Capital Account vs Current Account Transactions

# Capital Account and Current Account Transactions under FEMA

FEMA classifies all forex transactions into two buckets — capital account and current account. The classification decides the level of regulation.

## Capital Account Transaction — Section 2(e)

A transaction which alters:

• The assets or liabilities (including contingent liabilities) of persons resident in India outside India, OR
• The assets or liabilities in India of persons resident outside India,

— and includes transactions referred to in Section 6(3).

### Test (the 'alteration' test)

Ask: Does this transaction change the balance sheet position of a resident (outside India) or of a non-resident (in India)? If yes, it is a capital account transaction.

Typical examples:

• A resident purchasing shares of a foreign company.
• A non-resident buying immovable property in India.
• Borrowing/lending across borders.
• Issue of securities to non-residents.

## Current Account Transaction — Section 2(j)

Means any transaction other than a capital account transaction and, without prejudice to the generality, includes:

(i) Payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business.

(ii) Payments due as interest on loans and as net income from investments.

(iii) Remittances for living expenses of parents, spouse and children residing abroad.

(iv) Expenses in connection with foreign travel, education and medical care of parents, spouse and children.

### Test

A current account transaction is essentially the opposite/residual of capital account — it does not alter the balance sheet but reflects income, expenses and current obligations.

## Why the distinction matters — regulatory consequence

## Quick classification table

## Memory tip

• Capital → changes the 'asset–liability' position (balance sheet impact).
• Current → reflects 'day-to-day income/expense' (P&L impact).