# Capital Account Transactions [Section 6 of FEMA, 1999]

## Definition

Capital Account Transaction means a transaction which 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.

> In simple terms: cross-border transactions pertaining to investments, loans, immovable property, and transfer of assets are capital account transactions.

## Capital Account vs Current Account

Indian Rupee is NOT yet fully convertible on capital account.
Therefore, capital account transactions can be carried out only to the extent permitted.
Capital and current account transactions are intended to be mutually exclusive.

## Special Note on Contingent Liabilities

Person	Trigger
Resident in India	Transactions altering assets/liabilities INCLUDING contingent liabilities outside India
Non-resident	Transactions altering assets/liabilities in India

For residents, contingent liabilities outside India are also captured.

## Regulatory Architecture (post 15 October 2019)

### Section 6(1) – General Permission

Subject to sub-section (2), any person may sell or draw foreign exchange to/from an authorised person for a capital account transaction.

### Section 6(2) – Power Split between RBI and Central Government

By Finance Act 2015 (effective 15 October 2019), powers were divided:

Instrument Type	Regulator	Powers
Debt instruments	RBI (in consultation with Central Govt.)	Specify permissible classes, limits, and conditions
Non-debt instruments	Central Government (in consultation with RBI)	Specify permissible classes, limits, and conditions

### What RBI / CG Cannot Restrict (Proviso)

No restriction can be imposed on drawal of foreign exchange for:

1. Amortisation of loans, or

2. Depreciation of direct investments in the ordinary course of business.

### Section 6(3) – Now Deleted

Before 15 October 2019, Section 6(3) listed specific capital account transactions regulable by RBI. This list has been deleted w.e.f. 15 October 2019.

### Section 6(6) – Branch/Office of Non-Resident

RBI may, by regulation, prohibit, restrict, or regulate the establishment in India of a branch, office or other place of business by a person resident outside India.

### Section 6(7) – Meaning of 'Debt Instruments'

'Debt instruments' = such instruments as may be determined by the Central Government in consultation with RBI.

## Categorisation under the Regulations

The Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 divide transactions into:

1. Permissible transactions — listed in Schedule I (residents) and Schedule II (non-residents)

2. Transactions on which restrictions cannot be imposed

3. Prohibited transactions

Worked example

### Example 1

Example 1: Mr. X, resident in India, gives a guarantee to a foreign bank on behalf of his foreign subsidiary. The guarantee creates a contingent liability outside India. Is this a capital account transaction?

Answer: Yes. A transaction altering contingent liabilities outside India of a person resident in India is a capital account transaction (definition under Section 6). It is permitted under Schedule I (item d).

### Example 2

Example 2: ABC Ltd., a US company, buys an office building in Mumbai. Is this a capital account transaction?

Answer: Yes. The transaction alters the assets in India of a person resident outside India, hence it is a capital account transaction governed by Schedule II (item b).

### Example 3

Example 3: An Indian resident wishes to pay a loan installment to a foreign lender. Can RBI restrict this drawal?

Answer: No. The proviso to Section 6(2) bars restrictions on drawal of foreign exchange for amortisation of loans or depreciation of direct investments in ordinary course of business.

⚠️ Common exam mistakes

Forgetting that for residents, even contingent liabilities outside India are covered — not just actual liabilities.
Believing the Indian Rupee is fully convertible on capital account — it is not.
Continuing to cite the old Section 6(3) list — this has been deleted w.e.f. 15 October 2019.
Confusing the regulator: debt = RBI, non-debt = Central Government (post-2019). Many students reverse this.
Thinking RBI can restrict loan repayment drawals — it cannot, by virtue of the proviso to Section 6(2).

Bare-Act text Section 6 · Foreign Exchange Management Act, 1999 · click to expand

Section 6(1): Subject to the provisions of sub-section (2), any person may sell or draw foreign exchange to or from an authorised person for a capital account transaction. Section 6(2): The Reserve Bank may, in consultation with the Central Government, specify – (a) any class or classes of capital account transactions involving debt instruments, which are permissible; (b) the limit up to which foreign exchange shall be admissible for such transactions; (c) any conditions which may be placed on such transactions; Provided that the Reserve Bank or the Central Government shall not impose any restrictions on the drawal of foreign exchange for payment due on account of amortisation of loans or for depreciation of direct investments in the ordinary course of business. Section 6(7): For the purposes of this section, the term 'debt instruments' shall mean, such instruments as may be determined by the Central Government in consultation with the Reserve Bank.

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Capital Account Transactions - Meaning & Section 6 Framework

Worked example

⚠️ Common exam mistakes