FEMA Schedule I: Complete Guide to Prohibited Money Transactions

 India’s Foreign Exchange Management Act (FEMA) 1999 Schedule I lists nine money-outflow activities that are absolutely banned, regardless of amount. Violating them can trigger penalties up to three times the value involved and even criminal prosecution. This SEO-optimised guide (≈1,500 words) details each prohibition, the logic behind it, and practical compliance steps for 2025.

1. Why Schedule I Exists

1. Shield forex reserves: Barring capital-like drains such as inflated export commissions conserves hard currency for growth priorities.
2. Cut money-laundering routes: Lottery winnings and call-back telephony historically mask illicit flows; a blanket ban simplifies AML enforcement.
3. Uphold social policy: Outflows for gambling, banned publications, or excessive dividend repatriation conflict with public-interest objectives.

Also Read: Capital Account Transactions under FEMA, 1999

2. Quick-Reference Table of Prohibited Transactions

#	Transaction (Schedule I Rule)	What It Means	Common Pitfalls
1	Remittance of lottery winnings	Cannot wire prize money abroad.	Fantasy-sport payouts mis-coded as “service fee.”
2	Income from racing/riding or any hobby	Earnings from horse racing, e-sports, etc. banned from export.	Sponsorship fees disguised as consulting.
3	Purchase of lottery tickets, sweepstakes, football pools, banned magazines	Residents may not spend forex on gambling or proscribed content.	App-store payments masking betting services.
4	Commission on exports exceeding limits for overseas equity investment	Over-invoicing export commission to fund JVs is barred.	Third-country agents used as conduits.
5	Dividend remittance subject to dividend-balancing	Certain sectors must balance dividends with export earnings; if applicable, remittance blocked.	Ignoring legacy EOU conditions.
6	Commission on exports under Rupee State Credit Route >10% (tea/tobacco only)	Any excess or non-tea/tobacco commission is prohibited.	Splitting invoices to hide over-commission.
7	Interest on Non-Resident Special Rupee (NRSR) accounts	Banks cannot remit accrued interest abroad.	Automated SWIFT transfers via core banking.
8	Payments for “call-back” telephone services	FX payments for tariff-dodging call-back schemes are banned.	VoIP platforms invoiced as “IT services.”
9	Forex for travel to Nepal/Bhutan or transactions with their residents	Only Indian rupees allowed.	Forex cards issued for trekking tours.

All nine items are non-negotiable: even ₹1 violates FEMA.

3. Legal Consequences of Breach

• Section 13(1) Penalties: Up to 3× the sum involved or ₹2 lakh if unquantifiable, plus ₹5,000 per day for continuing breach.
• Confiscation: RBI/ED may seize involved currency or property.
• Compounding: Possible but solely at RBI’s discretion; repeat offenders risk prosecution under Section 13(1C).

Also Read: FEMA Act Case Study 5: Indian Company’s Overseas Investment Without Approval

4. Role of Authorized Dealer (AD) Banks

• Form A2 vetting: ADs must reject requests with Schedule I purpose codes.
• Enhanced KYC: Invoices, contracts, and beneficiary IDs scrutinised for disguised violations.
• Regulatory reporting: Suspicious attempts filed with RBI’s Foreign Exchange Department and FIU-IND.

5. Deep Dive: Rationale Behind Each Ban

5.1 Lottery & Betting Outflows

Gambling-derived funds are AML-sensitive and lack economic value-add, so an outright bar removes vetting complexity.

5.2 Hobby Income (Racing, E-gaming)

Race winnings often flow through informal channels; prohibiting remittance closes a high-risk loophole.

5.3 Banned Publications & Pools

Forex purchases of proscribed content undermine domestic regulations; the ban supports cultural policy.

5.4 Inflated Export Commission

Over-invoicing commissions to capitalise offshore ventures drains forex; Schedule I imposes a zero-tolerance stance.

5.5 Dividend Balancing

Ensures sectors benefiting from earlier concessions repay India through export earnings before profit repatriation.

5.6 RSCR Commission Cap

The 10% ceiling prevents misuse of the Rupee State Credit Route, which offers concessional terms to select nations.

5.7 NRSR Interest

Interest on rupee accounts is intended for domestic retention; remittance would effectively convert rupees to forex.

5.8 Call-Back Telephony

Call-back circumvents Indian telecom tariffs and complicates lawful interception; a categorical ban simplifies policing.

5.9 Forex for Nepal/Bhutan

India-Nepal/Bhutan treaties peg local trade to the Indian rupee; allowing forex would destabilise this arrangement.

Also Read: FEMA Act Case Study 3: Cross-Border Investment Gone Wrong

6. Interaction with Schedules II & III

• Schedule II: Transactions needing Central-Government approval (e.g., cultural tours) remain possible if cleared.
• Schedule III: Items requiring RBI approval (e.g., high-value private travel, exceeding LRS limits) are regulated, not banned.

Mis-classifying a Schedule I activity as “approval required” doesn’t legalise it—it stays illegal.

7. Compliance Checklist for 2025

• Keyword-trigger filters: Embed “lottery,” “call-back,” “NRSR” alerts in ERP/treasury systems.
• Automated purpose-code blocks: Prevent Form A2 generation for blacklisted codes.
• Staff training: Circulate RBI FAQs; many exporters still misread commission rules.
• Documentation vault: Keep contracts and invoices handy to prove transactions aren’t Schedule I look-alikes.
• Annual FEMA audit: Reconcile SWIFT logs with Form A2 records to spot mismatches early.

Also Read: FEMA Act Case Study 3: Cross-Border Investment Gone Wrong

8. Real-World Scenarios

1. E-sports cash-out: A gamer wins USD 5,000 abroad and tries to remit it home as “consultancy income.” AD must reject: hobby income is Schedule I-barred.
2. Over-commission export: Textile exporter books 15% commission to Hong-Kong agent to capitalise its JV. Full amount non-remittable.
3. Nepal trekking Forex card: Travel agency issues USD-loaded cards for clients. AD must refuse FX release; Nepal travel must use INR.

Also Read: FEMA Act Case Study 2: Understanding Foreign Exchange Compliance Through Real-World Scenarios

9. Penalty & Compounding Workflow

1. Show-Cause Notice (SCN): RBI outlines contravention.
2. Representation: Entity submits defence.
3. Order: Penalty fixed under Section 13; pay within 90 days.
4. Compounding: Optional application; lower fine, contravention cured post-payment.
5. Escalation: Non-payment → ED seizure + possible prosecution.

10. Key Takeaways for 2025

• Zero leeway: No authority can approve Schedule I transactions—ever.
• AD banks = gatekeepers: Robust purpose-code and KYC checks are frontline defence.
• Education over enforcement: Awareness drives compliance; ignorance is costly.
• Fintech vigilance: App-store or SaaS invoices can mask Schedule I payments; employ granular monitoring.
• Policy watch: Schedule I rarely changes, but FATF reviews and Union Budgets can tweak language—subscribe to RBI circular alerts.

Staying clear of FEMA Schedule I prohibited transactions is non-negotiable. A structured compliance program safeguards your organisation from hefty penalties and reputational damage.