Compounding under FEMA: Meaning, Process & 2025 Amendments

Did you know that you can voluntarily rectify issues through compounding of contravention under FEMA? It is a time-bound mechanism that helps settle cases without facing litigation. 

As one of the top chartered accountant firms in Gurgaon, we will explain what compounding under FEMA means, how the compounding process works, and the key changes in FEMA compounding rules introduced by the Reserve Bank of India (RBI) in 2025.

What is Compounding?

Compounding refers to the voluntary process where a person or entity admits to the contravention and reaches out to the RBI to compound any contravention by paying a penalty that is called the compounding amount. The contravention can be any provision, notification, direction or order issued under FEMA (Foreign Exchange Management Act). Once this is paid and accepted, the contravention is compounded, meaning that the matter is closed and no further legal action will be initiated.

This process is governed under Section 15 of FEMA. It empowers authorities (mainly the RBI and the Directorate of Enforcement) to compound contraventions. The compounding authorities assess the case and issue a compounding order.

Recommended: TDS Provisions on Foreign Remittances under Section 195

Why Choose To Compound Contraventions?

Compounding contraventions allows individuals to plead guilty and seek redressal despite non-compliance with rules and regulations. It allows you to:

• Avoid prosecution and prolonged court proceedings
• Regularize past FEMA violations
• Maintain a clean compliance track record
• Resolve the matter within a fixed time frame

What are Common Examples of Compounding under FEMA?

Common examples of contraventions under FEMA include:

• Delay in filing FDI-related forms (FC-GPR, FC-TRS)
• Delay in allotting shares after receiving foreign funds
• Exceeding limits in outward remittances
• Breach of External Commercial Borrowing (ECB) guidelines
• Transfer of shares without prior approval

After you identify the contravention, you must file an application for compounding to seek redressal from the RBI. The next section will explain how the compounding process works.

How Does the Compounding Process Work?

Seeking redressal is important in case any individual has committed a contravention of FEMA. This is how the process of compounding under FEMA works:

• Identify the Contravention
  Review your transactions and identify whether any FEMA compliance has been violated.
• File a Compounding Application
  Submit a compounding application to the RBI with a brief explaining the contravention, along with the documentary evidence.
• RBI Reviews the Case
  The Reserve Bank of India evaluates the nature of contravention and transaction details.
• Compounding Order is Issued
  The RBI passes a compounding order specifying the compounding amount to be paid.
• Payment and Closure
  Once the penalty is cleared out, the contravention is compounded, and the matter is officially closed.

As per FEMA guidelines, the entire process must be completed within 180 days from the date the application is received. Reach out to the leading tax consultant in Gurgaon to complete the process without any errors or delays.

Read Also:  When and How Should NRIs File Form 67 for Foreign Tax Credits?

New Compounding Rules Introduced by RBI – 2025 Update

In 2025, the RBI introduced several changes to the compounding process under FEMA. These updates aim to enhance transparency, reduce delays, and encourage individuals to follow compliance with rules and regulations. The new updates include changes like:

1. Online Filing of Compounding Applications

Applicants can now submit their compounding application online through the RBI’s newly launched portal for FEMA. This eliminates the need for individuals to go to the physical while also reducing the chances of delays in the process.

2. Automated Acknowledgements & Case Tracking

Each application now receives an auto-generated acknowledgment and a tracking number. This allows applicants to follow the status of their case in real-time.

3. Standardized Penalty Slabs

To make the process more consistent, the RBI has introduced standardized penalty ranges based on the nature of contravention, and mentions the amount of penalty for the duration of delay. This helps to reduce confusion related to the calculation of the compounding amount.

4. Classification of Contraventions

Contraventions are now categorized into three types: minor, moderate, and major. This classification is based on the severity of non-compliance with laws and regulations. It also determines how the RBI will handle the compounding proceedings and how much penalty is levied on the individual.

5. Shorter Timeline for Resolution

The RBI has reaffirmed its commitment to close every case within 180 days from the date of complete application. Most cases are now being resolved within 60–90 days.

6. Pre-Screening for Repeated Offences

Applicants who have repeated contraventions will be subject to a pre-screening process and may face higher penalties or even legal persecution by authorities.

Key Takeaways

• Compounding of contraventions under FEMA is a useful remedy to resolve violations without going to court.
• The Reserve Bank of India is the main authority for handling most technical and procedural FEMA contraventions.
• The compounding process can now be completed online after the reforms introduced in 2025.
• Filing a compounding application voluntarily improves your chances of receiving a lower penalty and closing the issue swiftly.

Read More: ⁠Disclosures and Penalties of Foreign Assets in Income Tax Return

Conclusion

If you or your business has unknowingly contravened any provision of FEMA or failed to comply with any of the regulations, don’t delay it. Our taxation consultants can help you prepare and file your compounding application, assess the nature of contravention, and ensure you comply with all FEMA provisions.