What is the difference between a current account transaction and a capital account transaction under FEMA?
GradeHunt_TeamGradeHunt Team · · CS Executive
In CS Executive ECIPL, FEMA is confusing me. Paying for a child's college fees abroad and buying shares of a US company both send money out of India, so why is one current account and the other capital account? Who controls each kind?
The test is whether the transaction changes assets or liabilities across the border.
Capital account transaction (Section 2(e), FEMA, 1999): a transaction that alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India, or the assets or liabilities in India of persons resident outside India.
Current account transaction (Section 2(j)): any transaction other than a capital account transaction. The Act gives examples:
1. Payments in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business.
2. Payments due as interest on loans and net income from investments.
3. Remittances for living expenses of parents, spouse and children living abroad.
4. Expenses for foreign travel, education and medical care of parents, spouse and children.
Your two examples:
- College fees for a child abroad: money is spent, no asset or liability is created abroad. Current account.
- Buying shares of a US company: the resident now owns an asset outside India. Capital account.
More examples:
- An exporter receiving payment for goods shipped: current account.
- An Indian company taking a loan from a foreign lender: creates a liability, so capital account.
- Interest paid on that loan: current account (clause 2 above).
Who regulates:
- Current account (Section 5): freely allowed, but the Central Government can impose reasonable restrictions in consultation with the RBI. It has done so through the Foreign Exchange Management (Current Account Transactions) Rules, 2000, which list prohibited transactions and those needing approval.
- Capital account (Section 6): allowed only to the extent permitted. Since the 2015 amendment (in force from 15 October 2019), the Central Government regulates non-debt instruments in consultation with the RBI, and the RBI regulates debt instruments in consultation with the Government.
For resident individuals, most remittances of both kinds also count towards the RBI's Liberalised Remittance Scheme limit of USD 2,50,000 per financial year. Studies abroad, medical treatment abroad and emigration are exceptions: the bank can release more than this limit if the university, hospital or country of emigration requires it.
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