However, as India solidified its position in the global markets, open cross-border capital flow became crucial for holistic economic growth. In 2004, the Committee on Procedures and Performance Audit on Public Services (‘CPPAPS’) recommended a scheme for liberalising personal outward remittances. The same year, RBI introduced the Liberalised Remittance Scheme (‘LRS‘), allowing Indian residents to make individual foreign exchange transactions with relative ease.
In the two decades since, LRS has been instrumental in simplifying overseas expenses and investments for Indian residents. In 2021-22, India recorded USD $19.6 billion in outward remittances under LRS, marking an increase of USD $7 billion from the previous year. As COVID-19 curbs ease and the world bounces back from its economic fallout, LRS is gaining popularity once again.
Explained below is the basic framework of LRS and how Indian residents can make foreign transactions under it.
What is the LRS remittance limit?
LRS allows Indian residents to freely remit up to USD $250,000 per financial year for current or capital account transactions or a combination of both. Any remittance exceeding this limit requires prior permission from the RBI.
Who can remit funds using LRS?
Only individual Indian residents are permitted to remit funds under LRS. Corporates, partnership firms, HUF, trusts, etc are excluded from its ambit. However, it is available to minors, provided that Form A2 is countersigned by the minor’s natural guardian.
What types of transactions are permitted?
1) Capital account transactions:
- Opening of foreign currency account abroad with a bank;
- Acquisition of immovable property abroad, overseas direct investment (ODI) and overseas portfolio investment (OPI), in accordance with the Foreign Exchange Management (Overseas Investment) Rules, 2022, Foreign Exchange Management (Overseas Investment) Regulations, 2022 and Foreign Exchange Management (Overseas Investment) Directions, 2022;
- Extending loans, including loans in Indian Rupees to non-resident Indians (NRIs) who are relatives as defined in the Companies Act, 2013.
2) Current account transactions:
- Private visits abroad (excluding Nepal and Bhutan)
- Going abroad on employment
- Maintenance of relatives abroad
- Business trips
- Medical treatment abroad
- Pursuing studies abroad
3) Other permissible transactions include purchasing objects of art subject to the provisions of other applicable laws such as the extant Foreign Trade Policy of the Government of India.
What types of transactions are prohibited?
Under LRS, the following types of transactions are expressly prohibited:
1) Transactions not permissible under Foreign Exchange Management Act, 1999
2) Remittance for margins or margin calls to overseas exchanges or overseas counterparty
3) Remittances for any purpose specifically prohibited under Schedule I or any item restricted under Schedule II of Foreign Exchange Management (Current Account Transaction) Rules, 2000
4) Capital account remittances to countries identified by Financial Action Task Force (FATF) as non-co-operative countries and territories or as notified by RBI
5) Remittances directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by RBI to the banks
What are the formalities and documentation involved?
LRS permits outward remittance in the form of a demand draft either in the resident individual’s own name or in the name of a beneficiary, against self-declaration of the remitter in the prescribed format. Individuals are also allowed to open, maintain and hold foreign currency accounts with a bank outside India for making remittances.
The following documentation is required from the remitter:
1) Designating a branch of an authorised dealer bank through which all the remittances will be made.
2) Furnishing Form A2 for purchase of foreign exchange
3) Providing Permanent Account Number (PAN)
4) Adhering to the prescribed Know Your Customer (KYC) and Anti-Money Laundering (AML) guidelines
Lastly, it is not permissible for banks to extend any credit facilities to resident individuals for facilitating capital account remittances under LRS
Are there any tax obligations?
Tax collected on source (TCS) is levied at the rate of 5% on all remittances above the threshold of Rs 7 lakh. However, the TCS deducted can be claimed as a refund at the time of filing income tax return (ITR) under Form 26 AS.
If any profit is made on foreign investments made under LRS, it is taxable in India based on how long the investment was held. If the investment was for 24+ months, a long-term capital gains tax of 20% is imposed. Otherwise, gains from these investments are treated as normal income and taxed as per the applicable tax slabs.
With more porous geographical borders and an integrated global economy, the frequency of foreign transactions has grown tremendously. LRS facilitates such transactions in a seamless manner while also safeguarding the country’s foreign exchange against instability. Residents and entrepreneurs alike should familiarise themselves with the nuances of LRS to have a hassle-free remittance experience and optimise their foreign exchange dealings.
(The author is Co-Founder & CEO, TeamLease Regtech.)