bills, security transfers and debt acknowledgements linked to assets outside India.
- Limits, forms and procedures are in rules, regulations and Reserve Bank directions, not in the Act.
Read next
- Section 4: holding foreign exchange, foreign security and property outside India
- Section 5: current account transactions
- Section 2: foreign exchange, foreign security, currency and security defined
- Authorized Persons Under FEMA: AD Banks
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.