Understanding the Liberalised Remittance Scheme (LRS)

The Liberalised Remittance Scheme (LRS) is a significant initiative introduced by the Reserve Bank of India (RBI) to facilitate the transfer of funds abroad by Resident Individuals (RIs). Under this scheme, individuals are permitted to remit up to USD 250,000 per financial year for a variety of current and capital account transactions.

Eligibility for LRS

The scheme is available to all Resident Individuals as defined under the Foreign Exchange Management Act (FEMA). Once an individual is classified as a resident under FEMA, they are eligible to use LRS, regardless of whether they are an Indian citizen or not. However, it’s important to note that LRS is not available to entities such as corporates, partnership firms, Hindu Undivided Families (HUF), trusts, or other organizations.

Permissible Current Account Transactions

Under LRS, individuals can remit funds for a range of permissible current account transactions, which include:

1. Private Visits: Travel expenses for visiting countries outside of Nepal and Bhutan.
2. Gifts and Donations: Remitting money to Non-Resident Indians (NRIs) or Persons of Indian Origin (PIOs) who are close relatives.
3. Emigration: Funds for migration purposes.
4. Overseas Business Trips: Expenses for business trips abroad.
5. Medical Treatment: Payments for medical treatment outside India.
6. Education: Funds for pursuing studies abroad.
7. Employment: Remittances for individuals going abroad for employment.
8. Maintenance of Close Relatives: Funds for the maintenance of family members living overseas.

Permissible Capital Account Transactions

LRS also covers various capital account transactions, allowing individuals to remit funds for:

1. Opening Foreign Currency Accounts: Residents can open accounts in foreign currencies at banks abroad.
2. Property Purchases: Investment in properties located outside India.
3. Investment in Securities: Funds can be remitted for purchasing shares, mutual funds, and other securities abroad.
4. Business Investments: Setting up wholly owned subsidiaries or joint ventures abroad for legitimate business purposes.
5. Loans to Relatives: Extending loans in Indian Rupees to relatives who are NRIs, as per the Companies Act.

Important Considerations and Limitations

1. Exceeding the Limit: If an individual wishes to remit more than the USD 250,000 limit for specific purposes like education, medical treatment, or emigration, it is permissible with documentation or approval from the RBI. For other purposes, prior RBI approval is required for amounts beyond the LRS limit.
2. Currency for Remittance: Remittances under LRS can be made in any freely convertible currency, not just USD.
3. No Limit on Frequency: There is no restriction on the number of remittances in a financial year, as long as the total amount does not exceed the prescribed limit of USD 250,000.
4. Remittance by Minors: Minors are also eligible to remit funds under LRS. However, the remittance will need to be countersigned by the minor's natural guardian when submitting the remittance form.
5. PAN Requirement: A Permanent Account Number (PAN) is mandatory for any remittance under LRS. The remitter must provide their PAN while completing Form A2, which is required for the remittance process.
6. Prohibited Activities: The LRS scheme does not allow remittances for certain activities, including:
• Margin trading or gambling.
• Purchasing Foreign Currency Convertible Bonds (FCCBs) of Indian companies in the overseas market.
• Trading in foreign exchange abroad.
• Remittances to countries identified by the Financial Action Task Force (FATF) as non-cooperative.

Special Cases and Clarifications

1. Remittance for Family Members: LRS allows remittances to be consolidated for family members, including minors, under the individual’s annual limit. However, capital account transactions such as property purchases cannot be consolidated unless the family members are co-owners.
2. Resident Indians Living Abroad: Individuals who are residing outside India for employment purposes and have been abroad for a considerable period will be considered as Non-Resident Indians (NRIs) under FEMA. As such, they will not be eligible for LRS, even if they are Indian citizens.
3. Loans and Gifts: A resident Indian can give loans to NRIs or PIOs who are close relatives, as per the provisions of the Companies Act. Similarly, a resident Indian can also make a rupee gift to an NRI/PIO who is a close relative, subject to the LRS limit of USD 250,000 per financial year.
4. Income Repatriation: For investments made under LRS, there is no requirement to repatriate the accrued interest or dividends back to India. However, if a resident Indian makes an overseas direct investment, such as in equity shares of a Joint Venture or Wholly Owned Subsidiary, they must comply with the relevant FEMA guidelines regarding repatriation and income.
5. Credit Facilities: Banks cannot extend credit facilities for capital account transactions under LRS. However, they may extend facilities for current account transactions related to remittances under the scheme.
6. Sole Proprietors: In a sole proprietorship, there is no legal distinction between the individual and the business owner. Therefore, the proprietor can remit funds under LRS, provided the remittance is made in their individual capacity.
7. Gift and Loan Transactions: A Resident Indian can make rupee gifts or loans to their close relatives who are NRIs or PIOs, as long as the amount is within the LRS limit and complies with the prescribed conditions.

Conclusion

The Liberalised Remittance Scheme (LRS) provides a flexible and straightforward way for Resident Indians to remit funds abroad for a variety of purposes. It helps individuals meet their needs for education, medical treatment, travel, and business expansion, among others. While it offers significant benefits, individuals should ensure they remain compliant with the guidelines set forth by the RBI and FEMA to avoid any complications during the remittance process.

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Disclaimer: Aim of this article is to give basic knowledge about the topic to people who are not in touch with Indian tax norms. When anybody is dealing with these kinds of cases practically, he shall consider all relevant provisions of all applicable Laws like FEMA/Income Tax/RBI /Companies Act etc.