Liberalised Remittance Scheme (LRS): Full Form, Meaning and RBI guidelines
Transferring money abroad, or outward remittance, is essential for Indians to invest internationally, pay for education, support family, and participate in global trade. The Liberalised Remittance Scheme, abbreviated as LRS, allows Indian residents to send money abroad more freely, removing restrictions from the Foreign Exchange Management Act of 1999.
LRS in India simplifies foreign remittances for residents, reducing costs and promoting cross-border transactions, benefiting foreign investors and Indian businesses through efficient capital movement.
In this blog, we’ll explain LRS in detail and show how you can use it to meet your remittance needs.
What is LRS?
LRS stands for Liberalised Remittance Scheme, a scheme introduced by the Reserve Bank of India that allows Indian residents to transfer funds abroad for specific purposes such as education, travel, investment, and more.
The Liberalised Remittance Scheme (LRS) was launched in 2004 with an initial limit of USD 25,000 for foreign remittances, which has since been increased multiple times. Currently, under the LRS, Indian residents can remit up to USD 2,50,000 annually through authorised agents, such as banks and payment platforms, with no specific restrictions on the number of transactions allowed. The permissible limit of USD 2,50,000 is applicable for the current account or capital account transactions or a combination of both.
Current account transactions under LRS include transactions that do not involve capital investment. These include remitting money abroad for:
- Medical treatment
- Education
- Gifts or donations
- Services such as consultancy
- Maintenance and living expenses of family members
- Private or business visits to foreign countries (excluding Bhutan and Nepal)
- Emigration
- Employment purposes
Capital account transactions under LRS include transactions involving capital investment, acquisition of assets, or non-recurring investments abroad. These include remitting money for:
- Investment in international financial markets
- Acquisition of immovable properties
- Setting up a joint venture or wholly owned subsidiary
- Depositing money in foreign currency accounts
- Providing INR loans to NRI relatives as defined in the Companies Act, 2013
Having learned the transactions possible under LRS, let’s understand the eligibility and restrictions for the same.
What are the eligibility criteria for LRS?
- The remitter must be an Indian resident as defined under FEMA.
- The remitter must have a valid PAN Card, a bank account in India and a passport.
- The remitted amount should not exceed the prescribed limit of USD 250,000 during a financial year.
Repatriation and Reinvestment under LRS
Many Indians remit money to foreign countries for several capital account transactions, which may earn them income or profits. The Reserve Bank of India has specified, under the Liberalised Remittance Scheme, the treatment of such earned income.
Under this scheme, if you invest in foreign financial markets or property, you can keep and reinvest the money you earn from those investments. However, if you receive foreign currency and don't use it or reinvest it, you must send it back to your home country and give it to the authorised person within 180 days.The limit for 180 days starts from the day of such receipt/ realisation/ purchase/ acquisition or date of return to India. Furthermore, the investor may be required to surrender additional receipts as per the regulations mentioned in the Overseas Investments Rules and Regulations 2022.
Consolidation and Family Remittances under LRS
LRS allows the consolidation of the remittance for the family members for current account transactions. For capital account transactions, family members cannot consolidate the remittance for transactions such as investments and opening foreign currency accounts.
In these cases, the family members must not be the co-partners/co-owners of the bank account or the investments.
The scheme allows family members to combine remittances for immovable property purchased outside India from a foreign resident if they follow its rules.
Tax Compliance and Documentation for LRS
Under the scheme, outward remittance occurs with the assistance of authorised dealers, like banks or financial institutions licensed by the RBI to carry out foreign remittances. These are some of the compliance requirements for these transactions:
- The users have to furnish their PAN cards to the Authorised Dealer (AD) banks to execute all the transactions under LRS.
- When a user executes a transaction, ADs are guided by the nature of the transaction as declared by the remitter in Form A2.
- Thereafter, the ADs analyse and certify the remittance transaction with the foreign exchange regulations issued by the RBI.
Before remitting money, the person must designate a branch of the AD to execute all the capital account remittances. For such transactions, the remitters must have opened and maintained a bank account with the bank for at least 1 year before the remittance.
However, banks may allow remittance before the completion of 1 year based on due diligence on the opening, operation and maintenance of the account. In such cases, the AD should obtain the previous year’s bank statement of the customer to analyse the funds' sources.If such a bank statement is unavailable, the bank may ask for the Income Tax Return or the latest Income Tax Assessment Order filed by the applicant.
The applicant also has to provide a filled Form A2 explaining the remittance’s purpose and declare that they are the owner of the funds, which they will not use for any purposes prohibited or regulated under the LRS.
Frequency and Limits Under LRS
As set by RBI, the annual limit for remittances under the LRS scheme is USD 2,50,000 during a financial year. The LRS limit is applied to the total amount of foreign exchange that an individual could remit abroad in a financial year for all eligible purposes combined. It encompassed both the Current Account and the Capital Account transactions.
The RBI has not specifically listed any restrictions on the remittance frequency under LRS during a financial year. It means that individuals can make as many remittance transactions as they want during a financial year as long as they do not exceed the USD 2,50,000 annual limit.
What are the Benefits of Liberalised Remittance Scheme?
- Diversification of Investment: Exporters or business owners can use the LRS to diversify their investment portfolio by channelling funds into foreign assets like stocks, bonds, mutual funds, and real estate. This diversification can help them mitigate risks associated with fluctuating exchange rates and economic conditions in India.
- Overseas Business Expansion: LRS allows Indian exporters to invest in foreign businesses, start-ups, and joint ventures. This flexibility provides an opportunity for exporters to expand their business operations globally, tap into new markets, and foster international collaborations.
- Access to International Markets: Exporters can leverage the LRS to remit money for various business-related expenses, including travel costs for market exploration, business meetings, and participation in international trade events. This facilitates easier access to global markets and the establishment of valuable business connections.
Although the Liberalised Remittance Scheme provides numerous benefits to Indian residents wanting to remit money outside India, the scheme has some limitations:
- The maximum amount that an Indian citizen can remit in a financial year is USD 250,000. Prior permission from RBI is required if the remittance exceeds this limit.
- Remittances under the LRS are not permitted for certain purposes, such as margin trading, purchasing lottery tickets, and speculation in the foreign exchange markets.
- The receiver of the remittance must be a resident outside India and legally registered to receive funds from India as per the respective country’s foreign exchange regulations.
Things to Remember When Using the LRS Scheme
When taking advantage of the Liberalised Remittance Scheme (LRS) in India, there are several important factors to keep in mind.
- Annual Limit: the scheme allows resident individuals, including minors, to remit up to USD 250,000 per financial year (April to March) for any permissible current or capital account transaction or a combination of both. This limit is subject to revisions based on prevailing economic conditions.
- Nature of Transactions: While the the scheme is quite flexible, it's crucial to know the types of transactions allowed. The scheme is primarily designed for activities like private visits, education expenses, emigration, medical treatment, and investments in foreign assets, among others.
However, there are restrictions on certain activities, such as trading in foreign exchange and remittances to countries identified as non-cooperative by the Financial Action Task Force (FATF). - Repatriation of Income: If you invest abroad under the scheme, you are allowed to retain and reinvest the income earned from those investments. However, any foreign exchange not reinvested must be repatriated and surrendered to an authorized person within 180 days of receipt. Additionally, comply with any repatriation requirements specific to investments under Overseas Investments Rules and Regulations.
- PAN Requirement: Permanent Account Number (PAN) is mandatory for all transactions. Ensure you have a valid PAN when making remittances through authorized persons.
- Remittances for Sole Proprietorships: In the case of sole proprietorship businesses, the owner can remit funds under LRS, but there is no legal distinction between the owner and the business for remittance purposes.
Conclusion
International transactions are streamlining the ever-growing global payments industry, and India is at the centre of evolving cross-border transactions. The Liberalised Remittance Scheme is an integral part of the international payment ecosystem, allowing resident Indians to remit up to USD 2,50,000 outside India during a financial year.
Since the RBI has divided the transactions into current and capital account transactions with certain restrictions, the remitter and the authorised dealers are required to adhere to the scheme’s terms and conditions.
Additionally, as regulations can change, it's advisable to consult with a financial advisor or the RBI for the most up-to-date information and guidance regarding the Liberalised Remittance Scheme. We at Skydo would be happy to connect you with our panel of CAs and CPAs to help you if you have specific questions about LRS or foreign currency transactions and exchanges.
FAQs about Liberalised Remittance Scheme
Q1. What is the maximum limit under LRS?
Ans: The maximum limit under the Liberalised Remittance Scheme (LRS) is USD 250,000 per financial year for resident individuals in India.
Q2. Can I claim TCS on LRS?
Ans: Yes, you can claim Tax Collected at Source (TCS) benefits on transactions under the Liberalised Remittance Scheme (LRS) by adjusting it against your tax liability or as an income tax refund.
Q3. Is LRS taxable?
Ans: Yes, profits from overseas investments through the Liberalised Remittance Scheme (LRS) are taxable in India. Long-term capital gains (over two years) are taxed at 20%, while short-term gains (below two years) are subject to normal income tax slab rates. Additionally, a 5% TCS is applicable for remittances exceeding Rs. 7,00,000, with the option to claim a refund during income tax return filing.
Q4. Can LRS be used for purchasing property abroad?
Ans: An Indian resident can transfer money abroad through the Liberalised Remittance Scheme (LRS) to buy immovable property outside India.
Q5. Who is not eligible for LRS?
Ans. Entities like corporations, partnership firms, trusts, and non-resident Indians (NRIs) cannot use the LRS scheme.
