Liberalized Remittance Scheme

What is Liberalized Remittance Scheme? All you need to know

Indian foreign exchange transactions are governed by the Foreign Exchange Management Act of 1999, which provides the necessary legal framework. 

In accordance with the Foreign Exchange Management Act of 1999 (FEMA), which became effective on June 1, 2000, all foreign exchange transactions are classified as either capital or current account transactions. 

Any transaction outside of India that doesn’t affect a resident’s assets or liabilities, including potential liabilities, is considered a current account transaction. 

In accordance with Section 5 of the FEMA, residents of India are free to buy or sell foreign currency for any current account activity, with the exception of transactions for which the Central Government has prohibited the use of foreign currency, such as remittances from lottery winnings and remittances from racing, etc. 

Let’s learn more about the Liberalized Remittance Scheme (LRS) 

What is LRS? 

All residents, including minors, are entitled to freely transmit up to USD 2,50,000 per financial year (April – March) for any permissible current or capital account transaction, or a combination of both, under the Liberalized Remittance Scheme.  

Furthermore, residents can use the foreign exchange facility for up to USD 2,50,000 for the purposes listed in paragraph 1 of Schedule III of the FEM (CAT) Amendment Rules 2015, dated May 26, 2015

The Scheme was launched on February 4, 2004, with a USD 25,000 cap. The adjustment has been done to the LRS limit to reflect current macroeconomic and microeconomic situations.  

The minor’s natural guardian must countersign the LRS declaration form if the remitter is a minor. The Scheme does not cover corporations, partnerships, trusts, etc.

LRS-annual-limit

What is permissible under the LRS? 

Indian residents can use the LRS to send money overseas for tourism, education, medical treatment, stock and property purchases, care of family living abroad, presents, and donations.  

Individuals may also create, manage, and retain foreign currency deposits with foreign banks to conduct transactions. 

What isn’t permissible under the LRS? 

Money from specific sources, such as gambling and lottery winnings, profits from certain corporations, and accrued interest from non-resident rupee bank accounts, cannot be remitted.  

Individuals cannot remit funds for prohibited or unlawful activities like margin trading. Furthermore, if an individual reaches the maximum annual limit of US $250,000, the individual must seek special approval from the RBI.  

The Financial Action Task Force lists nations and organizations to which you are not permitted to send money (FATF). 

Liberalized Remittance Scheme

What documentation is needed? 

The RBI requires remitters to fill out and submit Form A2, issued by RBI-appointed Authorized Dealers, to track the total amount of remittance sent by people.  

The amount of the remittance, the purpose, and the individual’s PAN number are all recorded on the form. The Authorized Dealer will validate the information and handle the remittance after receiving the document. 

Is there a limit to the number of times a remittance can be undertaken? 

The periodicity of transfers is unrestricted under the LRS. However, throughout a financial year, the total amount of foreign exchange purchased from or sent through all sources in India should not exceed USD 2,50,000.  

A citizen would not be liable to earn anything in further money transfers under this Scheme after making one for funds up to USD 2,50,000 during the accounting year, even if the cash flows of the investments were brought back into the country. 

TCS and the LRS 

The government levied a 5% TCS (Tax collected at Source) on transfers sent through the Liberalized Remittance Scheme (LRS) that exceeds INR 7 lakh in the Union Budget of 2020.  

The new rule will be in effect from October 1, 2020. TCS will apply to all LRS payments, including equity investments in other countries. 

Nature of remittancesTCS
Education expenses are financed through a loan (you will need to show proof of loan sanction)0.5% in excess of INR 7 lakhs in a financial year
Education expenses not financed through a loan5% in excess of INR 7 lakhs in a financial year
Overseas Travel Package5% of the entire amount remitted Note: There’s no 7-lakh threshold, all transactions applicable for the TCS
International Transaction on Debit Cards5% of the entire amount remitted
Note: Same as above. All transactions are applicable
Transfer from Domestic Account to NRO account5% in excess of INR 7 lakhs in a financial year (if the purpose of transfer under LRS i.e Loan to NRI/Gift to NRI etc)
For any other purpose (including investments)5% in excess of INR 7 lakhs in a financial year

It’s a widespread misunderstanding that Indians can’t invest in the United States.  

Citizens of India can send USD and invest in US equities through the LRS as long as they adhere to the maximum limit rules and buy USD from an Authorized Dealer.  

In reality, Indian people sent USD 442 million to invest in overseas shares and debt in 2017.

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