# Section 6 - Capital Account Transactions (CAT)

## Meaning

A Capital Account Transaction (CAT) is a transaction which alters:

	Outside India	In India
By a PRI (Person Resident in India)	Asset / Liability (including contingent liability) outside India	—
By a PROI (Person Resident Outside India)	—	Asset / Liability (including contingent liability) in India

The key element: the transaction must alter an asset or liability (whether actual or contingent) of either category of person, in the territory specified.

## Legal Provisions Under Section 6

### Section 6(1)

Subject to sub-section (2), a person may sell or draw foreign exchange to or from an Authorised Person (AP) for a Capital Account Transaction.

### Section 6(2)

The RBI, in consultation with the Central Government (CG), may specify:

Permissible CATs involving debt instruments, along with
Limits and conditions thereon.

### Important Restriction

RBI or CG shall NOT impose restrictions on drawal of forex for the following:

1. Amortisation of loan (repayment by instalments)

2. Depreciation of direct investment

3. Repayment of loan

### Section 6(3) (post-amendment framework)

CG may, in consultation with RBI, specify any class of CAT involving non-debt instruments which is permissible, along with limits and conditions thereon.

## Section 6(4) - Holding by PRI of Foreign Assets

A PRI may hold, own, transfer or invest in foreign currency, foreign security, or any immovable property situated outside India, provided that it was:

Acquired by such person when he was a PROI, OR
Inherited from a PROI.

### RBI Clarification on Section 6(4) Coverage

The following transactions are covered under Section 6(4):

1. FC accounts opened and maintained by such person when he was a PROI.

2. Income earned from:

Employment
Business / Vocation
Investment
Gift / Inheritance

...while the person was a PROI.

3. Forex held abroad by a PRI acquired by inheritance from a PROI.

4. PRI may freely utilise eligible assets and income therefrom for fresh investment abroad without RBI approval, provided the cost of investment is met out of eligible assets.

The sale proceeds need NOT be returned to India.

## Section 6(5) - Holding by PROI of Indian Assets

A PROI may hold, own, transfer or invest in Indian currency, Indian security, or any immovable property situated in India, provided that it was:

Acquired by such person when he was a PRI, OR
Inherited from a PRI.

## Section 6(6) - Restrictions on Establishment of Place of Business

RBI may impose restrictions on establishment in India by a PROI of:

Branch office
Office
Agency

Worked example

### Example 1

Example 1 - Identifying a CAT:

Mr. P, a PRI, takes a loan from a US bank to buy shares in a US company. This creates both a liability outside India (loan) and an asset outside India (shares). Both legs are CATs under Section 6.

### Example 2

Example 2 - Section 6(4) Application:

Ms. Q lived in the USA for 10 years (as PROI) and accumulated USD 500,000 in a US bank account. She returns to India and becomes a PRI. She may continue to hold, transfer, invest that USD 500,000 abroad without RBI approval, as it was acquired when she was a PROI [Section 6(4)].

### Example 3

Example 3 - Section 6(5) Application:

Mr. R was a PRI who owned a flat in Mumbai. He shifted to Canada and became a PROI. He may continue to hold and transfer this Mumbai flat as it was acquired when he was a PRI [Section 6(5)].

### Example 4

Example 4 - Reinvestment of Eligible Assets:

Continuing Example 2 - Ms. Q sells the US shares she bought from her USD 500,000 account and earns USD 100,000 in capital gains. She may reinvest the entire sale proceeds (USD 500,000 + USD 100,000) in fresh foreign investments without RBI approval, since the funds are 'eligible assets and income therefrom'.

⚠️ Common exam mistakes

Confusing CAT with Current Account Transaction - CAT alters asset/liability position; current account transactions do not.
Forgetting that contingent liabilities are also covered in the definition of CAT.
Assuming RBI can restrict drawal for loan repayment - it CANNOT restrict for amortisation, depreciation, or repayment of loans.
Confusing Section 6(4) with 6(5): 6(4) applies to PRI holding foreign assets; 6(5) applies to PROI holding Indian assets.
Forgetting that Section 6(4) freedom extends to income earned and inherited assets, not just originally acquired assets.

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(4): A person resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India. Section 6(5): A person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India.

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Section 6 - Capital Account Transactions (Meaning & Legal Framework)

Worked example

⚠️ Common exam mistakes