FEMA Current Account Transactions: What Foreign Companies Can Remit

This article is part of our Complete Guide to FEMA Compliance for Foreign Companies in India. Here we dive deep into the specific rules governing current account transactions, which cover the everyday cross-border payments that foreign companies routinely make from their Indian operations.

Current Account vs. Capital Account: Why the Distinction Matters

The Foreign Exchange Management Act, 1999 (FEMA) divides all cross-border transactions into two categories: current account transactions and capital account transactions. This classification is not academic. It determines the level of regulatory approval required, the documentation obligations, the role of the authorized dealer bank, and the penalties for non-compliance.

Section 2(j) of FEMA defines a current account transaction as any transaction that is not a capital account transaction. While this negative definition may seem circular, the Act provides specific inclusions: payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business; payments due as interest on loans and as net income from investments; remittances for living expenses of parents, spouse, and children residing abroad; and expenses in connection with foreign travel, education, and medical care.

For foreign companies operating in India, the practical implication is that current account transactions, which include payments for imported goods, service fees to overseas vendors, royalty payments, interest on borrowings, and management fees to the parent company, are generally permitted freely. Section 5 of FEMA provides that any person may sell or draw foreign exchange from an authorized dealer if such sale or drawal is a current account transaction. However, the Central Government has imposed specific restrictions through the Foreign Exchange Management (Current Account Transactions) Rules, 2000, organized into three schedules.

Schedule I: Prohibited Transactions

Schedule I lists transactions for which no drawal of foreign exchange is permitted, regardless of amount. These are absolute prohibitions with no exceptions (other than payments from Resident Foreign Currency accounts). Foreign companies operating in India must ensure that none of their cross-border payments fall into these categories:

• Remittance of lottery winnings: Any payment of prize money or winnings from lotteries, racing, riding, or other hobbies is prohibited.
• Remittance of income from racing, riding, or hobbies: This extends beyond winnings to any regular income earned from such activities.
• Remittance for purchase of lottery tickets, banned or proscribed magazines, or football pools: Even if the purchase is for personal use, the drawal of foreign exchange for these items is not permitted.
• Payment of commission on exports toward equity investment in joint ventures or wholly owned subsidiaries abroad: Commission agents facilitating exports cannot be paid in foreign exchange if the payment is toward equity investment overseas.
• Remittance of dividend by any company to which dividend balancing requirements apply: This is a legacy provision affecting specific companies subject to older dividend balancing conditions.
• Payment of export commission on exports under Rupee State Credit Route: Except for exports of tea and tobacco, commission payments on exports under this route are prohibited.

For most foreign companies, Schedule I prohibitions rarely create operational issues because the prohibited categories are narrow and specific. However, compliance teams should be aware of these prohibitions when structuring any unusual payment arrangement.

Schedule II: Transactions Requiring Government Approval

Schedule II identifies transactions that require prior approval from the Government of India before any foreign exchange can be drawn. These represent the middle tier of regulatory control, where the transaction is not prohibited but requires governmental scrutiny:

• Cultural tours: Remittances for cultural tours require Ministry of Human Resources Development approval.
• Advertisement in foreign print media: For purposes other than promotion of tourism, international bidding, or participation by the Government or PSUs in trade fairs or exhibitions abroad, government approval is needed.
• Remittance of freight charges by non-vessel operating multimodal transport operators: These require approval from the Ministry of Commerce.
• Multi-modal transport operator payments: Payments to non-Indian shipping companies for transport of goods with no prescribed Bill of Lading require approval.
• Charter of vessels for operations abroad: Remittance of hiring charges of transponders requires Space Commission approval.

For foreign companies, the most commonly encountered Schedule II restriction is the advertising provision. If your Indian subsidiary plans to advertise in foreign publications (print media) for purposes beyond the specified exceptions, prior government approval is required. However, digital advertising and online media generally fall outside this restriction, as the provision specifically references print media.

Schedule III: Transactions with RBI-Prescribed Limits

Schedule III is the most practically relevant schedule for both individuals and companies. It lists transactions where foreign exchange can be drawn from an authorized dealer bank up to specified limits, with drawals beyond those limits requiring RBI approval.

Key Schedule III Categories and Limits

• Private visits abroad: Up to USD 250,000 per financial year under the Liberalised Remittance Scheme (LRS) for resident individuals.
• Gift or donation remittances: Up to USD 250,000 per financial year.
• Business travel: No specific cap for bona fide business travel, but documentation requirements apply.
• Medical treatment abroad: Up to USD 250,000 per financial year, with additional amounts permissible with a medical institute estimate.
• Studies abroad: Up to USD 250,000 per academic year, or the estimate from the institution, whichever is higher.

For corporate entities (as opposed to individuals), the LRS limits do not directly apply. Indian companies, including subsidiaries of foreign companies, can make current account payments for legitimate business purposes without a specific dollar ceiling, provided the payment is for a genuine business transaction, the authorized dealer bank is satisfied with the documentation, applicable tax obligations (TDS, Form 15CA/15CB) have been met, and the payment does not fall within Schedule I or Schedule II.

Practical Guide: What Foreign Companies Can Remit

Foreign companies operating through Indian subsidiaries or branch offices routinely make several categories of cross-border current account payments. Here is how each category is treated under FEMA's current account framework:

Import Payments for Goods

Payments for imported goods are freely permitted current account transactions. The Indian entity pays through its AD bank against import documentation (Bill of Entry, commercial invoice, transport documents). For imports exceeding USD 100,000, an Importer Exporter Code (IEC) is mandatory. Import payment timelines: Generally, advance payment up to USD 200,000 is permitted without a bank guarantee. For amounts exceeding this, an unconditional bank guarantee is required.

Service Fees and Professional Charges

Payments for services rendered by overseas entities (consulting, legal, accounting, design, technology support) are current account transactions. The Indian entity must deduct tax at source under Section 195 of the Income Tax Act at the applicable rate (20% for fees for technical services, or the relevant DTAA rate, whichever is lower). Form 15CA (online declaration) and Form 15CB (CA certificate) must be filed before the remittance. The AD bank will not process the remittance without these forms.

Royalty and License Fee Payments

Payments for the use of intellectual property, trademarks, patents, and technical know-how from the foreign parent or affiliated entities are current account transactions. These are subject to withholding tax under Section 195 at 10-20% depending on the nature of the payment and applicable DTAA. Since December 2009 (Press Note 8 of 2009), there is no cap on the royalty rate that can be paid under the automatic route (the earlier 5% cap on domestic sales and 8% on export royalty was removed). However, transfer pricing rules under Section 92 require that the royalty rate be at arm's length.

Management and Intercompany Service Fees

Indian subsidiaries frequently pay management fees, shared service charges, or cost-allocation payments to the parent company or regional headquarters. These are current account transactions, but they attract particular scrutiny from two directions: transfer pricing (the fee must be at arm's length and for services actually received) and TDS (withholding at applicable rates). The Indian tax authorities have been increasingly aggressive in challenging management fee deductions where the subsidiary cannot demonstrate specific, identifiable services received in return for the payment.

Interest on External Commercial Borrowings

Interest payments on External Commercial Borrowings (ECBs) from the foreign parent are current account transactions. However, the ECB itself is a capital account transaction requiring compliance with RBI's ECB framework. Interest rates on ECBs were historically subject to an all-in-cost ceiling linked to the benchmark rate; this ceiling was removed by the RBI's Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026 notified on 16 February 2026 — related-party ECB rates must still be at arm's length. Interest payments are subject to withholding tax at 5% under Section 194LC for ECBs, or the applicable DTAA rate.

Dividend Payments

Dividend payments to foreign shareholders are current account transactions once declared. Dividend is subject to withholding tax at 20% under domestic law, or the applicable DTAA rate (typically 10-15% with most countries). The company must file Form 15CA/15CB before remittance. After the abolition of the Dividend Distribution Tax in 2020, dividends are taxable in the hands of the recipient, making DTAA treaty benefits critical for optimizing the effective tax burden.

Tax Collected at Source (TCS) on Remittances: 2025-26 Updates

The Union Budget 2025 introduced significant changes to the TCS regime on foreign remittances:

• The threshold for TCS on LRS remittances has been increased from INR 7 lakh to INR 10 lakh per financial year (effective 1 April 2025).
• For most LRS remittances exceeding INR 10 lakh, TCS remains at 20%.
• TCS on education remittances funded by a loan from a specified financial institution has been removed entirely; self-funded education and medical remittances above INR 10 lakh continue to attract TCS at 5%.
• For overseas tour program packages, TCS applies without threshold — 5% up to INR 10 lakh and 20% beyond (with a further reduction to a flat 2% proposed under Budget 2026-27 effective 1 April 2026).

For corporate entities making business payments, TCS provisions under LRS generally do not apply. However, if an Indian entity is making payments that could be characterized as personal remittances on behalf of employees (such as relocation expenses, education support, or personal travel advances), TCS obligations may arise. Authorized dealer banks are required to collect TCS on applicable transactions and deposit it with the government.

Authorized Dealer Bank Procedures

All current account foreign exchange transactions must be routed through RBI-authorized AD banks. The AD bank serves as the first line of regulatory compliance and has specific obligations:

1. KYC and documentation: The AD bank must verify the identity and legitimacy of the remitter, the nature and purpose of the transaction, and the supporting documentation.
2. Tax compliance check: For payments subject to TDS, the AD bank must verify that Form 15CA has been filed online and that Form 15CB (where applicable) has been issued by a chartered accountant.
3. Purpose code reporting: Every foreign exchange transaction must be reported with an RBI-prescribed purpose code. Incorrect purpose code reporting can trigger regulatory scrutiny.
4. Reporting: AD banks must submit prescribed returns to the RBI, including the R-Return (covering all foreign exchange transactions) and specific reports for LRS, ECB, and trade-related transactions.

The definition of drawal in the FEMA context is broad. It includes not only direct wire transfers but also opening of letters of credit, use of international credit cards, international debit cards, ATM cards, or any other instrument that has the effect of creating a foreign exchange liability.

2025-26 Regulatory Updates

Several significant changes to FEMA's current account framework have been implemented or proposed in 2025-26:

• Export realization timeline extension: In November 2025, the RBI extended the deadline for exporters to realize and repatriate export proceeds from 9 months to 15 months. This provides more flexibility for Indian entities exporting goods or services to foreign affiliates.
• Foreign currency accounts for exporters: Exporters can now open and maintain foreign currency accounts with banks outside India under general permissibility, without requiring specific RBI approval.
• SNRR Account expansion: The scope of permissible transactions through Special Non-Resident Rupee (SNRR) Accounts has been expanded to include both current and capital account transactions. This is significant for foreign companies that maintain SNRR accounts for their India operations.
• INR settlement encouragement: The RBI continues to liberalize regulations encouraging cross-border trade settlement in Indian Rupees. The RBI's March 2025 amendments to FEMA regulations further facilitate rupee-denominated trade invoicing and settlement.
• New Income Tax Act, 2025: The new Income-tax Act, enacted in 2025 and effective from April 1, 2026, consolidates and modernizes direct tax provisions. While the fundamental TDS and withholding tax framework remains similar, companies should review their compliance processes against the updated act provisions.

Common Compliance Mistakes

Foreign companies operating in India frequently encounter these current account compliance issues:

• Failing to file Form 15CA/15CB before remittance: The AD bank will block the remittance, causing payment delays to foreign vendors and parent companies. File these forms proactively, not at the last minute.
• Incorrect purpose code classification: Misclassifying a royalty payment as a service fee or vice versa can trigger RBI queries and potential FEMA compounding proceedings.
• Ignoring TDS obligations on current account payments: All cross-border payments to non-residents are potentially subject to TDS under Section 195. The withholding obligation applies regardless of whether the recipient has a permanent establishment in India.
• Making payments without supporting documentation: Every foreign exchange drawal must be supported by an underlying contract, invoice, or other documentary evidence. AD banks are required to verify this documentation.
• Confusing LRS limits with corporate payment limits: The USD 250,000 LRS limit applies to resident individuals, not to corporate entities. Indian companies can make unlimited current account payments for legitimate business purposes, subject to documentation and tax compliance.

Key Takeaways

• Current account transactions (trade payments, service fees, royalties, interest, dividends) are generally freely permitted under Section 5 of FEMA, subject to three schedules of restrictions: prohibited (Schedule I), government-approved (Schedule II), and RBI-limited (Schedule III).
• For corporate entities, there is no specific dollar ceiling on current account payments. The key requirements are genuine business purpose, proper documentation, tax compliance (TDS, Form 15CA/15CB), and routing through an authorized dealer bank.
• Every cross-border payment must be classified with the correct RBI purpose code. Misclassification can trigger FEMA compounding proceedings and penalties. Engage FEMA compliance specialists for complex payment structures.
• The 2025-26 regulatory updates, including the 15-month export realization timeline, expanded SNRR account scope, and new TCS thresholds (INR 10 lakh), provide greater operational flexibility for foreign companies.
• Transfer pricing scrutiny on intercompany payments (management fees, royalties, service charges) has intensified. Ensure all cross-border current account payments between related entities are at arm's length with robust documentation.