The Liberalised Remittance Scheme (LRS), introduced by the Reserve Bank of India (RBI), is designed to facilitate Indian residents to remit funds abroad for various purposes. This scheme, launched as part of India's financial liberalization measures, allows resident individuals to remit up to USD 250,000 per financial year (April to March) for a range of permissible current and capital account transactions. The LRS aims to provide more freedom to individuals in managing their finances and transactions on an international level while ensuring compliance with India’s foreign exchange regulations.
Eligibility for LRS Remittances
Under the LRS, resident individuals (RIs) are eligible to remit funds abroad. The term 'resident' here is defined by the Foreign Exchange Management Act (FEMA). This means that any person who is a resident of India, irrespective of their citizenship, can avail of the benefits of the LRS. However, the scheme is not applicable to entities like companies, partnerships, Hindu Undivided Families (HUFs), trusts, and similar organizations.
Permissible Transactions under LRS
The LRS covers a wide range of permissible transactions that are classified into current account transactions and capital account transactions.
Current Account Transactions:
These transactions refer to payments related to day-to-day activities and include:
- Private visits abroad (excluding Nepal and Bhutan).
- Gifts or donations to Non-Resident Indians (NRIs) or Persons of Indian Origin (PIOs), especially close relatives.
- Emigration (for those going abroad for employment).
- Medical treatment outside India.
- Education abroad, including tuition fees and other expenses.
- Employment-related travel.
- Maintenance of close relatives residing abroad.
Capital Account Transactions:
These transactions involve investments or other financial dealings and include:
- Opening a foreign currency account with a bank outside India.
- Purchasing property abroad.
- Investments in securities, shares, and mutual funds in foreign markets.
- Setting up a wholly owned subsidiary (WOS) or joint venture (JV) abroad for genuine business activities, subject to certain conditions.
- Extending loans to NRIs who are close relatives as defined under the Companies Act, 2013.
Restrictions and Guidelines for LRS
Although LRS provides a great deal of freedom, there are certain limitations and guidelines that must be adhered to:
- Exceeding the limit: The remittance limit of USD 250,000 per financial year can be exceeded only for specific purposes such as emigration, medical treatment, or studies abroad, provided the foreign country or institution requires a higher amount. In all other cases, exceeding the prescribed limit requires prior permission from the RBI.
- Currency and Frequency: Remittances can be made in any freely convertible foreign currency, not necessarily in US dollars. There is no limit on the number of transactions a resident individual can make within a financial year, but the total amount remitted across all transactions should not exceed the annual limit of USD 250,000.
- Minor’s Remittance: Minors are also eligible to remit under LRS, with their natural guardian’s countersignature required for certain documents.
- Consolidating Family Remittances: Remittances can be consolidated for family members, including minors, but only if each individual family member adheres to the terms and conditions of the scheme. It is important to note that remittances for capital account transactions, such as investment in property or setting up an account, cannot be pooled together unless all family members are co-owners or co-partners in the transaction.
What is Not Permitted under LRS?
There are certain transactions that are not allowed under the LRS, which include:
- Prohibited activities: Remittances for margin trading, lottery, or illegal activities are not allowed.
- Purchases of Foreign Currency Convertible Bonds (FCCBs): Remittances for purchasing FCCBs in the overseas secondary market are restricted.
- Foreign exchange trading: Remittances for trading in foreign exchange abroad are prohibited.
- Non-cooperative countries: Remittances to countries identified by the Financial Action Task Force (FATF) as non-cooperative or to entities involved in terrorism-related activities are not allowed.
Compliance and Documentation
To ensure smooth remittance under the LRS, it is mandatory for resident individuals to provide their Permanent Account Number (PAN) for all transactions under the scheme. The remitter is responsible for ensuring that the remittance adheres to the applicable regulations and limits set by the RBI and FEMA.
When remitting funds, the remitter needs to fill out Form A2, which declares the nature of the transaction. The Authorized Dealer (AD) bank will assess the permissibility of the transaction based on the details provided in the form. While the bank assists in ensuring that the transaction follows the prescribed guidelines, the ultimate responsibility lies with the remitter to comply with the foreign exchange rules.
Loans and Gifts under LRS
Under LRS, Indian residents are permitted to send funds for loans and gifts to NRIs or PIOs who are close relatives. The loan can be made in Indian Rupees, and it must comply with the terms and conditions specified by the Companies Act. Likewise, gifts made to close relatives in the form of rupee gifts can be transferred through electronic means or crossed cheques, provided the gift is within the overall limit of USD 250,000 for the financial year.
Repatriation of Income
Once the funds are invested or remitted abroad, there is no requirement to bring back the income earned from those investments, such as interest or dividends. However, if the remittance includes investments in a joint venture or subsidiary abroad, the resident investor must follow the FEMA guidelines regarding repatriation and income from such investments.
Conclusion
The Liberalised Remittance Scheme (LRS) has significantly eased the process of remitting funds abroad for residents in India, enabling them to pursue personal, educational, and business-related objectives internationally. While the scheme allows flexibility in the amount and purpose of remittances, it is crucial to ensure that all transactions adhere to the prescribed limits and guidelines set by the RBI. By doing so, individuals can take advantage of the scheme while staying compliant with India's foreign exchange laws.
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Disclaimer: Aim of this article is to give basic knowledge about the topic to people who are not in touch with Indian tax norms. When anybody is dealing with these kinds of cases practically, he shall consider all relevant provisions of all applicable Laws like FEMA/Income Tax/RBI /Companies Act etc.
