Current Account Transaction Rules Under FEMA
Three Schedules, three outcomes: prohibited, Government approval, RBI approval above a limit.
FEMA treats current account transactions as free by default. Section 5 of the Act lets any person draw foreign exchange for a current account transaction, except where the Central Government restricts it in the public interest, and it does that through one instrument: the Foreign Exchange Management (Current Account Transactions) Rules, 2000.
The Rules work through three Schedules. Learn which Schedule does what and who holds the approval power for each; that single map answers most questions on this topic.
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The Three Schedules
Schedule I
Status
Prohibited
Who approves
No one; drawal is barred
Rule
Rule 3
Schedule II
Status
Restricted
Who approves
Government of India (prior approval)
Rule
Rule 4
Schedule III
Status
Allowed up to limits; beyond them needs approval
Who approves
Reserve Bank of India (prior approval above the limit)
Rule
Rule 5
| Schedule | Status | Who approves | Rule |
|---|---|---|---|
| Schedule I | Prohibited | No one; drawal is barred | Rule 3 |
| Schedule II | Restricted | Government of India (prior approval) | Rule 4 |
| Schedule III | Allowed up to limits; beyond them needs approval | Reserve Bank of India (prior approval above the limit) | Rule 5 |
Schedule I: Prohibited Outright
No authorised person may release foreign exchange for these.
- check_circleRemittance out of lottery winnings.
- check_circleRemittance of income from racing, riding or any other hobby.
- check_circleRemittance for purchase of lottery tickets, banned or proscribed magazines, football pools, sweepstakes and the like.
- check_circlePayment of commission on exports made towards equity investment in joint ventures or wholly owned subsidiaries abroad of Indian companies.
- check_circleRemittance of dividend by a company to which dividend balancing applies.
- check_circlePayment of commission on exports under the Rupee State Credit Route, except commission up to 10% of invoice value on exports of tea and tobacco.
- check_circlePayment related to 'call back services' of telephones.
- check_circleRemittance of interest income on funds held in the Non-Resident Special Rupee Account scheme.
Rule 3 Also Bars Nepal and Bhutan
Alongside Schedule I, Rule 3 prohibits drawing foreign exchange for travel to Nepal or Bhutan, and for a transaction with a person resident in Nepal or Bhutan. Candidates who learn only the Schedule miss this.
Which Schedule, who approves. No signup.
Schedule II: Government Approval
Schedule II lists transactions that need prior approval of the Government of India, each tied to the ministry that controls it. They are institutional rather than personal: cultural tours, advertisement in foreign print media by State Governments and their PSUs above a threshold, freight of vessels chartered by a PSU, remittances by multi-modal transport operators to their agents abroad, transponder hire by TV channels and internet service providers, container detention charges above the Director General of Shipping's rate, sports prize money or sponsorship above a threshold, and P&I Club membership.
None of these can be routed through LRS. The LRS Master Direction states that the scheme is not available for anything prohibited under Schedule I or restricted under Schedule II.
Schedule III: RBI Approval Above These Limits
For persons other than individuals. Within the limit, the AD bank handles the remittance; above it, RBI's prior approval is needed.
| Transaction | RBI approval needed when it exceeds |
|---|---|
| Donations (for specified purposes such as educational chairs) | 1% of foreign exchange earnings of the previous three years, or USD 5,000,000, whichever is less |
| Commission to agents abroad on sale of residential flats or commercial plots in India | USD 25,000 or 5% of the inward remittance, whichever is more |
| Consultancy services procured from outside India | USD 10,000,000 per project for infrastructure projects; USD 1,000,000 per project for others |
| Reimbursement of pre-incorporation expenses | 5% of investment brought into India or USD 100,000, whichever is higher |
Schedule III for Individuals
For individuals, Schedule III links the current account purposes (private visits, gifts, employment, emigration, maintenance of relatives, business travel, medical treatment, studies) to the LRS limit of USD 250,000 a financial year. Whatever an individual has already remitted under LRS in the year reduces this limit.
Emigration, medical treatment and studies may exceed the limit if the country of emigration, the medical institution or the university requires it.
How CCFE Tests This
The standard question names a transaction and asks which Schedule it falls in, or who approves it. The trap is swapping the approvers: Schedule II goes to the Government of India, Schedule III to RBI. A second trap is the 'whichever is less' versus 'whichever is higher' wording in the Schedule III limits; options often flip it.
FAQs
What is Schedule I of the Current Account Transactions Rules?expand_more
The list of prohibited current account transactions, such as remittance of lottery winnings, purchase of lottery tickets and income from racing. No foreign exchange can be drawn for them.
Who approves Schedule II transactions under FEMA?expand_more
The Government of India. Rule 4 bars drawing foreign exchange for a Schedule II transaction without its prior approval.
What is the difference between Schedule II and Schedule III?expand_more
Schedule II transactions always need Government of India approval. Schedule III transactions are allowed up to stated limits, and only amounts above those limits need RBI approval.
Can a company donate abroad without RBI approval?expand_more
Yes, up to 1% of its foreign exchange earnings of the previous three years or USD 5,000,000, whichever is less, for the specified purposes. Above that, RBI's prior approval is needed.
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