Introduction
We live in a smaller world as compared to our ancestors. With technological developments, cross-border transactions have become quite common these days. Online remittances have made it easier to transact across nations. Transactions happen all the time, for various purposes such as the export of goods and services, Foreign trips, medical facilities, education, investment abroad, sale proceeds of investments, and remittance of income earned. While on the macro level, it is merely diversification of sources of income, for the nation, it has a huge impact on its economy and the national reserves. The foreign currency reserves maintained by the Reserve Bank of India (RBI) enable us to make cross-border payments. Although we only have domestic currency with us, we can pay and receive in foreign currency because the RBI maintains the reserves of these currencies, and ensures the exchange of currencies.
While inward remittances increase these reserves and therefore, increase the capacity to import goods from foreign countries, using foreign currency, outward remittances reduce these reserves. Therefore, to ensure that the nation has sufficient foreign currency reserves, the Reserve Bank places various restrictions on the remittance of money to foreign nations. It does this by placing various checks and compliances for remitting money to foreign nations. However, to avoid hardships for common citizens, it has also introduced a set of exemptions where the compliances are open and less restrictive. These exemptions are covered under the RBI’s ‘Liberalised Remittance Scheme’ (LRS).
Liberalised Remittance Scheme (LRS)
The administration of foreign exchange transactions in India is guided by the Foreign Exchange Management Act, of 1999 (FEMA). Under the FEMA law, all transactions involving foreign exchange are classified either as capital account transactions, or current account transactions. Transactions by residents which do not alter their assets or liabilities including contingent liabilities outside India are classified as current account transactions. The other transactions which alter the assets or liabilities are classified as capital account transactions. Under the same law, the Reserve Bank of India (RBI) introduced the Liberalised Remittance Scheme (LRS) in February 2004.
Under the scheme, all resident individuals, including minors, are allowed to freely remit up to USD 2,50,000 per financial year for any permissible transaction. Resident individuals can also avail of foreign exchange facilities within the limit of USD 2,50,000. In the case of minors, the LRS form is to be countersigned by the minor’s guardian. The LRS is available only to Indian Residents. Therefore, if you are a person who is not a resident of India, as per the FEMA rules, you cannot avail of the benefits under this scheme. The scheme is not available to Companies, LLPs, Partnership Firms, HUFs, Private or Public Trusts etc.
LRS aims to ensure a safe and efficient way of meeting expenses abroad. Indians go abroad for various purposes such as tourism, employment, medical treatments, education etc. The LRS allows people to pay for such expenses without the hassle of protocols and paperwork. Individuals must provide their Permanent Account Number (PAN) for all transactions under LRS.
Permissible transactions under LRS
Following are the permissible capital account transactions under the Liberalised Remittance Scheme (LRS) –
- Opening a foreign currency account in another country
- Purchasing property in a foreign country
- Investing in mutual funds, venture capital financing, unrated debt securities or promissory notes
- Setting up a wholly owned subsidiary (WOS) or a joint venture (JV)
- Extending loans including rupee loans to Non-resident Indians (NRI) relatives
Following are the permissible current account transactions under the Liberalised Remittance Scheme (LRS) –
- Private visits (other than Nepal/Bhutan including transportation, overseas hotel, lodging etc.)
- A gift to a person resident outside India
- Donation to an organisation outside India
- Going abroad for employment and incidental expenses for immigration
- Maintenance of a close relative abroad
- Business trips
- Medical treatment and education
Prohibited transactions under LRS
As per the RBI guidelines, the following remittances are prohibited under the LRS –
- Remittance for any purposes that are explicitly mentioned as prohibited under Schedule I and Schedule II of current account transaction rules which includes transactions such as the purchase of lottery tickets and prohibited magazines.
- Remittance from India for margins or margin calls to overseas exchanges/overseas counterparty.
- Remittances for purchasing foreign currency convertible bonds issued by Indian companies in the overseas secondary market.
- Remittance for trading in foreign exchange abroad.
- Direct or indirect capital account remittances to countries identified by the Financial Action Task Force (FATF) as non-cooperative countries and territories. This list changes from time to time.
- Direct or indirect remittances to individuals and entities identified as posing a significant risk of committing acts of terrorism as advised separately by the RBI to the banks.
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