Last updated: 14 Aug, 2021 | 04:22 pm
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
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:
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:
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
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
However, prior approval of RBI shall be taken in this regard.
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:
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:
*Explanation: “Real estate business” as referred above shall not include development of townships, construction of commercial premises, construction of residential premises, bridges, or roads.
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:
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.