💱 Forex Basics
Foreign Exchange Management Act (FEMA) 1999, Forex Transactions, Authorized Persons, and Dealers.
Foreign Exchange
Foreign Exchange (Forex) refers to the exchange of one currency for another. In India, forex operations are governed by the Foreign Exchange Management Act (FEMA) 1999.
Forex Operations Regulations
- Regulated under Foreign Exchange Management Act (FEMA) 1999, w.e.f. 01.06.2000 (replaced FERA 1973).
- FEMA rules/notifications issued by Central Govt. & RBI.
Objectives of FEMA 1999
- To facilitate external trade and payments.
- To promote orderly development and maintenance of forex market in India.
Other Key Aspects
| Aspect | Details |
|---|---|
| Inter-bank forex markets | Monday to Friday (9 am - 5 pm) |
| Saturday transactions | No major transactions to avoid forex risk |
| Regulation | Inter-bank forex markets regulated by RBI |
| Custodian of FC reserves | RBI |
| Foreign Trade regulation | Regulated by DGFT (Directorate General of Foreign Trade) |
| Exchange Rate System | Floating Rate - Foreign currency rates fixed by market forces (demand and supply) |
Forex Transactions
A transaction denominated in a currency other than the domestic currency (e.g., USD, EUR, GBP).
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Foreign Exchange
Foreign Exchange (Forex) refers to the exchange of one currency for another. In India, forex operations are governed by the Foreign Exchange Management Act (FEMA) 1999.
Forex Operations Regulations
- Regulated under Foreign Exchange Management Act (FEMA) 1999, w.e.f. 01.06.2000 (replaced FERA 1973).
- FEMA rules/notifications issued by Central Govt. & RBI.
Objectives of FEMA 1999
- To facilitate external trade and payments.
- To promote orderly development and maintenance of forex market in India.
Other Key Aspects
| Aspect | Details |
|---|---|
| Inter-bank forex markets | Monday to Friday (9 am - 5 pm) |
| Saturday transactions | No major transactions to avoid forex risk |
| Regulation | Inter-bank forex markets regulated by RBI |
| Custodian of FC reserves | RBI |
| Foreign Trade regulation | Regulated by DGFT (Directorate General of Foreign Trade) |
| Exchange Rate System | Floating Rate - Foreign currency rates fixed by market forces (demand and supply) |
Forex Transactions
A transaction denominated in a currency other than the domestic currency (e.g., USD, EUR, GBP).
Category of FC Transactions
Capital Account Transactions
A transaction resulting in change in asset / liability position outside the country.
Examples:
- SBI purchased office building in London
- Foreign JV company invested in India
- Purchase of foreign securities
- Foreign direct investment (FDI)
Current Account Transactions
A transaction which is not a capital account transaction.
Examples:
- Import/export of goods & services
- Payment of fee of Indian student to foreign university
- Remittances for family maintenance
- Travel expenses abroad
| Type | Definition | Examples |
|---|---|---|
| Capital Account | Change in asset/liability position abroad | FDI, property purchase abroad, foreign investments |
| Current Account | Not capital account (trade & services) | Import/export, education fees, travel expenses |
Authorized Persons (APs)
- FC transactions allowed through APs only.
- These are authorized by RBI to transact FC transactions.
Types of Authorized Persons
| Type | Description |
|---|---|
| Authorized Dealer (AD) | Banks/FIs authorized to deal in forex |
| Money Changer (MC) | Limited forex operations (notes, coins, TCs) |
Authorized Dealers (ADs)
Banks/FIs are ADs. There are 3 categories (RBI Notification dated 06.03.2006):
| Category | Entities | Functions |
|---|---|---|
| AD-1 | Commercial Banks, State Coop Banks, Urban Coop Banks, Small Finance Banks, Payment Banks | All types of forex transactions |
| AD-2 | Coop Banks, RRBs, Upgraded Full Fledged Money Changers (FFMCs) | Sell/buy forex and handle remittances |
| AD-3 | Financial Institutions | Transactions incidental to their business only |
Full Fledged Money Changers (FFMCs)
| Aspect | Details |
|---|---|
| Who can be FFMCs | Department of Posts, Urban Coop Banks, Other FFMCs |
| Functions | Purchase and sale of Foreign currency notes, coins, Travellers Cheques (TCs) |
| Purpose | For private and business visits |
Types of Persons under FEMA
For the purpose of FEMA, a person can be classified as:
- Resident, or
- Non-resident
Residents
A person who stayed in India for a period of > 182 days during the previous financial year.
Non-residents
A person who is not resident in India is a non-resident.
Non-residents can be:
- Non-resident Indians (NRIs)
- Persons of Indian Origin (PIOs)
- Foreign Nationals / Foreigners
Non-resident Indian (NRI)
A citizen of India residing outside India for an indefinite period in connection with his business, profession, residence, etc.
Key Points:
- Definitions are as per FEMA & Income Tax Act
- Indian student abroad for studies → classified NRI
- Indian citizens working abroad on assignments with foreign govt., UNO, IMF, World Bank → classified NRI
- Officials of Govt. and PSEs deputed abroad for assignments with foreign govt. or working at Indian Diplomatic Missions abroad → classified NRI
Person of Indian Origin (PIO)
A person resident outside India (except Pakistan & Bangladesh) who:
- Was citizen of India due to Indian Constitution/Citizenship Act. Means they do not have Indian citizenship.
- Parent or grand-parent or great grand-parent were Indian citizens
- His/her spouse is an Indian citizen
- OCI card holders
Other Persons
Foreigners who do not fall under NRI or PIO categories are classified as Foreign Nationals.
📖 Example: Story of Ramesh and his family
| Person | Situation | Category |
|---|---|---|
| Ramesh | Studying at IIM Ahmedabad (stayed > 182 days in India) | Resident |
| Ramesh | Goes to USA for higher studies at Harvard | NRI (Indian citizen abroad for studies) |
| Jennifer | American citizen, marries Ramesh in USA | PIO (spouse of Indian citizen) |
| Neha | Daughter of Ramesh & Jennifer, born in USA | PIO (parent is Indian citizen) |
| John | Jennifer's brother visiting India | Foreign National |
Key Takeaways:
- Ramesh remains an Indian citizen throughout → when in India he's Resident, when abroad he's NRI
- Jennifer becomes PIO after marrying Ramesh (not a citizen, but Indian origin via spouse)
- Neha is PIO by birth (parent is Indian citizen)
- John has no Indian connection → Foreign National
Facilities for Residents
Residents can:
- Use of FC or Remittances in FC
- Open FC deposit accounts
Rules for Indian Currency (INR)
Nepal & Bhutan: FC and Indian Currency Rules
- Use of FC and FC remittance not allowed (INR is legal tender in Nepal & Bhutan due to special bilateral agreements; hence no need for foreign currency)
- RBI bank notes ₹500 or below can be used
- Above ₹25,000: highest denomination allowed is ₹100
Other Countries: Indian Currency Rules
- Indian currency import: Max ₹25,000
- Indian currency export: Max ₹25,000
Forex Facilities for Residents under LRS
Rules for Foreign Currency (Other Countries except Nepal/Bhutan)
| Aspect | Details |
|---|---|
| Advance Purchase | FC can be purchased 60 days in advance |
| Application Form | Form A2 |
| Cash Purchase | Max ₹50,000 (above ₹50,000 via bank a/c, debit card, credit card) |
| Form of FC | Coins, Currency notes, Travellers' Cheque |
| Ceiling on Coins & Notes | USD 3,000 |
| Iraq & Libya | USD 5,000 |
| Iran, Russia, CIS (Commonwealth of Independent States) | No ceiling |
- Commonwealth of Independent States (CIS) is a political and economic union of former Soviet republics.
- Travellers' Cheque: It is a document issued by a bank guaranteeing payment of a specified amount to the bearer.
Import of FC
- No ceiling subject to declaration on form CDF (Currency Declaration Form)
- CDF mandatory if:
- Total amount > USD 10,000, or
- FC notes > USD 5,000
Unused FC
If you go outside India, and kept some unused FC, you can:
- Coins + other forex up to USD 2,000 can be retained
- Above USD 2,000: surrender within 180 days or deposit in Resident Foreign Currency - Domestic (RFC D) Account
Liberalized Remittance Scheme (LRS)
-
Remittance powers up to USD 250,000 (aggregate)
- per financial year
- per person are
-
delegated by RBI to AD banks for:
-
Current account transactions
-
Capital account transactions
-
RBI permission required for amount above USD 250,000
Current Account Transactions under LRS
- Private visits abroad (except Nepal & Bhutan)
- Gift or donation abroad
- Going abroad for employment
- Maintenance of close relatives abroad (as per Companies Act 2013)
- Business Travel abroad (conference, special training, meeting)
Exception: Amount can be > USD 250,000 with supporting proof for:
- Medical treatment expenses / check-up abroad, accompanying as attendant to a patient
- Going abroad for immigration
Capital Account Transactions under LRS
- Opening of foreign currency account abroad
- Purchase of property abroad
- Making investments abroad
- Setting up Wholly Owned Subsidiaries and Joint Ventures abroad
- Loans in Indian Rupees to Non-resident Indians relatives (as per Companies Act 2013)
Other Related Aspects for LRS
- Bank loan available for current account transactions only
- No bank loan for capital account transactions by banks
- Quoting of PAN mandatory for all transactions
- Reporting of transactions on daily basis (at XBRL site)
Tax Collection at Source (TCS) - Updated (28.08.25)
Threshold: Amount up to ₹10 Lakh per FY → No TCS
For amounts above ₹10 Lakh:
| Category | TCS Rate |
|---|---|
| (a) Education remittance with loan from specified institutions | Nil |
| (b) Education remittance (other than above) OR Medical treatment | 5% |
| (c) Any other purpose | 10% |
If PAN is inoperative: (add +10%)
- Category (b): 10%
- Category (c): 20%
Correspondent Bank Accounts
Banks maintain accounts with other banks across countries to facilitate international transactions.
| Account Type | Meaning | Referred to as |
|---|---|---|
| NOSTRO | Our account outside | "Our account with you" |
| VOSTRO | Foreign bank's account in home country | "Your account with us" |
| LORO | Other banks' NOSTRO/VOSTRO | "Their account with them" |
Mirror Account
A copy of NOSTRO a/c transactions maintained in the books of the bank holding the NOSTRO account. Used for reconciliation of entries. Maintained in 2 currencies (FC and home currency).
📖 Examples:
-
SBI account with Citibank in New York (USD)
For Bank Account Type SBI NOSTRO (SBI's account with Citibank) Citibank VOSTRO (SBI's account with them) Bank of Baroda LORO (it's SBI & Citibank's account) -
National Australia Bank opened CA with PNB in New Delhi
| For Bank | Account Type |
|---|---|
| NAB | NOSTRO (NAB's account with PNB) |
| PNB | VOSTRO (NAB's account with them) |
| Bank of India | LORO (it's NAB & PNB's account) |
Summary Cheat Sheet
| Parameter | Detail |
|---|---|
| Governing Act | FEMA 1999 (replaced FERA 1973) |
| Effective Date | 01.06.2000 |
| Rule Makers | Central Govt. & RBI |
| Objective 1 | Facilitate external trade & payments |
| Objective 2 | Orderly forex market development |
| Inter-bank Forex Timing | Mon-Fri, 9 AM - 5 PM |
| FC Reserves Custodian | RBI |
| Foreign Trade Regulator | DGFT |
| Exchange Rate Type | Floating Rate (market-driven) |
| Capital Account | Asset/liability change abroad |
| Current Account | Trade & services (non-capital) |
| AD-1 | Commercial Banks - All forex transactions |
| AD-2 | Coop Banks, RRBs - Buy/sell, remittances |
| AD-3 | FIs - Incidental transactions only |
| FFMCs | FC notes, coins, TCs for travel |
| Resident | Stayed in India > 182 days in previous FY |
| NRI | Indian citizen residing abroad indefinitely |
| PIO | Indian origin (not Pakistan/Bangladesh), OCI holder |
| Foreign National | Not Indian citizen, NRI, or PIO |
| Nepal/Bhutan INR | ₹500 notes max, no FC remittance |
| INR Import/Export | Max ₹25,000 each |
| FC Advance Purchase | 60 days in advance, Form A2 |
| FC Cash Purchase | Max ₹50,000 |
| FC Coins/Notes Ceiling | USD 3,000 (Iraq/Libya: USD 5,000) |
| FC Import CDF | Mandatory if > USD 10,000 or notes > USD 5,000 |
| Unused FC Retention | Up to USD 2,000 |
| LRS Limit | USD 250,000 per FY (aggregate) |
| LRS Current A/c | Private visits, gifts, employment, business travel |
| LRS Capital A/c | FC account abroad, property, investments, JV/WOS |
| LRS Bank Loan | Available for current a/c only |
| LRS PAN | Mandatory for all transactions |
| TCS Threshold | ₹10 Lakh/FY (below = No TCS) |
| TCS - Education (loan) | Nil |
| TCS - Edu/Medical | 5% (10% if PAN inoperative) |
| TCS - Other | 10% (20% if PAN inoperative) |
| NOSTRO | Our account with you (bank's account abroad) |
| VOSTRO | Your account with us (foreign bank's account here) |
| LORO | Their account with them (third party reference) |
| Mirror Account | Copy of NOSTRO a/c for reconciliation (2 currencies) |
| FC Rate Setter | Market forces / FEDAI |
| FC Surrender Timeline | Within 180 days of return |
| LRS Medical Limit | No limit (beyond LRS with documents) |
| LRS Declaration Form | Form A2 |
| Govt. Official at UNO | Categorised as NRI |
| Foreigner Spouse of IC | Categorised as PIO |
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