India: The Liberalised Remittance Scheme – LRS

The Tarapore committee which was constituted by The Reserve Bank of India (RBI) to suggest a roadmap on full convertibility of Rupee on Capital account transactions, submitted their report in May 1997 recommending liberalisation of controls on capital account transactions to be done in a phased manner. One of the recommendations was to allow an individual who is resident in India to invest in assets in financial markets overseas up to US $ 25,000 and gradually increase this amount in Phase II and Phase III, over a period of time.

Giving due regards to the recommendation of the committee, the RBI introduced the Liberalised Remittance Scheme (LRS) vide A.P. (Dir series) circular no. 64 dated 4th February 2004 which allowed a resident individual to remit outside India up to US $ 25,000 per calendar year for permitted capital or current account transactions or for combination of both.

Later on, the calendar year was changed to financial year and the limits were gradually raised over a period of time as depicted in the chart below. Currently, an individual who is resident in India is allowed to remit outside India up to USD 250,000 in a financial year under the LRS.

Who can avail benefit under this scheme?

The remittance can be made under the LRS by a Resident Individual only. An HUF, Partnership firm, Company, Trust, any Association of Persons, Body of Individuals or ant Artificial juridical person cannot avail benefit of remittance under this scheme.

Which are the permitted CAPITAL ACCOUNT transactions an individual can undertake?

It is our general understanding that all capital account transactions are prohibited to be undertaken unless they are specifically permitted by the RBI. An individual is specifically allowed to remit outside India the following nature of capital account transactions under the scheme:

• Opening a foreign currency account abroad with a bank
• Purchase of property abroad
• Making investment abroad in equity shares, debt instruments, Mutual funds, Venture Capital funds etc.
• Extending Loans to Non-Resident Indians who are relatives as defined under the Companies' Act.
• Setting up Wholly Owned subsidiary (WOS) or a Joint Venture (JV) outside India for any bonafide business purpose subject to the rules framed under the Overseas Direct Investments (ODI) regulations.

In my opinion, any capital account transaction which falls outside the purview of the above list is not permitted to be undertaken under this scheme.

Which are the permitted CURRENT ACCOUNT transactions an individual can undertake?

It is the general understanding that all the current account transactions are permitted to be undertaken unless they are specifically prohibited by regulation. Therefore every 'current account transaction' is permitted to be undertaken, within prescribed limit, unless there is specific prohibition from undertaking the same. The limit of USD 250,000 in a financial year actually subsumes remittance for all the current account transactions under its ambit. Following are the nature of current account transactions that are subsumed under this scheme:

1. Private visits abroad:
   An individual is allowed to obtain foreign exchange from an Authorised Dealer (AD) or an FFMC for his private visit abroad except for visits to Nepal and Bhutan. All the tour related expenses abroad like euro rail ticket, overseas hotel/lodging expenses shall all be subsumed under the LRS limit.
2. Gift to Non-residents:
   An individual resident is allowed to remit gift to a person residing outside India. A resident, however, cannot gift to another resident in foreign currency, for the credit to latter's foreign currency account held abroad under this LRS scheme.
   An individual resident can also make a rupee gift to an NRI/PIO who is a 'Relative' of the resident individual. The amount should be credited to the NRO Account. The gift amount has to be within the overall limit of the LRS per Financial Year. It would be the responsibility of the resident donor to ensure that all the remittances made by the donor during the financial year including the gift amount have not exceeded the limit of USD 250,000 prescribed under the LRS. The term 'relative' will be as defined under the Companies' Act 2013.
3. Donation:
   An individual resident is allowed to remit donation to an organisation outside India.
4. Employment:
   A resident individual going abroad for 'Employment' can draw foreign exchange up to USD 250,000 per financial year.
5. Maintenance of close relative:
   An individual resident can remit up to USD 250,000 per financial year for maintenance of close relative abroad. The term 'relative' will be as defined under the Companies' Act 2013.
6. Business trip:
   A resident individual who needs to take up any business trip in connection with any conference, seminar, training can draw foreign exchange up to the LRS limit.
   If an employee is deputed by his Company for any business trip for any of the above purposes and the expenses are borne by the company, the same shall not be regarded as foreign exchange used by the individual from his LRS limit. Such kind of expenses which are incurred by companies are regarded as residual current account transactions and are permitted without any limit.
7. Medical Treatment abroad:
   A resident individual is allowed to draw foreign exchange up to the LRS limit for medical treatment abroad without submitting any estimate or supporting for the treatment. An Authorised Dealer can also allow remittances in excess of the LRS limit based on the estimate of medical expenses from a doctor in India or doctor/hospital abroad.
   In addition to the above, the Authorised Dealer may further allow a sum up to USD 250,000 to a person for accompanying as an attendant to the patient going abroad for medical treatment.
8. Students going abroad:
   Authorised Dealers are allowed to release foreign exchange up to the LRS limit to resident individual for studies abroad without any estimate or supporting from the foreign University. An Authorised Dealer can also allow remittances in excess of the LRS limit based on the estimate received from the Universities abroad.

Which are the transactions that are not permitted under this scheme?

Following are some of the remittances which are mentioned under Schedule 1 of the Foreign Exchange Management (Current Account Transactions) Rules are prohibited and therefore not allowed even under the LRS:

• Out of lottery winnings;
• Income from racing and riding or other hobbies;
• Purchase of lottery tickets, banned magazines etc;

Remittance on capital account is also not permitted to be made under this scheme to countries identified by Financial Action Task Force (FATF) as non-cooperative countries notified by the RBI.

Repatriation of funds:

An investor who has remitted funds under the scheme is not required to repatriate funds or income generated out of this investment made under the scheme back to India. He is in fact allowed to retain and reinvest the income earned on the investments abroad.

However, if Overseas Direct Investment (ODI) is made under this scheme in the equity shares or compulsory convertible debentures/preference shares, the guidelines and regulations as specified under the ODI regulation will need to be followed and complied with.

Some other important information:

It is important to note that an individual is required to designate a single branch of an AD through which all the remittances under the scheme will have to be made.

The AD bank is required to ensure that the 'Know Your Customer' guidelines and 'Anti Money laundering' rules are complied with.

The remittance must be made by a resident individual out of his/her own funds.

The AD bank is not permitted to lend money to anyone for the purpose of making any remittance under this scheme.

It is mandatory for the resident individual to make full and proper disclosure of all the income generated out of the remittance made under this scheme as well as assets created and located abroad in his income tax return.

Under the Income Tax Act, section 206C(1G) has been recently introduced which is applicable from 1st October 2020. According to this section, if any remittance is made under LRS for an amount exceeding Rs. 700,000/-, the AD bank is required to collect tax at source (TCS) @ 5% on the amount that exceeds Rs. 700,000/-. The resident individual will get a certificate of such tax payment and can claim this TCS against his personal tax liability.

It is further provided that if the amount of remittance by an individual under LRS represents payment our of the loan taken from a defined financial institution for the purpose of pursuing any education abroad, the rate of TCS shall stand reduced to 0.5% (as against 5%) on the amount that exceeds Rs. 700,000/-.

As can be seen from above, there is substantial relaxation and flexibility given by the RBI to an Indian resident individual to remit funds abroad. By and large, for most of the purposes and reasons for which the funds are generally required to be remitted abroad are covered and permitted under this scheme. Further, the procedure of remittance of funds is also quite simple. An individual is only required to fill up Form A2, a declaration form and submitted some informative documents to make the remittance. No further reporting as regards the performance of the investment abroad is required to be done to the RBI.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.