Every time someone sends money abroad for studies, buys foreign shares, or a company borrows from a foreign bank, foreign exchange rules apply. In India, these rules are set by the Foreign Exchange Management Act (FEMA), 1999, which replaced the strict FERA. Exams ask about the shift from FERA to FEMA, current and capital account transactions, the Liberalised Remittance Scheme (LRS) and rupee convertibility. This post explains them in simple words. It ends with 15 previous year questions.
Key Points (Quick Revision)
- FERA, 1973 was replaced by FEMA, 1999, which came into force on 1 June 2000.
- FERA violations were criminal offences; FEMA violations are civil offences.
- The RBI regulates foreign exchange under FEMA; the Enforcement Directorate enforces it.
- Under LRS, a resident individual can send up to US$ 2,50,000 abroad in a financial year.
- The rupee is fully convertible on the current account since 1994, but only partly on the capital account.
1. From FERA to FEMA
| Point | FERA, 1973 | FEMA, 1999 |
|---|---|---|
| Aim | To conserve scarce foreign exchange | To manage foreign exchange and support trade and payments |
| Nature of offence | Criminal - arrest and jail | Civil - mainly penalties |
| Approach | Everything banned unless allowed | Everything allowed unless restricted |
| Context | Shortage of foreign exchange | After the 1991 reforms and growing forex reserves |
FEMA came into force on 1 June 2000. The first FERA was passed in 1947 and replaced by the stricter FERA of 1973.
2. Who does what under FEMA
- Central government - makes rules, especially on current account transactions.
- RBI - regulates capital account transactions in consultation with the government and authorises banks (Authorised Dealers) to deal in foreign exchange.
- Enforcement Directorate (ED) - investigates violations of FEMA.
3. Current account vs capital account transactions
| Type | Meaning | Examples | Rule |
|---|---|---|---|
| Current account | Day-to-day payments that do not change assets or liabilities abroad | Imports, exports, travel, education fees, medical treatment, gifts | Freely allowed, except a few that are banned or limited |
| Capital account | Transactions that change a person's assets or liabilities abroad | Buying foreign shares or property, foreign loans, FDI | Allowed only within limits set by the RBI and government |
4. Liberalised Remittance Scheme (LRS)
- Introduced in 2004, with a limit of US$ 25,000 a year.
- The limit has been raised over time and now stands at US$ 2,50,000 per financial year per resident individual.
- It covers both current purposes (travel, studies, medical, gifts) and some capital purposes (shares, property abroad).
- Money cannot be sent for banned purposes such as lottery, betting or to certain countries flagged as risky.
- Tax Collected at Source (TCS) applies above a threshold for many purposes; rates and limits change through Budgets, so check the latest rules.
5. Rupee convertibility
- Convertibility means the freedom to change rupees into foreign currency and back at market rates.
- India made the rupee fully convertible on the current account in August 1994, accepting Article VIII of the IMF's rules.
- On the capital account, convertibility is partial, to protect the economy from sudden outflows.
- The Tarapore Committees (1997 and 2006) gave roadmaps for moving towards capital account convertibility.
6. Penalties under FEMA
- A person who violates FEMA can be fined up to three times the amount involved, or up to ₹2 lakh where the amount cannot be measured.
- If the penalty is not paid, civil imprisonment can follow.
- Many minor violations can be compounded (settled by paying a fee) with the RBI.
- Appeals go to an Appellate Tribunal and then to the High Court.
For hiding black money abroad, separate laws such as the Black Money Act, 2015 and the PMLA apply.
7. Why FEMA matters
- It made foreign exchange rules simpler and friendlier for trade and investment.
- It allows Indians to study, travel and invest abroad within clear limits.
- With partial capital controls, India keeps a safety net against sudden currency crises.
8. Previous year questions
- Which Act replaced FERA? – FEMA, 1999
- When did FEMA come into force? – 1 June 2000
- Violations under FEMA are of what nature? – Civil
- Violations under FERA were of what nature? – Criminal
- Which body enforces FEMA? – Enforcement Directorate
- Which body regulates capital account transactions under FEMA? – RBI
- When was the Liberalised Remittance Scheme introduced? – 2004
- What is the current LRS limit per financial year? – US$ 2,50,000
- What was the LRS limit when it began? – US$ 25,000
- When did the rupee become fully convertible on the current account? – August 1994
- Which IMF Article did India accept for current account convertibility? – Article VIII
- Which committees gave roadmaps for capital account convertibility? – Tarapore Committees (1997, 2006)
- Is buying property abroad a current or capital account transaction? – Capital account
- Is paying foreign education fees a current or capital account transaction? – Current account
- What is the maximum penalty under FEMA where the amount is known? – Three times the amount involved
9. How to revise this topic
Start with the shift: FERA 1947 and 1973 (criminal, conserve forex) to FEMA 1999 (civil, manage forex), in force 1 June 2000.
Next, learn the roles: government for current account rules, RBI for capital account, ED for enforcement.
Then fix LRS: 2004, US$ 25,000 at start, now US$ 2,50,000 per financial year; TCS above a threshold.
Finally, remember convertibility: full on current account since August 1994 (IMF Article VIII), partial on capital account; Tarapore Committees 1997 and 2006.
10. Frequently Asked Questions
What is FEMA?
The Foreign Exchange Management Act, 1999 governs foreign exchange in India. It replaced FERA, came into force on 1 June 2000, and treats violations as civil offences.
What is the difference between FERA and FEMA?
FERA aimed to conserve foreign exchange and treated violations as criminal offences. FEMA aims to manage foreign exchange, allows most transactions and treats violations as civil offences.
What is the LRS limit?
Under the Liberalised Remittance Scheme, a resident individual can send up to US$ 2,50,000 abroad in a financial year for permitted purposes.
Is the Indian rupee fully convertible?
The rupee is fully convertible on the current account since August 1994, but only partly convertible on the capital account.
Who enforces FEMA?
The Enforcement Directorate investigates FEMA violations, while the RBI regulates foreign exchange transactions under the Act.
For more Economy topics in simple language, see our Exchange Rate and Forex Reserves, Balance of Payments and Black Money and Benami Law posts, or browse the Economy section. Preparing for a bank exam? Start with the RBI Grade B guide or join the 100 Hour GS Course.