When it comes to managing money across borders, not all transactions are the same. In India, foreign exchange activities are classified into two categories, current account transactions and capital account transactions. While capital account transactions deal with investments and asset transfers, current account transactions focus on day-to-day trade, services, and remittances.
For businesses, exporters, freelancers, and even individuals sending money abroad, understanding the rules around current account transactions is critical. From permissible limits to associated fees, being informed ensures compliance with India’s Foreign Exchange Management Act (FEMA) while also minimizing unnecessary costs.
What Are Current Account Transactions?
Under FEMA (Foreign Exchange Management Act), current account transactions refer to payments made for everyday trade, services, or personal needs rather than for investments or asset transfers. According to the RBI’s Annual Report 2023, India’s current account deficit stood at 0. 2% of GDP in FY 2022–23, driven mainly by trade in goods and services. This highlights how crucial current account flows are in reflecting the country’s day-to-day economic activity and external stability.
These include:
- Import and export of goods and services.
- Interest payments, royalties, and licensing fees.
- Foreign travel, education, and medical remittances.
- Family maintenance, gifts, and other personal transfers.
In simpler terms, if the transaction is tied to immediate requirements rather than building long-term assets, it falls under current account transactions.
For businesses, exporters, freelancers, and individuals, this means that current account transactions are not just regulatory terms, they are the financial lifelines connecting India with the rest of the world.
Key Regulations Governing Current Account Transactions
The rules for current account transactions in India are framed under the Foreign Exchange Management Act (FEMA), 1999, and overseen by the Reserve Bank of India (RBI). While most transactions are liberalized, some restrictions and limits apply to ensure transparency and prevent misuse.
1. General Permissibility
Most current account transactions are freely allowed unless specifically restricted by the Government of India or the RBI. This liberalization enables exporters, businesses, and individuals to engage in global trade and payments without heavy approvals.
2. Prohibited Transactions
Certain types of payments are strictly prohibited, such as:
- Remittances for lottery winnings.
- Payments for banned magazines or sweepstakes.
- Remittances for “call-back” telephone services.
- Payments that could be linked to unlawful or speculative activities.
3. Transactions Requiring Prior RBI Approval
Some transactions, while not banned, need RBI’s prior approval. These include:
- Remittances exceeding set limits for consultancy services.
- Large donations or contributions to organizations abroad.
- Certain types of maintenance expenses or personal remittances above prescribed thresholds.
4. Liberalised Remittance Scheme (LRS)
Individuals are allowed to remit up to USD 250,000 per financial year under LRS for purposes like travel, education, gifts, or maintenance of relatives abroad. Anything beyond this limit requires RBI approval.
5. Role of Authorized Dealers (AD Banks)
All current account transactions must be routed through authorized dealer (AD) banks, which act as gatekeepers to ensure compliance with FEMA and anti-money laundering rules.
Fees Associated with Current Account Transactions
While most current account transactions are freely permitted, they often carry costs that can reduce the actual value received or paid. These fees vary by bank, payment channel, and destination country. The main charges include:
1. Bank Processing Charges
Banks levy flat fees or percentage-based charges for processing outward and inward remittances. For example, a bank may charge ₹500–₹1,000 for every outward transfer.
2. SWIFT Charges
When payments are routed through the SWIFT network, intermediary banks deduct service charges, which can range from USD 15–40 per transaction depending on the route.
3. Foreign Exchange (FX) Markup
Banks and payment providers often add a spread to the exchange rate when converting currencies. Even a 1–2% markup can significantly impact large transactions like tuition fees or export payments.
4. GST on Fees
All banking charges, including processing fees and conversion charges, are subject to 18% GST, which adds to the total cost of a transaction.
5. Compliance and Documentation Costs
For businesses and exporters, costs may also include professional fees for preparing remittance documents, reconciliation, or GST filings.
Why It Matters: These fees may look small individually, but can erode margins in frequent or high-value cross-border payments. Comparing providers, checking FX markups, and reviewing bank fee structures can help minimize costs on current account transactions.
Final Words
The framework around current account transactions in India is designed to balance free movement of money for trade and personal use with regulatory oversight. By understanding what falls under this category, the limits imposed, and the fees involved, businesses and individuals can better manage global payments.
Whether you are paying for overseas education, sending money to family, or receiving export earnings, keeping track of rules under FEMA ensures compliance while protecting your financial interests.
