Indian businesses handling international payments must comply with the Foreign Exchange Management Act (FEMA), as violations can lead to substantial financial penalties, sometimes up to three times the transaction value. In April 2025, the RBI introduced penalty caps, offering relief for minor or technical lapses while continuing strict action against serious breaches.
FEMA governs all cross-border transactions involving Indian residents and businesses. Non-compliance can result in monetary fines, asset confiscation, and, in rare cases, criminal proceedings. Penalties vary by violation type, ranging from fixed amounts for reporting delays to percentage-based fines of up to 300% of the contravention value.
This guide explains how penalties are calculated, outlines criminal provisions, and details the compounding process that allows businesses to resolve violations without litigation, including which cases qualify for the new ₹2 lakh cap.
Key takeaways
- FEMA violations are mainly civil offences, but concealing foreign assets above ₹1 crore or failing to pay penalties can lead to criminal prosecution and imprisonment.
- In 2025, the RBI introduced relief by capping penalties at ₹2 lakh for specific technical contraventions, such as LRS breaches and delayed export reporting.
- Standard penalties remain stringent, reaching up to 300% of the amount involved for quantifiable violations, or a fixed ₹2 lakh when the amount cannot be determined.
- The Compounding of Contraventions mechanism allows businesses to voluntarily settle violations and avoid litigation, provided the case is not sensitive.
- Ongoing violations may attract an additional fine of up to ₹5,000 per day, underscoring the importance of early detection and regular compliance audits.
What Constitutes a FEMA Violation?
Understanding which actions qualify as violations helps prevent accidental non-compliance. FEMA contraventions include any breach of provisions, rules, regulations, notifications, directions, or conditions of RBI authorisations. These violations apply equally to individuals, companies, and other legal entities handling foreign exchange.
Most contraventions are civil in nature but can escalate depending on severity and intent. Violations range from procedural lapses, such as delayed reporting, to serious unauthorised transactions in prohibited sectors. This classification determines the applicable penalty and whether the contravention is eligible for compounding.
What are Material Contraventions?
Material contraventions are significant breaches that disrupt the regulatory framework without involving deliberate intent. They undermine the integrity of reporting and the effectiveness of foreign exchange controls. A common example is issuing shares to foreign investors without obtaining the required government approval.
Because of their broader systemic impact, penalties for material contraventions are higher than those for technical lapses. Typical instances include exceeding sectoral caps on foreign investment, using incorrect valuation methods for share transfers, and operating foreign currency accounts without authorisation.
What are Sensitive Contraventions?
Sensitive contraventions involve serious offenses such as money laundering or terrorist financing. The Directorate of Enforcement (ED) investigates these cases rather than standard RBI adjudication. These violations typically remain non-compoundable and carry maximum prosecution risk.
How is the Penalty for FEMA Violation Calculated?
The previous section established contravention categories. Section 13 of FEMA governs penalty calculations, creating a structured framework based on quantifiability. The Adjudicating Authority determines final penalty amounts based on the specifics of each case and the gravity of the violation.
Penalties for FEMA violations follow distinct paths depending on whether authorities can quantify the amount involved. This binary approach creates predictable liability ranges for businesses evaluating compliance risks.
Penalties for Quantifiable Amounts
Quantifiable contraventions attract penalties up to three times the sum involved. The “up to” provision grants authorities discretion based on violation circumstances. A ₹10 lakh contravention creates maximum penalty exposure of ₹30 lakh, though actual imposed amounts often fall below statutory ceilings.
Did You Know?
The three-times penalty provision originated from FEMA’s predecessor, FERA, but with reduced criminal consequences.
Penalties for Non-Quantifiable Amounts
Non-quantifiable contraventions face maximum penalties capped at ₹2 lakh. These situations arise when violations involve procedural lapses without clear transaction values. Examples include failure to follow specific directives or maintain prescribed documentation standards.
Continuing Penalties for Ongoing Violations
Continuing contraventions persist beyond the initial violation date. Additional penalties amount to ₹5,000 per day after the first day. A reporting delay extending 20 days creates a liability of ₹2 lakh base penalty plus ₹1 lakh continuing penalty (20 × ₹5,000).
What is the new Rs 2 Lakh penalty cap?
Before 2025, even minor FEMA breaches attracted heavy penalties, often disproportionate to the offence. The RBI’s April 2025 amendment corrected this imbalance by introducing penalty caps for select technical contraventions, easing compliance pressure on businesses while preserving strict deterrence for serious violations.
| Penalty Regime | Old System | New System (2025) |
| Quantifiable Technical Violations | Up to 3× amount | Capped at ₹2 Lakh |
| Reporting Delays | Percentage-based | Fixed ₹2 Lakh maximum |
| Applicability | All contraventions | Selected Row 5 violations |
| Relief Scope | Limited discretion | Standardised caps |
Cap on LRS and ODI Breaches
Liberalised Remittance Scheme violations now attract capped penalties for specific breaches. Key covered violations include:
- Unused LRS funds not reinvested within 180 days
- Missing documentation for outward remittances
- Technical errors in declaration forms
Overseas Direct Investment breaches qualifying for caps encompass:
- Delayed valuation report submissions
- Late repatriation of investment proceeds
- Minor reporting inconsistencies
Previously, a ₹50 lakh LRS violation could attract a penalty of ₹1.5 crore. The new cap limits liability to ₹2 lakh for qualifying technical breaches.
Explore Razorpay’s Global Payment Solutions
Cap on Export Advance Receipts
Under the revised framework, exporters who receive advance payments but fail to ship goods within one year face a capped penalty of ₹2 lakh. Earlier, penalties were linked to the advance amount, often resulting in heavy fines. The change offers meaningful relief to exporters, especially SMEs, by protecting them from disproportionate penalties caused by genuine delays such as production issues, shipping disruptions, or documentation bottlenecks.
Cap on Gifting and Property Contraventions
Individual financial transactions also benefit from penalty rationalisation. Covered scenarios include:
- Resident Indians gifting high-value shares to non-resident relatives without permission
- Penalty for contraventions by NRI under FEMA regarding prohibited property purchases
- Technical violations in inheritance transfers
NRIs purchasing agricultural or plantation property face a fixed maximum liability rather than property-value-based penalties.
Pro Tip: Keep detailed records of all foreign asset transactions to demonstrate legitimate business purposes and mitigate the risk of prosecution.
Criminal consequences can include imprisonment of up to five years in addition to monetary penalties. Civil penalties may also lead to imprisonment if dues remain unpaid for 90 days or more, reinforcing compliance through both financial and personal liability.
When Does a FEMA Violation Lead to Criminal Prosecution?
The penalty caps mentioned apply to civil violations, but FEMA still includes criminal provisions for serious contraventions. Knowing these thresholds helps businesses avoid severe regulatory consequences.
Unlike FERA, which emphasised criminal liability, FEMA primarily imposes civil penalties. Section 13(1C) establishes criminal liability for acquiring foreign assets exceeding ₹1 crore, targeting major exchange control violations rather than technical lapses.
What is Compounding of Contraventions?
Criminal prosecution is the most severe enforcement outcome, though most violations are eligible for compounding. Compounding allows entities to admit contraventions, pay a settlement fee, and close the matter without prolonged litigation. It is particularly useful for businesses that uncover unintentional breaches during internal audits.
However, only eligible contraventions can be compounded, excluding cases involving money laundering or Enforcement Directorate investigations. Applications must be submitted through prescribed channels within 180 days.
Who can apply for compounding?
Eligibility for compounding contravention under FEMA extends to:
- Individuals or corporate entities committing contraventions
- Authorised representatives with proper documentation
- Legal heirs for the deceased person’s violations
Key conditions include:
- Contraventions must be regularised before the application
- No pending appeals for the same violation
- Same contravention not compounded within the previous three years
How is the compounding fee calculated?
RBI employs a matrix system combining fixed and variable amounts. The variable component typically ranges from 0.05% to 0.5% of the involved sums. Duration factors increase fees for longer violation periods.
Calculation components:
- Base amount determined by violation category
- Percentage of contravention value
- Time multiplier for continuing violations
- Maximum cap at 300% aligning with Section 13[2]
How Can Businesses Avoid FEMA Penalties?
Key prevention strategies focus on documentation, timelines, and professional guidance:
- Track FC-GPR and APR filing due dates religiously
- Obtain Foreign Inward Remittance Certificates for all export receipts
- Maintain purpose code accuracy for every transaction
- Review LRS limit utilisation monthly
- Consult chartered accountants for complex ODI/FDI transactions
Document audit checklist:
- FIRC acknowledgments for export proceeds
- Annual Performance Reports (APR) filing confirmations
- FC-GPR submissions for share allotments
- UIN mapping for advance receipts
- LRS declaration compliance records
How Razorpay MoneySaver Simplifies FEMA Compliance
Manual compliance creates risk of violations due to human error. Razorpay MoneySaver automates critical FEMA requirements, significantly reducing exposure to the import FEMA violation penalty.
Automated e-FIRC generation eliminates the primary documentation challenge for exporters. Every international payment automatically produces electronic FIRCs, ensuring audit-ready proof without bank follow-ups. This single feature prevents numerous potential reporting violations.
Direct repatriation through MoneySaver Export Accounts ensures compliance with the FEMA-mandated timeline. Export proceeds are settled directly into Indian bank accounts, automatically meeting strict repatriation deadlines. The platform’s global account network spanning 160+ countries enables local payment receipt via ACH or SEPA while maintaining compliance with Indian regulations.
Automate FEMA Compliance with Razorpay
Skip manual errors—auto-generate e-FIRCs, receive via ACH/SEPA, and repatriate
funds on time with RBI-ready flows.
Conclusion
FEMA penalties reflect a balanced framework: severe fines of up to 300% of transaction value for serious breaches, alongside capped penalties of ₹2 lakh for technical lapses. This distinction helps separate genuine business errors from deliberate financial misconduct.
To stay compliant, businesses should adopt structured processes, conduct regular audits, and seek professional guidance. Compounding provisions allow correction of unintentional violations, while automation reduces compliance errors. A clear understanding of FEMA penalty structures turns regulatory compliance from a risk-driven concern into a manageable part of routine business operations.
FAQs
1. What is the maximum penalty for a FEMA violation in 2025?
For quantifiable violations, the penalty can be up to three times the sum involved. However, for specific technical contraventions where the amount is not quantifiable or falls under new relief rules, the penalty is capped at ₹2 Lakh.
2. Can I be imprisoned for violating FEMA regulations?
Generally, FEMA violations are civil offenses resolved through monetary penalties. However, criminal prosecution and imprisonment for up to 5 years apply if you fail to pay penalties or conceal foreign assets worth more than ₹1 Crore.
3. What is the new ₹2 Lakh penalty cap introduced by the RBI?
The RBI has rationalised penalties for certain contraventions, such as LRS and ODI breaches or delayed export reporting, capping the maximum penalty for violation of FEMA at ₹2 Lakh per contravention to ease the compliance burden.
4. How does the ‘Compounding of Contraventions’ process work?
Compounding is a voluntary process where you admit to a contravention and pay a settlement fee to the RBI. This legalises the error and stops any further legal proceedings or adjudication regarding that specific violation.
5. Do FEMA penalties apply to NRIs and individuals?
Yes, penalties under FEMA apply to all ‘persons resident in India,’ including individuals and companies, as well as NRIs handling assets or transactions in India that violate foreign exchange rules.
6. What is the penalty for continuing violations under FEMA?
If a FEMA violation continues after the first day, an additional penalty of up to ₹5,000 per day may be imposed for each day the violation persists.
7. How are penalties calculated if the violation amount cannot be quantified?
If the sum involved in the contravention cannot be quantified, the maximum penalty is fixed at ₹2 Lakh, replacing earlier ambiguity with a clear liability limit.
