For Indians with family members studying overseas or those looking to invest internationally, the Foreign Exchange Management Act of 1999 imposed severe restrictions.
However, the Liberalised Remittance Scheme (LRS), introduced by the Reserve Bank of India in 2004, aims to simplify this challenge for Indian residents. From its modest beginnings with a $25,000 annual limit, the LRS has evolved significantly, now allowing remittances of up to $250,000 per financial year for a wide range of purposes.
In this comprehensive guide, we’ll learn more about the LRS scheme including its key features, tax applications, and eligibility criteria. Read along!
What is the Liberalised Remittance Scheme (LRS)?
The LRS is a foreign exchange policy introduced by the Reserve Bank of India in 2004. It aims to simplify and streamline the process of sending money abroad for Indian residents. The LRS allows individuals to remit funds for various current and capital account transactions, effectively easing the restrictions set by the Foreign Exchange Management Act (FEMA) of 1999.
Initially launched with a limit of USD 25,000 per financial year, the LRS has evolved over time. The current limit stands at USD 250,000 per financial year, allowing residents to use these funds for a wide range of purposes including education, medical treatment, investments, and travel. This scheme has made it easier for Indians to manage their international financial needs and diversify their investment portfolios beyond domestic markets.
Key Features
Key features of the LRS scheme include:
- Applicable to all resident individuals, including minors
- Allows for both current and capital account transactions
- Non-Resident Indians (NRIs) have separate rules for fund transfers
- Tax Collected at Source (TCS) applies on remittances above тВ╣7 lakh, with rates varying based on purpose and time period
- Remittances from Exchange Earners’ Foreign Currency (EEFC) and Resident Foreign Currency (RFC) accounts are included in the LRS ceiling
Eligibility Criteria for Liberalised Remittance Scheme
The LRS in India allows specific individuals to transfer funds abroad. Here are the key eligibility criteria:
- Resident Status: The scheme is open to all resident individuals in India. This includes adults, minors, and students.
- Banking and Identification: Eligible individuals must have an active Indian bank account. Additionally, they need to possess a valid Permanent Account Number (PAN) and a passport.
- Purpose: The remittances should be used for specific purposes such as educational expenses, business ventures, and personal use.
Permissible Transactions Under LRS
The LRS allows Indian residents to conduct various international transactions. Here’s an overview of the permissible transactions:
- Travel and Tourism: Individuals can remit funds for travel to foreign countries, except Nepal and Bhutan. This includes private visits, business trips, conferences, and medical travel.
- Employment and Emigration: The scheme facilitates remittances for those seeking employment abroad or planning to emigrate.
- Family Support: Funds can be sent for maintaining close relatives living in foreign countries.
- Healthcare: Remittances are allowed for medical treatments abroad, including check-ups and accompanying attendants.
- Education: The LRS covers expenses related to studies in foreign institutions.
- Financial Transactions: Individuals can open foreign currency accounts abroad, purchase property, and make various investments including equity shares, debt instruments, and mutual funds.
- Gifts and Donations: The scheme permits sending money as gifts or donations to foreign recipients.
- Other Current Account Transactions: Any other current account transaction not prohibited under the FEMA 1999 is generally allowed.
- Consolidated Remittances: Family members can consolidate their remittances for certain transactions, subject to individual compliance with LRS terms.
It’s important to note that these transactions are subject to an annual limit of USD 250,000 per financial year. Authorised Dealer (AD) banks can process these remittances without Reserve Bank of India (RBI) permission, provided they verify the transaction’s genuineness.
Transactions Not Permitted Under LRS
The LRS has specific restrictions on certain types of transactions. Here’s an overview of the transactions not permitted under this scheme:
- Prohibited Activities: Remittances for purposes explicitly prohibited under Schedule-I of the Foreign Exchange Management (Current Account Transactions) Rules, 2000. This includes purchasing lottery tickets, sweepstakes, or proscribed magazines.
- Margin Trading: Sending funds for margins or margin calls to overseas exchanges or counterparties is not allowed. This prevents speculative trading activities abroad.
- Secondary Market Bonds: Remittances to purchase Foreign Currency Convertible Bonds (FCCBs) issued by Indian companies in overseas secondary markets are prohibited.
- Forex Trading: The scheme does not permit remittances for trading in foreign exchange abroad.
- High-Risk Destinations: Capital account remittances to countries identified as “non-cooperative” by the Financial Action Task Force (FATF) are not allowed. This helps prevent potential money laundering or terrorism financing.
- Sanctioned Entities: Remittances to individuals or entities identified as posing significant terrorism risks, as advised by the Reserve Bank of India (RBI) to banks, are prohibited.
- Resident-to-Resident Gifting: Gifting foreign currency by one resident to another resident for crediting to the latter’s foreign currency account held abroad under LRS is not permitted.
- Restricted Transactions: Any item restricted under Schedule II of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 is also not allowed.
These restrictions are designed to maintain the integrity of the LRS, prevent misuse of foreign exchange, and align with international financial regulations.
LRS: Annual Limits and Recent Changes
The LRS has undergone significant changes since its inception in 2004. Currently, the annual limit for remittances under LRS stands at USD 250,000 per financial year. This limit has evolved over time, starting from a modest USD 25,000 in 2004 and gradually increasing to its present amount.
Also, as of July 1, 2023, the Finance Act, 2023 has revised the Tax Collection at Source (TCS) rates for various types of remittances. For instance, overseas tour packages now attract a 20% TCS rate, up from the previous 5%. Another notable change is the inclusion of international credit card transactions, if they exceed тВ╣7,00,000 per financial year.
The government has also introduced a 180-day utilisation rule тАУ funds remitted under LRS must be used within 180 days, or they must be repatriated to India.
Remit Funds to USA using Appreciate App
The Appreciate app offers a streamlined, cost-effective solution for your remittance needs. Here’s how it works:
- Set up your account
Access your dashboard and navigate to the ‘Profile’ section. From there, go to ‘Accounts’ and locate your Customer ID. Make sure to note this ID as you’ll need it later. If you haven’t already done so, remember to register your device by tapping on the ‘register’ option.
- Activate your Virtual Debit Card
Check your email inbox for a message titled ‘YES Bank Virtual Debit Card’. Open this email and download the attached PDF, which contains your virtual Debit Card details. To access this PDF, you’ll need a password. The password format combines your Customer ID and your birth date in DDMM format.
- Create your Debit Card PIN
Visit the Yes Online website to set up your PIN. Look for the option to “Generate/Regenerate Debit Card PIN”. After checking the terms and conditions, proceed to enter your debit card details. You’ll then set a new PIN and create your Login ID and Password for future access.
- Fund your YES Bank account
In the app, navigate to ‘Profile’, then ‘Money Transfer’. Tap on ‘add money to yes bank’. You’ll need to enter the amount you wish to transfer and provide your UPI ID. Once you’ve entered these details, you’ll complete the transfer using your UPI app.
- Transfer to your Buying Power
Go to ‘Money Transfer’ again, but this time tap on ‘add money to buying power’. Enter the amount you wish to transfer and proceed. You’ll need to upload your bank statement – you can do this manually by selecting the PDF from your phone.
You’ll then need to confirm your details, select the source of funds, and accept the terms and conditions. The final steps involve authorizing the transfer using either your YES Online account or Debit Card, and completing the transaction by entering an OTP sent to your mobile number.
Tax Implications of LRS
The Finance Act, 2023, revised the TCS rates, effective from July 1, 2023; removing the reference to the term ‘out of India’ concerning LRS. This means that all remittances under LRS are now subject to TCS, regardless of whether they are incurred within India or outside. The pre and post-amendment TCS rates are detailed below:
| Particulars | TCS Rate till June 30, 2023 | TCS Rate with Effect from July 1, 2023 |
| Education (funded through a loan from a specified financial institution) | 0.5% if the aggregate remittance exceeds INR 7,00,000 | 0.5% if the aggregate remittance exceeds INR 7,00,000 |
| Education (not covered above) or medical treatment | 5% if the aggregate remittance exceeds INR 7,00,000 | 5% if the aggregate remittance exceeds INR 7,00,000 |
| Overseas tour packages | 5% without any threshold limit | 20% without any threshold limit (except for credit and debit card payments where the threshold of INR 7,00,000 applies) |
| Other remittances | 5% if the aggregate remittance exceeds INR 7,00,000 | 5% if the aggregate remittance exceeds INR 7,00,000 |
Other key pointers to note are:
- Profits from overseas investments are taxable in India. Long-term capital gains (investments held over 2 years) are taxed at 20%, while shorter-term investments are taxed at regular income tax rates.
- TCS can be claimed as a credit when filing your ITR (Income Tax Return) using Form 26AS. This allows for a potential refund of the collected tax.
- Certain entities, like government bodies and specified organisations, are exempt from TCS. Additionally, if TDS (Tax Deducted at Source) is already applicable, TCS doesn’t apply.
Compliance and Reporting
When making remittances under LRS, individuals must provide a declaration to the Authorised Dealer (AD) bank, stating the purpose of the remittance and confirming that the funds will be used for permitted activities only. This declaration is typically made through Form A-2.
For capital account transactions, individuals need to designate a specific branch of an AD bank through which all remittances will be made. It’s important to note that the applicant should have maintained an account with this bank for at least one year prior to making the remittance.
Also, new customers seeking to make capital account remittances are subject to additional due diligence. This may include providing bank statements for the previous year or, if unavailable, the latest Income Tax Assessment Order or Return to verify the source of funds.
As of recent changes, banks are also required to report all transactions under LRS to the Reserve Bank of India (RBI), regardless of the amount. This includes reporting on the Tax Collected at Source (TCS) for remittances exceeding тВ╣7 lakhs.
Advantages of Using LRS
The LRS not only simplifies international transactions but also opens up a world of possibilities for personal and professional growth. Let’s explore the key advantages of using LRS:
- Investment Diversification: LRS allows you to spread your financial wings by investing in foreign stocks, bonds, mutual funds, and even real estate. This global approach can help balance your portfolio and potentially boost returns.
- Educational Support: Funding overseas education becomes smoother with LRS. You can easily transfer money for tuition fees, living expenses, and study materials, supporting academic pursuits in institutions worldwide.
- Business Expansion: Entrepreneurs can leverage LRS to invest in foreign start-ups, businesses, or joint ventures. This facilitates global business expansion and fosters international partnerships.
- Charitable Giving: LRS allows you to make gifts or donations to family members or charitable organisations outside India, extending your generosity across borders.
Frequently Asked Questions About LRS
What are the charges for LRS?
Under the Liberalised Remittance Scheme (LRS), you are required to pay a 5% Tax Collected at Source (TCS) on remittances exceeding Rs. 7,00,000. This deducted TCS can be claimed as a refund while filing your income tax return using Form 26AS.
What is the limit of remittance in India?
There are no restrictions on the frequency of remittances under the LRS, but the total amount remitted in a financial year should not exceed USD 2,50,000. Once this limit is reached, further remittances under the scheme are not permitted even if the funds are brought back into India.
Is LRS applicable on credit cards?
International credit card payments made by individuals while on a visit outside India are not covered under the LRS, according to a notification amending the Foreign Exchange Management (Current Account Transactions) Rules, 2000. This amendment is effective retrospectively from May 16.
Who is eligible for LRS?
All resident individuals, including minors, are eligible to remit up to USD 2,50,000 per financial year under the LRS for permissible current or capital account transactions. This limit applies to a combination of both types of transactions.
Is TCS on foreign remittance refundable?
Yes, you can claim a refund for TCS on foreign remittance in your income tax return if it exceeds your actual tax liability. To do this, you must complete the relevant sections of the ITR form and provide supporting documentation.
Can I give a loan under LRS?
A resident individual can give an interest-free rupee loan to a NRI or a close relative under LRS, subject to conditions such as a minimum maturity of one year and adherence to the overall LRS limit of USD 2,50,000 per financial year. Also, the loan must be used for the borrower’s personal or business requirements in India and cannot be remitted outside the country.
Conclusion
LRS allows Indian residents to remit up to USD 250,000 per financial year for various purposes, including overseas education, medical treatment, investments, and travel. This scheme has evolved since its inception in 2004, with the remittance limit increasing from an initial USD 25,000 to its current amount. Also, recent changes have brought international credit card transactions under the LRS umbrella and revised Tax Collection at Source (TCS) rates. These modifications aim to enhance regulatory oversight while maintaining the scheme’s core benefits.
Disclaimer: Investments in securities markets are subject to market risks. Read all the related documents carefully before investing. The securities quoted are exemplary and are not recommendatory.
