1. Crypto Is Taxed and Regulated, But What Does FEMA Say?
India has, in the space of a few years, moved from regulatory silence on cryptocurrency to a fairly developed tax and anti-money-laundering position. The Income-tax Act now expressly defines and taxes Virtual Digital Assets (VDAs), and VDA service providers have been brought within the Prevention of Money Laundering Act, 2002 (PMLA) as reporting entities required to register with the Financial Intelligence Unit-India (FIU-IND). It is tempting to conclude from this that the regulatory picture is now settled. It is not. Taxation and AML compliance answer a narrower question than most cross-border crypto transactions actually raise: whether the transaction is permissible under the Foreign Exchange Management Act, 1999 (FEMA).
FEMA becomes relevant wherever a transaction has a cross-border element: an Indian resident purchasing tokens from an overseas exchange, remitting money abroad to acquire crypto, receiving tokens from a foreign company or protocol, receiving salary, consulting fees or investment consideration in tokens, moving tokens between Indian and foreign wallets, investing in an overseas Web3 project, or disposing of crypto to a non-resident counterparty. In each situation, the fact that VDA income is taxable, or that the counterparty exchange is PMLA-registered, says nothing about whether the underlying cross-border movement of value is one FEMA permits, restricts, or has simply not yet addressed. Getting this distinction right, and understanding why it exists, is the purpose of this article.
2. The Classification Problem: What Is Crypto Under FEMA?
FEMA regulates two broad categories of cross-border activity, current account transactions and capital account transactions, each built around defined terms including "currency," "foreign exchange," and "security." Where a transaction cannot be located within these defined terms, FEMA's machinery does not straightforwardly apply, and this is precisely the difficulty cryptocurrency presents.
Section 2(h) of FEMA defines "currency" to include currency notes, postal notes, money orders, cheques, drafts, travellers' cheques, letters of credit, bills of exchange, promissory notes, credit cards, "or such other similar instruments, as may be notified by the Reserve Bank." Cryptocurrency has not been notified by the RBI under this residuary limb, and nothing in the ordinary meaning of the enumerated instruments extends to a token. Section 2(za) defines "security" to mean shares, stocks, bonds, debentures, government securities, savings certificates, deposit receipts and units of specified collective investment vehicles, together with certificates of title to such instruments. A cryptocurrency token, deriving its value from market supply and demand rather than an underlying claim on an issuer, does not fit this definition either, and consequently does not constitute a "foreign security" for the purposes of Sections 3 and 4 of FEMA, which govern dealing in and holding of foreign exchange and foreign security.
The consequence is that FEMA's core prohibitions and permissions, built around the concepts of foreign exchange and foreign security, do not on their face capture a transaction in cryptocurrency. This is not the same as saying FEMA is irrelevant to crypto. A remittance made to acquire crypto still involves the outflow of rupees or foreign currency, which is unambiguously subject to FEMA; what remains unsettled is how the resulting token itself should be characterised once the currency leg is complete. The RBI has not notified VDAs within the statutory definition of currency or security, and the Government's own position, expressed through the Income-tax Act's VDA provisions, is that cryptocurrency is not recognised as legal tender. Practitioners should be candid that this leaves a genuine gap rather than treating the tax definition of a VDA, or the PMLA definition of a virtual asset, as if it settled the FEMA question by extension. It does not; each statute defines its terms for its own purposes.
Not all tokens raise identical questions. A payment-oriented token, a governance token, a stablecoin pegged to fiat currency, a security-like token structured to resemble an equity or debt claim, and a purely utility token, may each sit differently against the FEMA definitions above, particularly the "security" definition. A token structured with rights closely resembling a debenture invites more searching analysis than a token that is, in substance, a bearer instrument of no fixed claim. Generalised statements about "crypto" under FEMA should be treated with caution until the specific instrument has been examined.
3. Can an Indian Resident Buy Crypto on a Foreign Exchange?
The most common scenario, an Indian resident remitting funds to an overseas exchange to purchase crypto, illustrates the practical bite of the classification problem described above.
The Liberalised Remittance Scheme (LRS) permits a resident individual to remit up to USD 250,000 per financial year, but only for a "permissible current or capital account transaction." The RBI's Master Direction on LRS does not list cryptocurrency purchase among the enumerated permissible capital account transactions, which include opening a foreign currency account, acquiring immovable property abroad, and making Overseas Direct or Portfolio Investment. Nor does the direction's list of expressly prohibited transactions name cryptocurrency by name. The restriction in practice arises not from an express statutory prohibition, but from the requirement that any remittance correspond to a recognised permissible purpose; since crypto purchase does not squarely fit any listed capital account category, authorised dealer banks have generally treated it as falling outside the Scheme's permitted purposes and have declined to process such remittances.
This is an important distinction for a lawyer to draw precisely. It would be inaccurate to tell a client that FEMA "bans" the use of LRS for crypto, since no notification or rule says so in those terms. It is more accurate to say that the LRS route requires the remittance to be tied to a recognised permissible transaction, that cryptocurrency purchase has not been included in that list, and that authorised dealers, taking a conservative view, generally will not process such remittances. A client who moves funds through an international card or account outside the AD bank LRS facility is not thereby placed in a compliant position; the underlying FEMA question, whether the outward remittance was for a permitted purpose, remains live regardless of the payment rail used. The safer compliance position is to treat crypto acquisition from a foreign exchange as a transaction without a clearly established permissible route under current practice, pending further RBI clarification.
4. Receiving Tokens From Outside India
For founders, employees and professionals, the more frequent question is not remittance outward but receipt of tokens from abroad, whether as compensation, consulting fees, an airdrop, or investment consideration.
The FEMA analysis should generally follow the underlying transaction rather than the form of consideration. If an Indian resident provides consulting services to a foreign client and is paid in a stablecoin instead of US dollars, the transaction remains, in substance, an export of services from India. Under Section 2(l) of FEMA and the FEMA export regulations, export proceeds must be realised in freely convertible foreign exchange, within the currently prescribed period of nine months, and repatriated through recognised banking channels. A token is not freely convertible foreign exchange in the sense these provisions contemplate, and receipt of a token cannot presently be shown as compliant realisation of export proceeds. The consultant paid in tokens has not avoided a FEMA question; they have deferred it to the point of converting the tokens into rupees or foreign currency, at which point the original export transaction may still be regarded as unrealised.
Employee or founder token grants from an overseas entity raise a related but distinct issue. Where the grant is genuinely compensation for services rendered in India to a foreign employer, the export-of-services analysis above applies with similar force. Where the grant instead represents an equity-like or investment-like interest, for example a token intended to function as a founder's allocation in a protocol treated as analogous to a shareholding, the transaction may additionally engage the Overseas Investment framework, which governs how a resident may acquire an interest in a foreign entity. FEMA does not currently provide settled guidance on how a token-based allocation should be characterised, and the prudent position is to analyse the substance of what the token represents, rather than relying on its label as a "token" to sidestep either analysis.
5. Indian Companies Accepting or Paying in Crypto
The corporate use case sharpens these issues further. An Indian company invoicing a foreign customer in cryptocurrency, or accepting stablecoins for exported services, faces the same realisation and repatriation requirement discussed above: export proceeds must be received in freely convertible currency through recognised banking channels, and a crypto receipt does not presently satisfy this on its own terms. A company structuring its export invoicing around crypto settlement should assume its FEMA export declaration and repatriation obligations remain outstanding until the value is converted into a recognised currency and brought into India through an authorised channel, rather than treating the crypto receipt itself as discharging those obligations.
The position is symmetrical for outward payments. An Indian company paying a foreign vendor in cryptocurrency for services or software is, in substance, making an outward remittance for an import of services, which ordinarily must be made through an authorised dealer in permitted currency; paying in tokens outside the banking channel raises the same absence-of-permitted-route concern as the LRS position discussed in Section 3. Receiving investment consideration in tokens, rather than cash, raises a further difficulty, since India's foreign investment framework contemplates consideration in cash or, in limited cases, a swap of specified instruments, and does not presently address token-denominated consideration. Companies exploring crypto or stablecoin-based cross-border settlement should treat this as an area requiring bespoke advice, and, where possible, structure the actual value transfer through conventional banking channels rather than relying on general industry practice as a safe harbour.
6. Holding Crypto Outside India: Is It a Foreign Asset?
A separate question arises where an Indian resident simply holds tokens outside India, whether in an account with an overseas exchange, in a wallet with a foreign custodian, or in self-custody interacting with a decentralised protocol with no fixed geographic location.
FEMA's restrictions on resident holding of assets abroad are generally built around concepts such as immovable property, foreign currency accounts, and foreign securities, each of which presumes an identifiable situs or a recognised custodial relationship. A token held in a self-custody wallet, secured by a private key rather than a custodial account with an identifiable institution, does not map neatly onto these concepts, and Indian foreign exchange law has not articulated a clear position on where such an asset is situated for regulatory purposes. It would be an overstatement to assert that the location of an exchange's servers, or the jurisdiction of a custodian, necessarily fixes the situs of the underlying token for FEMA purposes; no statute or RBI direction says this, and the question remains open. What can be said with more confidence is that where a resident holds tokens through an identifiable foreign custodial account, comparable in substance to a foreign bank or brokerage account, the prudent position is to treat that holding as analogous to a foreign asset for compliance and disclosure purposes, pending further regulatory clarity, rather than to assume the absence of an express rule means the holding is unregulated.
7. FEMA, Crypto Tax and PMLA Are Different Compliance Questions
It is worth stating plainly, since the three regimes are frequently conflated in practice, that a single crypto transaction can carry tax consequences, anti-money-laundering consequences, and foreign-exchange consequences, and satisfying one does not satisfy the others. Tax consequences arise under Section 115BBH, which taxes gains on transfer of a VDA at a flat 30%, and Section 194S, which imposes a 1% withholding obligation on the buyer in most transactions. AML consequences arise under the PMLA, which since March 2023 has treated VDA service providers, whether based in India or serving Indian customers from abroad, as reporting entities required to register with FIU-IND and conduct customer due diligence. Foreign-exchange consequences arise under FEMA wherever value, an asset, a payment or a counterparty crosses India's foreign exchange boundary, as described throughout this article.
Paying the 30% tax on a VDA transaction, or transacting through a duly FIU-IND-registered exchange, does not establish that the underlying cross-border remittance or receipt was FEMA-compliant; these are separate compliance obligations administered by different authorities under different statutes, and a lawyer advising on a cross-border crypto transaction should analyse all three rather than treating tax and AML compliance as a proxy for foreign-exchange compliance. This is, in practice, the single most important structural point for a client to understand.
8. Conclusion: The Regulatory Gap Matters
India's tax and AML treatment of virtual digital assets has advanced considerably since 2022, but the FEMA treatment of cross-border crypto transactions has not kept pace, and remains built around statutory definitions of currency and security that were not designed with tokens in mind. The Supreme Court's decision in Internet and Mobile Association of India v. Reserve Bank of India established that RBI cannot indirectly prohibit crypto trading through a disproportionate banking circular, and confirmed that holding or trading cryptocurrency is not itself illegal in India. It did not, and could not, resolve how FEMA's specific definitions apply to specific cross-border crypto transactions, which is a separate legal question the judgment did not need to decide.
The practical question for a lawyer or in-house counsel advising on a cross-border crypto transaction should therefore not be "is crypto legal in India." It should be: what is the underlying transaction, where are the counterparties, how is value actually crossing the border, and does FEMA provide an established, lawful route for that specific movement of value. Indian residents and companies dealing with overseas exchanges, foreign Web3 businesses, token-denominated compensation, or crypto-settled cross-border payments should work through this FEMA analysis before the transaction occurs, rather than treating tax compliance, or the counterparty exchange's AML registration, as a substitute for it.
Fathom Legal advises Indian residents, founders and companies on the foreign-exchange dimension of crypto and Web3 transactions, alongside our broader FEMA and cross-border regulatory practice. We work closely with clients to map the underlying transaction before value crosses the border, not after. If you are structuring token compensation, cross-border settlement, or an overseas Web3 investment, our team can help identify where the law is settled and where it is not. Reach out to our FEMA and fintech practice group for a structuring discussion.
This article is intended as a general overview of a developing regulatory area and does not constitute legal advice. Specific cross-border crypto transactions should be reviewed with FEMA counsel before they are undertaken.