However, as India strengthened its position in global markets, open cross-border capital flows became critical to overall economic growth. In 2004, the Committee on Process and Performance Audit on Public Services (‘CPPAPS’) recommended a scheme to liberalize individual outward remittances. In the same year, RBI introduced liberalization Remittance Plan (‘Lok Raj Sangathan‘), allowing Indian residents to conduct personal foreign exchange transactions with relative ease.
In the two decades that followed, LRS has been instrumental in facilitating overseas spending and investments for Indian residents. In 2021-22, India recorded US$19.6 billion in outward remittances under the LRS, an increase of US$7 billion over the previous year. As COVID-19 is curbed and the world recovers from its economic fallout, LRS is once again gaining popularity.
The basic structure of LRS is explained below and how Indian residents can transact overseas under it.
What is the LRS remittance limit?
LRS allows Indian residents to freely remit up to $250,000 per fiscal year for current or capital account transactions or a combination of both. Any remittance in excess of this limit requires prior approval from RBI.
Who can remit money using LRS?
Only individual Indian residents are allowed to remit money under LRS. Corporates, Partnership Firms, HUFs, Trusts etc. have been kept out of its purview. However, it is available for minors, provided Form A2 is countersigned by the minor’s natural guardian.
What types of transactions are allowed?
1) Capital Account Transactions:
- opening a foreign currency account with a bank abroad;
- Acquisition of immovable property abroad, Foreign Direct Investment (ODI) and Foreign Portfolio Investment (OPI) in accordance with Foreign Exchange Management (Foreign Investment) Rules, 2022, Foreign Exchange Management (Foreign Investment) Regulations, 2022 and Foreign Exchange Management) Directions, 2022;
- Giving 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 tour abroad (except Nepal and Bhutan)
- gift/donation
- go abroad for employment
- Migrant
- Maintenance of relatives abroad
- business trips
- medical treatment abroad
- study abroad
3) Other permissible transactions include purchase of art objects 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 permitted under the Foreign Exchange Management Act, 1999
2) Remittances for margin or margin calls to foreign exchanges or foreign counterparties
3) Remittance for any purpose specifically prohibited under Schedule I or anything prohibited under Schedule II of the Foreign Exchange Management (Current Account Transactions) Rules, 2000
4) Capital account remittances by the Financial Action Task Force (FATF) to countries and territories notified as non-cooperative countries or by RBI
5) Remittances, directly or indirectly, to persons and entities that have been identified as having significant risk of acts of terrorism, as notified separately to the banks by the RBI.
What are the formalities and documents involved?
LRS allows outward remittance in the form of demand draft in the name of the resident individual or in the name of the beneficiary, against the self-declaration of the remitter in the prescribed format. Individuals are also permitted to open, maintain and maintain foreign currency accounts with any bank outside India for making remittances.
The following documents are required from the sender:
1) Designating a branch of the authorized dealer bank through which all remittances will be made.
2) Submission of Form A2 for purchase of foreign currency
3) Providing Permanent Account Number (PAN)
4) Adhere to Know Your Customer (KYC) and Anti-Money Laundering (AML) guidelines
Lastly, it is not allowed for banks to extend any credit facility to resident individuals for facilitating capital account remittance under LRS.
Are there any tax liabilities?
Tax Collected at Source (TCS) is levied at the rate of 5% on all remittances above the limit of Rs 7 lakh. Although TCS Deduction can be claimed as refund while filing Income Tax Return (ITR) under Form 26AS.
If there is any gain on foreign investment made under LRS, it is taxable in India, depending on the period for which the investment was held. If the investment was for 24+ months, a long-term capital gains tax of 20% is levied. Otherwise, gains from these investments are treated as ordinary income and taxed as per the applicable tax slabs.
With more porous geographic boundaries and an integrated global economy, there has been a tremendous increase in the frequency of foreign transactions. LRS facilitates such transactions in a seamless manner while protecting the country’s foreign exchange against volatility. Residents and entrepreneurs alike should be familiar with the nuances of LRS so that they can have a hassle-free remittance experience and optimize their forex transactions.
(The author is co-founder and CEO of TeamLease RegTech.)