Foreign Exchange and Trade in India

Questions and Answers

What is the primary objective of the Foreign Exchange Management Act (FEMA) of 1999?

To eliminate all forex transactions

To restrict foreign trade

To consolidate and amend foreign exchange laws (correct)

To control RBI's monetary policies

Who exercises trade control in India under FEMA?

Reserve Bank of India

Ministry of Finance

Ministry of External Affairs

Director General of Foreign Trade (correct)

Which category of Authorized Dealers is allowed to carry out all permissible current and capital account transactions?

AD Category-II

AD Category-III

AD Category-I (correct)

Full Fledged Money Changer

Which of the following is NOT classified as an Authorized Dealer under FEMA?

Individual Forex Investors Signup and view all the answers

What must be authorized by the Reserve Bank of India for conducting foreign exchange transactions?

Authorized Persons Signup and view all the answers

What function is specific to Category A Branches of Authorized Dealer banks?

Maintaining Nostro and Vostro Accounts Signup and view all the answers

What distinguishes AD Category-II from AD Category-I?

AD Category-II handles non-trade related current account transactions. Signup and view all the answers

Which of the following branches can purchase and sell forex in the open market?

Category A Branches Signup and view all the answers

What is the maximum transaction charge for the originating bank when funds are transferred up to ₹50,000?

₹5 Signup and view all the answers

If a beneficiary does not maintain an account with Nepal SBI Bank Limited, what is the charge for remittances above ₹5,000?

₹75 Signup and view all the answers

How much does State Bank of India charge per transaction when sending funds up to ₹50,000?

₹20 Signup and view all the answers

What happens to the transaction charge of ₹20 from SBI when a beneficiary maintains an account with NSBL?

The amount is shared equally between SBI and NSBL Signup and view all the answers

For transactions greater than ₹50,000, which charges are applicable?

Charges prescribed by SBI apply Signup and view all the answers

What is the definition of a person resident in India according to FEMA?

A person residing in India for more than 182 days during the preceding Financial Year Signup and view all the answers

According to FEMA, who qualifies as a Non-Resident Indian (NRI)?

An Indian citizen residing abroad with no intention to return Signup and view all the answers

Which of the following is NOT a criteria for determining an individual's tax resident status in India?

Residency in another country for over 90 days Signup and view all the answers

What does the term 'Foreign Currency Account' refer to?

An account held in currency other than that of India, Nepal, or Bhutan Signup and view all the answers

What was the recent amendment to the period of stay for Indian citizens to avoid residency in India?

The period was increased from 60 to 120 days if income exceeds Rs. 15 lakhs Signup and view all the answers

Under what condition is a person deemed to be a resident of India for tax purposes?

If they have stayed in India for 182 days or more in the previous year Signup and view all the answers

Which transaction is classified as a Current Account transaction under FEMA?

Payment due in connection with foreign trade Signup and view all the answers

What is excluded from the definition of a Person of Indian Origin (PIO)?

Citizens of Pakistan Signup and view all the answers

What does a person need to prove to qualify as a Non-Resident Indian under Income Tax law?

They must not meet the residency definitions of FEMA Signup and view all the answers

For what reason was the PIO Card Scheme withdrawn?

To merge with the OCI Card Scheme Signup and view all the answers

Which of the following best describes an Indian citizen for tax purposes when visiting India?

They are considered resident only if they meet specific conditions Signup and view all the answers

Which of the following describes the rights of PIOs regarding travel to India?

They enjoy visa-free travel to India with a PIO card Signup and view all the answers

What is a key factor for someone to be considered of Indian origin?

Having parents or grandparents born in undivided India Signup and view all the answers

Which statement regarding remittance for living expenses abroad is correct under Current Account Transactions?

It is classified as a Current Account transaction and permitted Signup and view all the answers

What is the maximum Indian Rupee gift amount that a resident individual can give to an NRI/PIO per financial year under the Liberalised Remittance Scheme?

INR 250,000 Signup and view all the answers

Which circumstance allows for the remittance of foreign exchange exceeding USD 250,000?

With prior permission from the Reserve Bank of India Signup and view all the answers

What tax rate applies to education-related foreign remittances made out of loans that exceed Rs. 7 lakh?

0.5% Signup and view all the answers

What type of transaction does not fall under the Liberalised Remittance Scheme (LRS)?

Business visits of employees abroad Signup and view all the answers

What is the TCS rate applicable for remittances for an overseas tour package exceeding Rs. 7 lakh?

20% Signup and view all the answers

What is required from new customers seeking remittances under the Liberalised Remittance Scheme?

A one-year bank statement prior to remittances Signup and view all the answers

What transactions are prohibited under the FEMA 1999 regulations?

Participation in lottery schemes Signup and view all the answers

For an individual, what is the TCS rate on foreign remittances for other transactions exceeding Rs. 7 lakh?

20% Signup and view all the answers

Which type of payment is excluded from LRS limits as per the recent clarification from the government?

Payments using an international credit card Signup and view all the answers

What is the maximum amount of foreign currency notes and coins that can be sold to travelers proceeding to countries other than specific regions?

USD 3000 Signup and view all the answers

What action must Authorised Dealers take regarding tax collection from amounts received for remittance out of India?

They must ensure TCS is applied as per the guidelines Signup and view all the answers

What is one key requirement for the amount sent as remittance for capital account transactions?

Must have undergone proper due diligence by the bank Signup and view all the answers

What type of remittance related to education made out of loans has a reduced tax rate under TCS?

Remittances above Rs. 7 lakh Signup and view all the answers

What is the maximum cash limit a traveller proceeding for Haj/Umrah pilgrimage can carry?

The full amount of entitlement in cash Signup and view all the answers

Which entities are allowed to remit foreign exchange for hotel accommodations and tour arrangements?

Authorized dealers Signup and view all the answers

What is the retention time for unutilized foreign exchange for travellers?

180 days Signup and view all the answers

Can a resident Indian use an International Credit Card for purchases in Nepal?

No, it is not permitted Signup and view all the answers

What is the maximum allowable amount for foreign exchange retained by a returning traveller without any ceiling beyond 180 days?

USD 2000 Signup and view all the answers

What limit of remittance is allowed for foreign states by residents with specified conditions?

Up to net salary only Signup and view all the answers

What is the permitted amount for donations remitted by corporations from foreign exchange earnings?

One percent of earnings or USD 50,00,000, whichever is less Signup and view all the answers

Following how many days from the last transaction can residents request a refund of unutilized balance on prepaid travel cards?

10 days Signup and view all the answers

Which of the following requires prior approval from the Reserve Bank of India?

Remittances for sale of residential flats exceeding USD 25,000 Signup and view all the answers

What is the defined period for a person to surrender unused foreign exchange after returning to India?

180 days Signup and view all the answers

What is a condition for NRIs/PIOs when issued International Credit Cards?

Charges should be settled from NRE/FCNR accounts only Signup and view all the answers

What is the maximum aggregate amount of foreign currency a traveller can retain beyond 180 days?

USD 2000 plus coins Signup and view all the answers

What is the permitted amount that can be remitted for technical collaboration agreements without prior approval?

Unlimited based on agreements Signup and view all the answers

What is the maximum remittance approval requirement from the Reserve Bank of India for consultancy services related to infrastructure projects?

USD 10,000,000 Signup and view all the answers

What is a Nostro Account?

An account of an Indian bank with a foreign bank in foreign currency Signup and view all the answers

For reimbursements of pre-incorporation expenses, what is the higher threshold for requiring Reserve Bank of India approval?

5 percent of investment Signup and view all the answers

Which of the following is NOT a permitted capital account transaction under the Liberalised Remittance Scheme?

Sending a gift to another resident in foreign currency Signup and view all the answers

What is the maximum guaranteed amount an AD Category-I bank can issue without further approval for service imports?

USD 500,000 Signup and view all the answers

What is the maximum amount a resident Indian can remit abroad under the Liberalised Remittance Scheme in a financial year?

USD 2,50,000 Signup and view all the answers

What is the validity period for retaining Form A2 by Authorised Persons?

1 year Signup and view all the answers

What is a Vostro Account?

A foreign bank's account in Indian rupees held with an Indian bank Signup and view all the answers

Which of the following statements is NOT true about online submission of Form A2?

It requires a physical document submission only. Signup and view all the answers

Who can utilize the Liberalised Remittance Scheme?

Resident individuals including minors Signup and view all the answers

What is the maximum remittance permitted for non-resident individuals who have inherited assets from foreigners in India?

USD 1,000,000 Signup and view all the answers

Which of the following is classified as a permitted current account transaction?

Emigration Signup and view all the answers

For NRIs/PIOs, how much can be remitted abroad from an NRO account in one financial year without needing RBI approval?

USD 1,000,000 Signup and view all the answers

What is a Loro Account?

An indirect account held in foreign currency by a third-party bank Signup and view all the answers

What requirement must be fulfilled before Authorised Dealers conduct foreign exchange transactions on behalf of an applicant?

Obtain a declaration that the transaction complies with regulations Signup and view all the answers

What is the requirement for a loan to an NRI/OCI relative under the Liberalised Remittance Scheme?

The loan must be free of interest with a one-year minimum maturity Signup and view all the answers

What is the maximum remittance amount allowed per transaction to a beneficiary residing in Nepal under the Indo-Nepal Remittance Facility Scheme?

₹2 lakh Signup and view all the answers

Under the guidelines for foreign exchange release, how much can be remitted for medical treatment abroad without requiring estimates from healthcare providers?

USD 2,50,000 Signup and view all the answers

Which of the following does NOT apply to walk-in/non-customers remitting to Nepal?

Requirement to hold an account in India Signup and view all the answers

What documentation is required by Authorised Dealers for payments other than imports?

A simple letter contains basic information and Form A2 Signup and view all the answers

What form must a resident individual complete to purchase foreign exchange under the Liberalised Remittance Scheme?

Form A2 Signup and view all the answers

Which of the following statements about remittances for consultancy services is true?

The threshold for approval varies based on project type Signup and view all the answers

Which of the following cannot be a purpose for which the loan to NRI relatives can be utilized?

Investment in agricultural activities Signup and view all the answers

Which of these transactions is explicitly prohibited under the Liberalised Remittance Scheme?

Remitting funds for a business of chit fund Signup and view all the answers

What must be preserved by Authorised Dealers for verification by the Reserve Bank?

Documents and information obtained from the applicant Signup and view all the answers

What is NOT required for remittances exceeding USD 2,50,000?

Financial documentation of the transaction Signup and view all the answers

Which factor does NOT affect the remittance facilities for non-resident individuals other than NRIs/PIOs?

Age of the individual Signup and view all the answers

Study Notes

Foreign Exchange Management Act (FEMA) 1999

Introduced in India on June 1, 2000, replacing the Foreign Exchange Regulation Act (FERA).
Aims to facilitate external trade, payments, and orderly development of the foreign exchange market.
The Reserve Bank of India (RBI) exercises exchange control, while the Director General of Foreign Trade (DGFT) exercises trade control.

Authorised Persons and Dealers

Only RBI-approved Authorised Persons can conduct forex transactions.
Authorised Persons include:
- Authorised Dealers (AD)
- Full Fledged Money Changers (FFMC)
- Offshore Banking Units
Authorised Dealers classified into three categories:
- AD Category-I: Handles all current and capital account transactions (e.g., Commercial Banks).
- AD Category-II: Handles specified non-trade-related transactions (e.g., FFMCs).
- AD Category-III: Handles specific transactions incidental to their business.

Residing Status Definitions

Resident Indian: A person residing in India for over 182 days in the preceding financial year, excluding those working abroad or intending to stay outside India.
Non-Resident Indian (NRI): A person who stays outside India for the intention of residing abroad for an uncertain period, including Indians studying abroad.

Person of Indian Origin (PIO)

PIOs hold foreign citizenship but trace their ancestry to India, including those born in India or descended from Indian citizens.
PIO Card Scheme was merged with the OCI Card Scheme in 2015.

Current and Capital Account Transactions

Current Account Transactions: Do not alter assets/liabilities and include payments for foreign trade, short-term credit, and living expenses abroad.
Capital Account Transactions: Altars assets/liabilities, including investments abroad and property purchases.

Nostro, Vostro, and Loro Accounts

Nostro Account: A bank's account in a foreign bank, indicated as "our account with you."
Vostro Account: A foreign bank's account held in an Indian bank, indicated as "your account with us."
Loro Account: Related to other banks' views of the Nostro and Vostro relationship.

Liberalised Remittance Scheme (LRS)

Introduced in 2004 to allow resident Indians to remit up to USD 250,000 per financial year for permitted transactions.
Not available for corporates, HUFs, or trusts; minor remittances require guardian countersignature.
Remittances include travel, medical expenses, and education abroad.

Permitted Transactions under LRS

Capital Account: Includes opening foreign currency accounts, purchasing property, investments, and loans to close relatives.
Current Account: Includes expenses for private visits, education, gifts, and medical treatment.

TCS (Tax Collected at Source) on LRS Transactions

Effective October 1, 2023: TCS rates vary per transaction type, e.g., 5% for tour packages and up to 20% for unqualified remittances.
Medical treatment and educational loan remittances have different TCS rates.

Important Guidelines

Prohibited for travel and transactions with residents of Nepal and Bhutan.
Lottery participation remittances are prohibited.
Prior permission from RBI is required for remittances exceeding USD 250,000.### Foreign Exchange Limits for Travelers
Total foreign exchange limit is USD 250,000 per financial year.
Travelers to most countries: can exchange up to USD 3,000 per visit.
Travelers to Iraq or Libya: can exchange up to USD 5,000 per visit.
Travelers to Iran, Russia, and CIS States: full exchange available.
Haj/Umrah pilgrims: can receive full exchange or amount specified by the Haj Committee of India.

Remittance Regulations

Authorized Dealers can remit reasonable amounts for hotel accommodations and tour arrangements using the LRS limit of USD 250,000.
Resident individuals can remit up to their net salary; applicants must fit specific residency criteria.

Payments for Royalties and Trademarks

Drawal of foreign exchange for royalty payments and technical collaboration agreements does not require Ministry approval.
Acquisition of trademarks or franchises in India is permitted without Reserve Bank approval.

Regulations for Specific Travels

Indian passport holders and PIOs traveling to Kartarpur, Pakistan: allowed to carry only Indian currency and/or foreign currency, not exceeding Rs. 11,000.

Surrender of Foreign Exchange

Unused foreign exchange must be surrendered within 180 days of purchase but can be utilized for other eligible purposes without penalty.
Returning travelers may retain up to USD 2,000 in foreign currency and other forms beyond 180 days.

International Credit Cards (ICCs)

Residents can use ICCs abroad without restriction for legitimate expenses.
Payments via ICCs are allowed online for permissible purchases, with no separate monetary ceiling.
Use of ICCs in Nepal and Bhutan is prohibited.

Prepaid Travel Cards

Refunds for unutilized foreign exchange on travel cards are allowed after 10 days from the last transaction.
Authorized Persons can redeem balances, subject to small retention amounts for pending transactions.

Gift and Donation Remittances

Remittances for donations allowed up to 1% of previous three-year foreign exchange earnings or USD 50,000, whichever is lower.
Additional remittances require Reserve Bank approval.

Commissions for Sales Transactions

Commissions above USD 25,000 or 5% of inward remittance for sales of properties require Reserve Bank approval.

Consultancy Services Remittances

Remittances exceeding USD 10 million for infrastructure projects require prior Reserve Bank approval.

Pre-Incorporation Expense Remittances

Remittances above 5% of investment or USD 100,000 for reimbursement of pre-incorporation expenses require Reserve Bank approval.

Guarantees for Service Imports

Banks can issue guarantees up to USD 500,000 for services imported without Reserve Bank approval.
Larger amounts for Public Sector Companies need Ministry of Finance approval.

Authorised Dealers' Operational Instructions

No specific document requirements for various transactions; however, a declaration must be obtained from applicants.
Form A2 is mandatory for all cross-border remittances and must be retained for verification.

Remittance Facilities for Non-Residents

Non-resident individuals can remit up to USD 1 million per financial year under specific conditions.
Restrictions apply to citizens of Nepal, Bhutan, and PIOs.

Remittance Facilities for NRIs/PIOs

NRIs/PIOs can remit up to USD 1 million per financial year from NRO accounts.
Remittances are subject to applicable taxes.

Indo-Nepal Remittance Facility Scheme

Established to enable one-way remittances to Nepal.
Allowable remittance limit is ₹2 lakh per transaction; non-customers can send up to ₹50,000 per transaction.
Charges for transactions vary and depend on account status with the banks involved.

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Description

This quiz covers the Foreign Exchange Management Act (FEMA) of 1999 and its impact on Forex transactions in India. Learn about the roles of the Reserve Bank of India and the Director General of Foreign Trade in regulating foreign exchange and trade. Test your knowledge on the guidelines introduced by FEMA and their significance.