The Centre has warned non-profit organizations against receiving foreign funds due to various raids and closedowns. In March 2025 there were news-reports of raids on non-profit organizations for non-compliances under the FEMA including foundations linked to George Soros and 12 offices linked to Social Democratic Party of India. This edition provides an overview of the Foreign Exchange Management Act, 1999 (FEMA) - compliances and safeguards under the FEMA for Indian non-profit institutions.
Scope of FEMA Law
The Foreign Exchange Management Act (FEMA) regulates foreign exchange transactions in India, covering trade, investments, remittances, and currency conversions. It aims to facilitate external trade, promote orderly foreign exchange markets, and ensure smooth capital flows. FEMA provides a framework for foreign investments and financial transactions while preventing unauthorized dealings. It allows automatic and government approval routes for foreign direct investment (FDI) and enforces compliance through penalties for violations. The Reserve Bank of India (RBI) oversees its implementation, ensuring stability in India’s foreign exchange market.
How is FEMA different from Foreign Contribution (Regulation) Act (FCRA)?
FCRA falls under the purview of the Ministry of Home Affairs (MHA) and governs the acceptance and utilization of foreign contributions and hospitality by individuals, associations, and non-profit organizations in India. The main objective of FCRA is to ensure that foreign contributions and hospitality received by entities or individuals are utilized for legitimate and authorized purposes.
The law defines foreign contribution as any donation, transfer, or income received from foreign sources, excluding payments for goods or services which is an amount over INR 25,000.
A non-profit entity would require an FCRA registration to be eligible to receive foreign contributions. To obtain and maintain registration under the FCRA, non-profit organizations must meet strict criteria, including, annual reporting, and a minimum of three years of active charitable activities.
Non-profit Compliances on Receiving Funds from a Foreign Source under a Service Agreement
FEMA regulates the acceptance and utilization of foreign remittances to non-profits including by way of service agreements. A non-profit can receive service fees from, subject to compliance with FEMA. As per FEMA mandate, a non-profit receiving foreign funds under service agreements should:
- open a current account for the foreign currency inward remittances
- limit the remittances USD 1,000,000 per project for consultancy services. [Schedule III Clause 2 (iii) of Foreign Exchange Management (Current Account Transactions) Rules, 2000 states that remittances exceeding USD 1,000,000 per project for consultancy services shall require prior approval of the Reserve Bank of India]
Additionally, non-profit organizations receiving foreign funds under service agreement must:
- Check that the activities for which the funds are received are permitted under the objects clause of the trust deed or memorandum of association
- Ensure that the agreement under which the funds are received are not styled as a “grant agreement” but in fact received as a consideration for specific services under a “services agreement”
- Determine the income tax treatment for such sums received prior to receiving the money
- Determine GST applicability for the transaction prior to receiving the money (GST will not apply only if there is an export of services)
- Foreign remittances received under FEMA must comply broadly with the purpose they are received for.
Non-compliances under FEMA
Non-compliance under FEMA can lead to various complications and penalties including financial penalties such as:
- Confiscation of the amount involved to the Central Government;
- A penalty up to thrice the sum involved in such contravention where such amount is quantifiable; or
- Up to two lakh rupees where the amount is not quantifiable; and
- Where such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues.
In addition to financial penalties, non-profit organizations may also receive a Show Cause Notice from the Enforcement Directorate which may lead to further investigation into the organization’s foreign transactions. As a result of this, the non-profit organization will suffer:
- Operational Disruption: Organizations may be forced to cease operations temporarily or permanently if they lose essential licenses or permits. They will also have to spend considerable time to deal with show cause notices and investigations.
- Loss of Donor Trust and Funding: Non-compliance with FEMA can damage the non-profit organization’s credibility, leading to loss of foreign donors and disqualification from grants.
- Difficulties in Receiving Future Foreign Funds: RBI and the MHA may restrict the organization from receiving foreign contributions, making international fundraising impossible.
- Regulatory Scrutiny and Delays: Non-compliant organizations face increased scrutiny in approvals, delays in fund transfers, and operational disruptions due to government monitoring.
- Increased Costs: Regulatory scrutiny can increase compliance costs and administrative burdens.
Disclaimer: This article provides a general overview of FEMA compliances for non-profit organizations receiving foreign funds under service contracts and is intended for informational purposes only. It does not constitute legal advice. Organizations should consult with qualified legal and financial professionals to obtain advice tailored to their specific circumstances.