FCRA vs FEMA: Which Law Applies to Foreign Money Coming Into India?

Two different laws, two different ministries, two completely different consequences for getting it wrong — and one question that decides which applies: was the money paid for something, or given?

FEMA governs foreign exchange transactions and is administered by the RBI under the Ministry of Finance. FCRA governs foreign contributions — donations and grants with nothing given in return — and is administered by the Ministry of Home Affairs.

The confusion is understandable. Both deal with money arriving from outside India. Both involve registration, designated bank accounts and reporting. But they sit under different ministries for a reason: FEMA is economic regulation, concerned with managing foreign exchange. FCRA is a security statute, concerned with who is funding activity inside India and why.

That difference in purpose explains the difference in consequences. A FEMA contravention is civil, and there is a compounding route. An FCRA contravention can be criminal.

The bottom line

Ask one question: did the sender receive goods, services or any consideration in return?

Yes — it is a commercial transaction. FEMA territory. An export of services, consultancy income, investment.

No — it is a gift, grant or donation. FCRA territory, and you need FCRA registration or prior permission before the money arrives.

The two statutes side by side

What counts as "foreign contribution"

FCRA reaches the donation, delivery or transfer by a foreign source of any article, currency or security. The critical qualifier is that nothing of value passes back the other way.

"Foreign source" is broader than most people expect. It includes foreign governments, foreign companies, international agencies (with some carve-outs), and citizens of other countries. A company registered in India but with majority foreign shareholding above the prescribed threshold can also be treated as a foreign source — which catches people out.

Money received from a non-resident Indian who holds an Indian passport is generally not foreign contribution, because the person is an Indian citizen. The same money from someone who has taken foreign citizenship generally is. Citizenship, not residence, is the operative fact — a distinction worth checking before accepting a large donation from a relative abroad.

The case that causes the most trouble

An Indian NGO does research work for a foreign university and invoices it. The money arrives from abroad, into an organisation that also receives donations.

That receipt is a fee for services rendered. Consideration flowed back — the research. It is therefore commercial income under FEMA, not foreign contribution, and it should not go anywhere near the FCRA account. Routing it there is itself a compliance problem.

Reverse the facts. The same university gives the NGO a grant to run a literacy programme, expecting nothing back beyond reports on how the money was spent. Reporting obligations are not consideration. That is foreign contribution, and it requires FCRA registration or prior permission first.

An organisation can lawfully receive both — but the two streams must be kept rigidly separate, in different bank accounts, with different reporting.

What FCRA compliance actually involves

There are two routes in.

Registration is the standard route for an organisation with a track record. The entity must have existed for three years and have spent at least Rs 15 lakh on its core activities for the benefit of society over the last three financial years. Registration is granted for a fixed term and must be renewed before it lapses.

Prior permission is the route for a newer organisation or a one-off receipt. It is tied to a specific donor, a specific amount and a specific purpose.

The 2020 amendments tightened the regime considerably, and these are the provisions that trip up organisations working from older guidance:

• Foreign contribution must first be received into a designated FCRA account at the State Bank of India, New Delhi Main Branch, 11 Sansad Marg — the branch notified by the Central Government in October 2020 under the amended Section 17. Funds can be moved to another account for utilisation afterwards, but that first landing point is mandatory.
• Administrative expenses are capped at 20% of foreign contribution received in a financial year — reduced from the earlier 50%.
• Sub-granting is prohibited. An FCRA-registered organisation cannot pass foreign contribution on to another organisation, even one that is itself FCRA-registered. This broke a common funding model overnight.
• Aadhaar identification is required for office bearers and key functionaries.

Certain categories of person are barred from accepting foreign contribution at all, including election candidates, judges, government servants, members of legislatures, and people connected with registered newspapers and broadcast media.

Worked example

A Section 8 company running education programmes has three inflows in a year:

1. ₹40 lakh grant from a foreign foundation to run a school programme. No consideration back. Foreign contribution — FCRA applies, must land in the SBI New Delhi account, subject to the 20% administrative cap.
2. ₹12 lakh from a foreign company for a commissioned impact-assessment report. Consideration flowed back. FEMA territory — ordinary export of services, and it must be kept out of the FCRA account.
3. ₹5 lakh from a founder's brother, an Indian citizen working in Dubai. Indian passport, so generally not foreign contribution — but worth documenting the citizenship position on file.

Put inflow 2 into the FCRA account and you have created a problem where none existed. Put inflow 1 into the ordinary account and the problem is considerably more serious.

Common mistakes

• Treating residence as the test. For NRI donations, the question is citizenship.
• Mixing service income and grants in one account. The separation is not a formality.
• Sub-granting to a partner NGO. Prohibited since 2020, regardless of the recipient's own registration.
• Working from the old 50% administrative expense limit. It is 20%.
• Missing the renewal window and continuing to receive funds on a lapsed registration.
• Assuming an Indian-registered company is never a foreign source. Majority foreign ownership above the threshold can make it one.
• Accepting funds while an application is pending. Prior permission means prior.

Checklist

1. For each inflow, ask whether the sender received anything in return.
2. If nothing was given back, confirm the sender's status as a foreign source — for individuals, check citizenship rather than residence.
3. Confirm FCRA registration or prior permission is in force before the money moves.
4. Ensure foreign contribution lands first in the designated SBI New Delhi Main Branch account.
5. Track administrative expenses against the 20% cap through the year, not at year end.
6. Never sub-grant foreign contribution to another organisation.
7. Keep commercial receipts entirely outside the FCRA account and report them under the ordinary tax and FEMA route.
8. Diarise the renewal date well ahead of expiry.

Frequently asked questions

What is the single difference between FCRA and FEMA? FEMA governs foreign exchange transactions where value flows both ways. FCRA governs foreign contributions where nothing is given in return.

Does my NGO need FCRA to invoice a foreign client? No. Fees for services are commercial receipts under FEMA. Keep them out of the FCRA account.

Is money from an NRI foreign contribution? Generally not, if the person holds an Indian passport. If they have taken foreign citizenship, it generally is.

Can I give FCRA funds to a partner NGO? No. Sub-granting foreign contribution has been prohibited since the 2020 amendments.

How much can I spend on salaries and overheads? Administrative expenses are capped at 20% of the foreign contribution received in a financial year.

Can a company receive foreign contribution? A Section 8 company can, with registration or prior permission. An ordinary trading company receiving investment or payment is in FEMA territory, not FCRA.

What happens if I get it wrong? FEMA breaches are civil and compoundable. FCRA breaches can attract cancellation of registration, prosecution and imprisonment, so the asymmetry matters.