All you Need to know about Liberalised Remittance Scheme (LRS)

All you Need to know about Liberalised Remittance Scheme (LRS)

Last updated: 14 Aug, 2021 | 04:22 pm

LRS (Liberalised Remittance Scheme): What is LRS? (A Detailed Guide)

Liberalised Remittance Scheme (LRS) was introduced by RBI on 4th February 2004 vide RBI A.P. (DIR Series) Circular No. 64 dated February 4, 2004, read with GoI Notification G.S.R. No. 207(E) dated March 23, 2004, on the recommendations of the Tarapore Committee. LRS came as an aid to streamline the process of sending money outside India by Indian residents, which used to be very time-consuming and cumbersome before the introduction of this scheme.

Limit of Liberalised Remittance Scheme

The current limit of remittance under LRS is $2,50,000. However, this limit was changed multiple times before authorizing the current limit.There is no restriction as to the frequency of transactions. However, the total amount of foreign exchange transactions shall not exceed the limit of $2,50,000.

It is also pertinent to note that remittances can be made in any freely convertible foreign currency and is not necessarily required to be made in US Dollars. 

Applicability of LRS

All the individuals who are resident are authorized to remit funds under the LRS scheme. This also includes minors. However, in the case of minors, the countersignature of the guardian shall be required in the LRS declaration form.

Also, Permanent Account Number (PAN) shall be mandatorily provided by the resident individuals for all the transactions under LRS made through Authorized Persons.

The option of consolidation of remittances under LRS is available for family members. However, the condition is that each family member shall comply with the terms and conditions stated in the scheme. For capital account transactions, clubbing by other family members is not permitted for opening a bank account, purchasing property, or investments if these family members are not the co-partners or co-owners of the overseas bank account, investment, or property. Also, a resident cannot give a gift in foreign currency for the credit of the foreign currency account of another resident held outside India under LRS.

To understand the implications of this scheme, firstly let’s go through some basic terminologies associated with this scheme

  1. Capital Account Transactions: Section 2(e) of FEMA 1999 defines capital account transaction as a transaction that,
  • Changes the value of assets or liabilities situated outside India and owned by the person resident in India. Here, the liabilities include contingent ones as well.
  • Changes the value of assets or liabilities situated in India and owned by the person resident outside India.

Current Account Transactions: Section 2(j) of FEMA 1999 defines current account transactions to mean all the transactions that are not capital account transactions. It also includes the following transactions:

  1. Payments to be made in relation to foreign trade, current services, other current business, and short-term banking and credit facilities provided that these payments are made in the ordinary course of business
  2. Payments to be made as to interest on loans availed and as net income from investments
  3. Remittances in relation to the living expenses incurred of parents, spouse, and children who are residing abroad
  4. Expenses incurred for parents, spouse, and children in relation to foreign travel, education, and medical care.

Definition of current account transaction has been given a wider meaning to cover all the transactions that are not capital account transactions and additionally includes the above four transactions.

LRS for Current Account Transactions

Now, RBI has categorized the current account transactions under three schedules as per their permissibility. Out of these three schedules, LRS is specifically prohibited for transactions under Schedule I, which includes:

  1. Remittance
  • out of the money earned from winning the lottery
  • of income earned from racing or riding or any other hobby
  • for purchasing lottery tickets, football pools, banned/proscribed magazines, sweepstakes, etc.
  • of dividends made by any company; however, dividend balancing shall be applicable to such companies
  • of income earned in the form of interest on funds that are held in the Non-Resident Special Rupee Account Scheme.
  1. Payment
  • of commission on exports. These exports should be made towards equity investment in Joint Ventures or Wholly Owned Subsidiaries situated abroad of Indian companies.
  • of commission on exports. These exports should be made under the Rupee State Credit Route. However, it shall not include the commission of up to 10% of the invoice value of tea and tobacco exports.
  • for 'Call Back Services' related to telephones.

LRS is not allowed for Schedule II activities as well, although Schedule II activities are permitted to be conducted with the prior approval of the Central Government.

LRS is allowed for transactions under Schedule III. These transactions can be undertaken within the limit of LRS. Any additional remittance in the excess of $2,50,000 shall require prior approval of the Reserve Bank of India.

For Resident Individuals

  1. a) Undertaking private visits to any country (other than Nepal and Bhutan as they are prohibited)
  2. b) Giving donations or gifts
  3. c) Going outside India for undertaking employment
  4. d) Emigration purposes
  5. e) Maintaining close relatives outside India
  6. f) Undertaking travel for your business or attending a conference or specialized training or for meeting medical expenses or check-up outside India
  7. g) Expenses associated with undertaking medical treatment outside India
  8. h) Studies and education abroad
  9. i) Any other current account transaction

A person other than an individual may also draw the foreign exchange within the limit of the Liberalised Remittance Scheme for the above-mentioned purposes.

Cases where more than $2,50,000 can be remitted under LRS

  1. For the following purposes, remittance can be made up to the actual amount of expense incurred even if it exceeds the LRS limit of $2,50,000 if it is so required by such country:
  • Emigration (point d above)
  • Expenses of medical treatment abroad (point g above) and
  • Studies abroad (point h above)

However, prior approval of RBI shall be taken in this regard.

  1. A person who is a resident in India but not permanently and
  • is a citizen of any foreign country (excluding Pakistan) or
  • is an Indian citizen and is on deputation to a foreign company’s office, branch, subsidiary, or joint venture in India.

may remit an amount up to his net salary. Here, net salary means salary after deducting the taxes, provident fund contribution, and other deductions.

In a Financial Year, any amount remitted under the LRS shall be deducted from the limit of $2,50,000 and the balance limit shall be available.

No approval of the Reserve Bank of India is required by the residents who are on a visit outside India and make payment using the International Credit Cards. However, for the purchase of prohibited items, restrictions on the use of international credit cards would continue.

LRS for capital account transactions

For capital account transactions, LRS can be utilized for the following purposes:

  • For opening and maintaining a Foreign Currency Account with a bank situated outside India
  • Purchasing a property outside India
  • Investments outside India. Such investments can be made in foreign equity shares, debt instruments, mutual funds, venture capital funds, etc.
  • Extending loans to relatives who are NRIs (Non-resident Indians) as defined in the Companies Act, 2013 (including loans in INR)
  • Setting up Wholly Owned Subsidiary (WOS) or a Joint Venture (JV) outside India for conducting business that shall be subject to Overseas Direct Investments Regulations

The limit of $2,50,000 per Financial Year under LRS is cumulatively available for both capital and current account transactions and is not separately available for current and capital account transactions.

Loan in INR under Liberalised Remittance Scheme to Non-Resident Indians (NRI) / Person of Indian Origin (PIO) close relative

The loan can be extended by a resident individual to a close relative who is an NRI/PIO if the below-mentioned conditions are satisfied:

  • The loan is extended on an interest-free basis.
  • The minimum maturity period of the loan is 1 year.
  • The loan is within the limits of the Liberalised Remittance Scheme (i.e., $2,50,000) per Financial Year.
  • The loan is utilized by the borrower for meeting their personal requirements or for their Indian business purposes.
  • The loan should not be utilized by the borrower for the activities, either himself or along with any other person, in which investments by the person resident outside India are prohibited, which includes
  1. a) Chit funds business
  2. b) Agricultural activities or plantation activities
  3. c) Nidhi Companies
  4. d) Real estate business*
  5. e) Trading of Transferable Development Rights (TDRs)
  6. f) Construction of farmhouses

*Explanation: “Real estate business” as referred above shall not include development of townships, construction of commercial premises, construction of residential premises, bridges, or roads.

  • The amount of loan is credited to the Non-Resident Ordinary Account held by NRI/PIO.
  • Remittance of loan amount outside India is not permitted.
  • Loan repayment shall be made through inward remittances either through
  1. a) Normal banking channels 
  2. b) Through debit to the borrower’s Non-resident External Account (NRE) or Non-resident Ordinary Account (NRO) or Foreign Currency Non-resident (FCNR) Account 
  3. c) From sale proceeds of the assets against which loans are granted, such as, immovable property, securities, or shares.

Close relative means a relative as defined under the Companies Act 2013.

Prohibitions on Liberalised Remittance Scheme

Liberalised Remittance Scheme cannot be used for the following purposes:

  • Schedule I of Foreign Exchange Management (Current Account Transaction) Rules, 2000.
  • Schedule II of Foreign Exchange Management (Current Account Transaction) Rules, 2000.
  • Capital account remittances to non-cooperative countries and territories as identified by Financial Action Task Force (FATF) as available on the FATF website or as notified by the Reserve Bank of India.
  • Direct or indirect remittances to those individuals and entities that pose significant risks of committing acts of terrorism are not permitted, as advised by the Reserve Bank of India.
  • Trading in foreign exchanges outside India.
  • Remittance to overseas exchanges or overseas counterparty from India for margins or margin calls.

Tax Collection at Source under LRS

The scope of Tax Collection at Source (TCS) has been widened after its implications under LRS by way of Section 206C(1G) of the Income Tax Act, 1961.

Under section 206C(1G), TCS shall be collected by every person, being an authorized dealer, who receives an amount or aggregate of all the amounts exceeding Rs. 7,00,000 in a Financial Year from a buyer for remittance out of India.

The amount of TCS to be collected shall be 5% of the amount to be remitted and such TCS shall be collected at the time of debiting the amount payable by the buyer or at the time of receipt of such amount from the buyer, whichever is earlier.

Requirements for remittance under LRS

The individual shall designate a branch of an Authorised Dealer (AD) through which they propose to make all the capital account transactions. Prior to the remittance, the individual should have maintained the bank account with the bank for a minimum period of one year. However, this requirement of one year is not applicable for current account transactions. The reason is that the remittance facility for permissible current account transactions under LRS can also be provided by Full Fledged Money Changers (FFMCs) and as these FFMCs cannot maintain accounts of the remitters, this criterion of one year has been confined to capital account transactions only. However, FFMCs, while allowing current account transactions, shall ensure compliance with Anti-Money Laundering Rules in force and guidelines of Know Your Customer (KYC).

For remittances relating to the permissible current account transactions, the applicant may do it by way of a new bank account. If the applicant who seeks to make the remittance is a new customer of the bank, then due diligence on the opening, operation, and maintenance of the account shall be carried out by the authorized dealer. Satisfaction as to the source of the funds can be obtained by the AD by perusing the bank statements of the applicant. If bank statements are not available, then copies of the latest Income Tax Returns filed or the Assessment Orders shall be obtained. The applicant shall furnish Form A-2 regarding the purpose of remittance. S/He shall declare that funds proposed to be remitted belong to him and shall not be used for prohibited or regulated purposes.

This was a complete guide to the Liberalised Remittance Scheme and it was a great initiative by the RBI benefitting crores of Indians by removing the erstwhile procedural barriers.