On April 24, 2025, the Reserve Bank of India (RBI) issued A.P. (DIR Series) Circular No. 04/2025-26, amending the Directions on Compounding of Contraventions under FEMA, 1999. This update brings welcome relief to individuals and entities by introducing a cap on penalties for specific FEMA violations, reducing uncertainty and compliance costs.
Under Section 15 of the Foreign Exchange Management Act (FEMA), 1999, the RBI is empowered to compound contraventions to facilitate voluntary compliance and ease regulatory burdens in cases of unintentional,reporting or technical breaches.
Pre-Amendment Framework (Row 5 of the Compounding Matrix)
Previously, contraventions classified under Row 5 of the RBI’s compounding matrix—covering “all other non-reporting contraventions not covered under Rows 1 to 4″—were subject to the following penalty structure:
- Fixed Component: ₹50,000 per regulation/rule contravened (per compounding application)
- Variable Component (as a percentage of the amount involved in the contravention):
| Duration of contravention | Variable amount that may be imposed as percentage of “amount under contravention” |
| Less than 1 year | 0.50% |
| 1 year and above but less than 2 years | 0.55% |
| 2 years and above but less than 3 years | 0.60% |
| 3 years and above but less than 4 years | 0.65% |
| 4 years and above but less than 5 years | 0.70% |
| 5 years or more | 0.75% |
There was no cap on the total penalty amount, which often resulted in significantly high compounding fees, especially in high-value cases.
What Has Changed?
With the issuance of Circular No. 04/2025-26, the RBI has now introduced a cap of ₹2,00,000 on the total penalty amount under Row 5 of the compounding matrix.
This cap will apply at the discretion of the compounding authority, taking into account:
- The nature and gravity of the contravention
- Exceptional circumstances or mitigating factors
- Larger public interest
The amendment is particularly relevant for common contraventions such as:
- Non adherance of timelines in case of realisation of exports or failure to export in case of advances received
- Failure to repatriate or non-reinvestment of remittances under the Liberalised Remittance Scheme (LRS)
- Procedural lapses in ODI and other foreign exchange transactions
Conclusion
The amendment signals RBI’s proactive and facilitative approach striking a balance between enforcement and enabling ease of doing business in cross-border transactions. The RBI’s introduction of a ₹2 lakh cap on FEMA penalties for certain non-reporting contraventions is a positive, business-friendly reform. It reflects a risk-based regulatory approach while encouraging voluntary compliance
The article is written by Ms. Ridhi Gada and is published at Taxguru. The link is:
https://taxguru.in/rbi/rbi-caps-fema-penalties-predictable-compliance-reduced-burdens.html