# Current Account Transactions [Section 5 read with Section 2(j)]

## Governing Framework

Current Account Transactions are governed by:

Section 5 of FEMA, 1999 (operative provision), and
The Foreign Exchange Management (Current Account Transactions) Rules, 2000 (detailed restrictions).

## Definition — Section 2(j)

The term 'Current Account Transaction' is defined negatively: it means a transaction other than a capital account transaction and includes —

#	Type of Transaction
(i)	Payments in the ordinary course of foreign trade; other services such as short-term banking and credit facilities in the ordinary course of business
(ii)	Payments in the form of interest on loans or income from investments
(iii)	Remittances for living expenses of parents, spouse, or children living abroad
(iv)	Expenses in connection with foreign travel, education etc.

## The Golden Rule

> Current Account transactions are freely permitted unless specifically prohibited.

> Capital Account transactions are prohibited unless specifically or generally permitted.

This is the most important interpretative key for FEMA — direction of default is opposite for the two account types.

## Section 5 — The Operative Power

Any person may sell or draw foreign exchange to/from an Authorised Person if such sale or drawal is a Current Account Transaction.
The Central Government, in public interest and in consultation with the RBI, may impose reasonable restrictions on Current Account Transactions.
This power has been exercised through the FEM (Current Account Transactions) Rules, 2000.

## Why Restrict Current Account Transactions At All?

Although free in principle, reasonable restrictions are necessary. Without them, residents could transfer funds abroad under the garb of current account transactions, defeating capital controls.

## The Conceptual Test — Asset/Liability Creation

A transaction is a Current Account Transaction if, after settlement, neither party owns nor owes anything in the other country. A transaction is a Capital Account Transaction if it creates or alters an asset or liability in the other country.

Worked example

### Example 1

Example 1 — Import of machinery (cash basis):

An Indian resident imports machinery from a UK vendor for his factory and pays immediately.

Under accounts/income-tax law, machinery is capital expenditure.
But under FEMA, once payment is made, the Indian resident neither owns nor owes anything to the UK vendor, and the UK vendor has no asset/liability in India.
Conclusion: Current Account Transaction.

### Example 2

Example 2 — Import of machinery on 3-month credit:

Same facts as Example 1, but with a 3-month credit period.

Technically, there is a liability outside India during the credit period.
However, Section 2(j)(i) treats short-term banking and credit facilities in the ordinary course of business as Current Account Transactions.
Conclusion: Current Account Transaction.

### Example 3

Example 3 — Gift remitted abroad to NRI brother:

A Person Resident in India (PRII) transfers US$ 1,000 from his Indian bank account to his NRI brother in New York as a gift.

In income-tax law, gift is a capital receipt.
Under FEMA, once the gift is accepted by the NRI, no one owns or owes anything across borders. The transaction is closed.
Conclusion: Current Account Transaction (though still subject to LRS limits).

### Example 4

Example 4 — PROI gives gift in India to PRII in foreign currency abroad:

If a Person Resident Outside India (PROI) gives an Indian resident funds abroad as a gift, the resident cannot keep it abroad — it must be brought to India (Section 8 read with Section 4).

### Example 5

Example 5 — PRII gives gift to PROI in Indian rupees in India:

For the PROI, this creates funds lying in India (an alteration of an Indian asset).

Conclusion: Capital Account Transaction (permitted under separate rules subject to conditions).

⚠️ Common exam mistakes

Applying accounting/income-tax classifications (capital vs revenue) to FEMA. FEMA looks at cross-border asset/liability creation, not the nature of expense in the books.
Treating short-term credit on imports as a capital account transaction. Section 2(j)(i) expressly carves it into current account.
Reversing the golden rule — assuming Current Account transactions are prohibited unless permitted. The opposite is true.
Believing Current Account transactions are entirely unrestricted. The Central Government may impose reasonable restrictions under Section 5 — and has done so via the 2000 Rules.
Forgetting the consultation requirement — restrictions must be imposed by Central Government in consultation with the RBI and in public interest.

Bare-Act text Section 5 · Foreign Exchange Management Act, 1999 · click to expand

Any person may sell or draw foreign exchange to or from an authorised person if such sale or drawal is a current account transaction: Provided that the Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be prescribed.

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Current Account Transactions — Definition and Section 5

Worked example

⚠️ Common exam mistakes