The Liberalised Remittance Scheme (LRS) was introduced by the Reserve Bank of India in February 2004 as a measure to facilitate resident individuals in remitting funds abroad for permitted current or capital account transactions. This scheme emerged in response to India’s comfortable foreign exchange reserves and was aimed at providing greater freedom to individuals in carrying out foreign exchange transactions. Unlike other regulations, LRS is not part of any specific rules or regulations but is guided by RBI circulars and master directions. The scheme allows resident individuals to send money abroad up to a prescribed limit per financial year for various permissible purposes, both related to current account transactions like travel and education, and capital account transactions like investments and property purchases.
Background and Regulatory Framework
The Liberalised Remittance Scheme was introduced vide RBI A.P. (DIR Series) Circular No. 64 dated February 4, 2004, and Government of India Notification G.S.R. No. 207(E) dated March 23, 2004. It has since undergone several revisions to align with prevailing economic conditions. The RBI DED Master Direction No. 7/2015-16 dated January 1, 2016, provides consolidated instructions on the scheme. Reporting requirements are governed under RBI FED Master Direction No. 18 dated January 1, 2016. Initially, the LRS limit was set at USD 25,000 and has been gradually increased over the years to the current limit of USD 2,50,000 per financial year per resident individual, effective from May 26, 2015.
The scheme is designed exclusively for resident individuals, including minors, allowing them to remit funds abroad for legitimate and specified purposes. Corporations, partnership firms, Hindu Undivided Families (HUF), trusts, and other entities are not eligible to use LRS.
Objectives of the Liberalised Remittance Scheme
The primary objective of the Liberalised Remittance Scheme is to liberalise the process of outward remittances by resident individuals, thereby promoting ease of access to foreign exchange for a range of permitted activities. The scheme aims to:
- Encourage individuals to participate in foreign investments and asset acquisition.
- Support education and medical treatment abroad by simplifying foreign exchange access.
- Facilitate foreign travel and personal expenses abroad.
- Promote cross-border business activities such as establishing subsidiaries or joint ventures.
The scheme was also introduced to replace multiple restrictive mechanisms that limited individuals’ ability to freely access foreign currency, thereby aligning India with global practices and increasing the country’s integration with the international economy.
Scope and Applicability
LRS is available only to resident individuals as defined under the Foreign Exchange Management Act (FEMA). This includes Indian citizens residing in India and minors through their natural guardians. Under LRS, individuals can remit funds abroad up to USD 2,50,000 per financial year for any permitted current or capital account transaction or a combination of both.
The scheme covers a wide range of transactions, including private visits abroad, medical treatment, education, maintenance of relatives abroad, business trips, purchase of property, investments, loans to relatives who are non-resident Indians, and setting up of wholly owned subsidiaries and joint ventures outside India for bona fide business purposes.
However, the scheme explicitly excludes entities such as companies, partnership firms, trusts, and HUFs. These entities must seek RBI approval under the Foreign Exchange Management Regulations for any outward remittances.
Permissible Capital Account Transactions Under LRS
Under the Liberalised Remittance Scheme, resident individuals are permitted to undertake specific capital account transactions. These include opening foreign currency accounts abroad with banks, purchasing immovable property outside India, investing in overseas securities such as shares and debt instruments of foreign companies, mutual funds, venture capital funds, and unrated debt securities. The scheme also permits the acquisition of shares as remuneration or qualification for directors in overseas companies.
Additionally, resident individuals can establish wholly owned subsidiaries and joint ventures outside India for genuine business activities. Loans, including in Indian Rupees, can also be extended to Non-Resident Indians who are relatives, as defined under the Companies Act, 2013.
It is important to note that banks and financial institutions are prohibited from providing any credit facilities to residents to facilitate capital account remittances under LRS. This is intended to prevent borrowing for foreign exchange remittances.
Permissible Current Account Transactions Under LRS
The LRS limit of USD 2,50,000 per financial year also includes remittances for permitted current account transactions, which include private visits abroad, gifts and donations to persons outside India, travel for employment, emigration, maintenance of close relatives abroad, business trips, medical treatment, and education.
Private visits abroad, except to Nepal and Bhutan, are covered under this scheme, allowing individuals to obtain foreign exchange up to the prescribed limit in aggregate per financial year. All related expenses for tours, including transport and lodging, are subsumed under the LRS limit.
Gifts or donations up to the limit can be sent to persons or organizations outside India. Remittances for employment abroad are also permissible up to the prescribed limit per financial year.
Persons emigrating from India can remit funds up to USD 2,50,000 or the amount prescribed by the destination country, whichever is lower. Any amount exceeding this limit may be remitted only for incidental expenses in the country of immigration and not for investments or acquisition of assets abroad.
Maintenance of close relatives abroad is also allowed under LRS, with remittances permitted up to USD 2,50,000 per year.
Business trips abroad are covered, including visits for international conferences, seminars, or training programs.
Medical treatment expenses abroad can be funded up to the LRS limit without requiring estimates from medical institutions. Amounts exceeding the limit require submission of medical estimates for approval.
Education-related expenses for studies abroad are also permitted up to the limit without insisting on estimates from foreign institutions. Remittances exceeding this limit can be allowed by authorized banks upon submission of fee estimates.
Restrictions and Prohibited Transactions
Despite the liberal nature of the scheme, certain transactions are prohibited under LRS. These include remittances for purposes banned under the Foreign Exchange Management (Current Account Transactions) Rules, 2000, and transactions involving countries identified by the Financial Action Task Force (FATF) as non-cooperative in combating terrorism and money laundering.
Remittances to individuals or entities flagged by the Reserve Bank of India as posing significant risks are also prohibited. Moreover, remittances for margin payments to overseas exchanges or counterparties are disallowed.
Additionally, the scheme forbids residents from gifting foreign currency to other residents for credit to their foreign currency accounts abroad under LRS.
Tax Collection at Source on LRS Transactions
The Government of India introduced provisions under Section 206C(1G) of the Income Tax Act to levy Tax Collection at Source (TCS) on foreign remittances under LRS and the sale of overseas tour packages. This came into effect from July 1, 2023, and was amended with effect from October 1, 2023.
TCS applies at a rate of 20% on remittances exceeding Rs. 7 lakhs per financial year for purposes other than education and medical treatment. For education and medical treatment, the TCS rate remains at 5% on amounts exceeding Rs. 7 lakhs.
Payments made abroad through International Credit Cards are excluded from the LRS limit and are not subject to TCS.
The threshold limit of Rs. 7 lakhs applies to the aggregate remittance amount in a financial year across all LRS transactions. Individuals must furnish their Permanent Account Number (PAN) to avoid higher TCS rates, which apply to those who do not provide PAN or fail to file income tax returns.
Documentation Requirements for Liberalised Remittance Scheme
To avail of the Liberalised Remittance Scheme, resident individuals are required to designate a specific branch of an Authorised Dealer (AD) through which all their remittances will be made. This designated branch will handle all transactions related to LRS for the individual. The individual must submit Form A2, which is a prescribed application for the purchase of foreign exchange under LRS. This form contains declarations and details about the nature of the remittance and the purpose for which it is intended.
Submission of Permanent Account Number (PAN) is mandatory for making remittances under the scheme. The PAN helps in tracking and monitoring foreign remittances and is necessary to comply with tax collection provisions. Without furnishing PAN, the individual may be subject to higher tax collection at source (TCS) rates.
In case the remitter is a minor, Form A2 must be countersigned by the minor’s natural guardian. This ensures that remittances by minors are properly authorised and monitored.
Retention and Reinvestment of Funds Abroad
One of the important features of the Liberalised Remittance Scheme is that resident individuals who remit funds abroad under the scheme are allowed to retain the funds and income generated from investments overseas. There is no requirement for the repatriation of funds or income generated through investments made under LRS.
However, in the case of overseas direct investments in equity shares or compulsorily convertible preference shares of a Joint Venture (JV) or Wholly Owned Subsidiary (WoS) outside India, the individual must comply with the terms and conditions prescribed under the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004. These regulations govern the transfer or issue of foreign securities and impose certain compliance requirements to regulate such investments.
The ability to retain and reinvest income earned abroad under LRS encourages individuals to hold investments for the long term without the pressure of repatriation, fostering a more stable and predictable flow of foreign investments by residents.
Transactions Allowed Under LRS to International Financial Services Centres
Resident individuals can also make remittances under LRS to International Financial Services Centres (IFSCs) established in India. IFSCs operate under special regulations aimed at attracting international financial services and facilitating cross-border transactions.
Individuals may open Foreign Currency Accounts (FCA) within IFSCs to conduct permissible investments under LRS. Recent regulatory relaxations have removed the requirement to repatriate funds lying idle in such accounts within 15 days of receipt, thereby aligning the treatment of FCA in IFSC with the broader provisions of the LRS.
Furthermore, authorised persons can facilitate remittances for payment of fees to foreign educational institutions or universities located in IFSCs for pursuing permitted courses such as financial management, fintech, engineering, science, technology, and mathematics. This enhances access for students who wish to undertake specialized education programs offered within IFSCs.
Restrictions and Prohibited Transactions under LRS
Despite its liberal nature, the scheme has explicit restrictions to ensure compliance with India’s foreign exchange laws and international obligations. The LRS is not available for any remittance purpose prohibited under Schedule I or restricted under Schedule II of the Foreign Exchange Management (Current Account Transactions) Rules, 2000.
Capital account remittances under LRS are not permitted to countries or territories identified by the Financial Action Task Force (FATF) as non-cooperative in anti-money laundering and combating terrorism financing measures. These countries are listed and updated periodically, and banks are advised to deny remittances under LRS to such jurisdictions.
Additionally, remittances to individuals or entities flagged by the Reserve Bank of India as posing significant risks related to terrorism or financial crimes are strictly prohibited. The scheme also disallows remittances for margin payments or margin calls to overseas exchanges or counterparties, as such transactions require separate regulatory approvals.
Gifting foreign currency to another resident in India for credit to their foreign currency accounts abroad under LRS is not permitted. This prevents circumvention of the scheme limits and ensures individual compliance with prescribed regulations.
Tax Collection at Source (TCS) on LRS Remittances
From July 1, 2023, and revised effective October 1, 2023, Tax Collection at Source provisions apply to foreign remittances under LRS and to the sale of overseas tour packages. These provisions require authorised dealers to collect tax at specified rates on remittances exceeding certain thresholds.
For remittances related to education or medical treatment, the TCS rate is 5% on the amount exceeding Rs. 7 lakhs in a financial year. This rate remains unchanged even after the amendment effective from October 1, 2023.
For remittances under LRS for purposes other than education and medical treatment, the TCS rate has increased from 5% to 20% on the amount exceeding Rs. 7 lakhs per financial year. Similarly, for overseas tour program packages, the TCS rate remains at 5% up to Rs. 7 lakhs, and 20% for the amount above this limit.
Payments made through International Credit Cards abroad are excluded from the LRS limit and are not subject to TCS, as clarified by the tax authorities.
The Rs. 7 lakh threshold applies to the aggregate of all remittances under LRS during the financial year, regardless of the purpose. Therefore, remittances for education, medical treatment, and other purposes together contribute to this threshold.
If the remitter does not provide their PAN or has not filed income tax returns for the specified period, TCS is collected at higher rates, which are double the normal rates, subject to o minimum of 5% and a maximum of 20%. This measure encourages tax compliance among remitters.
Process and Compliance for TCS on LRS
Tax collection at source under Section 206C(1G) of the Income Tax Act is required when the following conditions are met:
- The remitter is an individual resident in India.
- The payment is made to an authorised dealer for foreign currency remittance under LRS or an overseas tour program package.
- The remittance amount is within the prescribed limit of USD 2,50,000.
- The remittance is from disclosed sources of income or assets.
- The remittance is not for prohibited transactions or those requiring specific RBI approval.
The authorised dealers are responsible for collecting the TCS at the time of foreign currency remittance. This collection ensures timely compliance with tax laws and helps track high-value foreign remittances.
Role of Authorised Dealers and Banks
Authorised Dealers, usually banks authorised by the Reserve Bank of India, play a critical role in implementing the Liberalised Remittance Scheme. They verify compliance with scheme limits, the purpose of remittances, documentation requirements, and tax provisions such as TCS.
They are also responsible for reporting remittances to the RBI under the prescribed reporting formats and timelines. Authorised Dealers ensure that individuals comply with all regulatory conditions before allowing foreign exchange transactions under LRS.
The banks also ensure that no credit facilities are extended to residents for capital account remittances under the scheme, to prevent borrowing for outward remittances.
Foreign Exchange Limit and Its Application
The Liberalised Remittance Scheme allows resident individuals to remit up to USD 2,50,000 per financial year (April to March) for permitted current and capital account transactions or a combination of both. This limit is cumulative and includes all types of remittances under the scheme.
The limit applies to the individual and not to the family as a whole. However, remittances by family members can be consolidated provided each complies with the terms of the scheme. It is important to understand that clubbing of remittances is not permitted in the case of capital account transactions, such as opening overseas bank accounts or purchasing property, unless the individuals are co-owners or co-partners.
The USD 2,50,000 limit has been revised multiple times since the inception of LRS. It started with USD 25,000 in 2004 and increased gradually to the current amount as per RBI directions. The revisions are based on macroeconomic conditions and the foreign exchange reserve status of the country.
Use of LRS for Overseas Property Purchase
One of the capital account uses permitted under the scheme is the purchase of immovable property abroad. Resident individuals can buy residential or commercial property overseas within the LRS limit.
The scheme requires adherence to the laws of the country where the property is being purchased, as well as compliance with Indian foreign exchange regulations. It is important to ensure that the property is acquired for bona fide purposes and not for evasion of Indian tax laws or money laundering.
While LRS allows the purchase, individuals should also consider tax implications in both countries. Any income earned from the property, such as rent or capital gains on sale, may be taxable in India under the Income Tax Act and possibly in the foreign jurisdictio,n depending on tax treaties.
Investments in Overseas Securities
Under LRS, resident individuals may invest in shares, debt instruments, mutual funds, venture capital funds, and other securities of foreign companies. The scheme covers investments in both listed and unlisted companies.
An individual can also acquire shares as remuneration or qualification shares in overseas companies where they hold the post of director. This facilitates the movement of professionals and entrepreneurs in international business.
Investments can be made through direct purchase or through established foreign financial intermediaries. However, authorised dealers in India are not allowed to extend loans or credit to facilitate such investments, preventing financing of investments through borrowed funds.
The income earned on these investments, including dividends, interest, or capital gains, can be retained and reinvested abroad without repatriation restrictions.
Setting up Subsidiaries and Joint Ventures Abroad
The Liberalised Remittance Scheme also allows resident individuals to set up wholly owned subsidiaries and joint ventures outside India for bona fide business purposes. This was introduced to encourage Indian entrepreneurs and investors to participate in global business expansion.
The investments under this provision must be genuine business investments and not for speculative purposes. The scheme requires compliance with applicable FEMA regulations and disclosures regarding the nature of the investment.
Individuals setting up subsidiaries or joint ventures abroad should maintain proper documentation and ensure adherence to the foreign country’s laws regarding foreign direct investment and business operations.
Loans to Non-Resident Indian Relatives
LRS permits resident individuals to extend loans to Non-Resident Indian (NRI) relatives, including loans in Indian Rupees. This provision facilitates support within families where some members reside abroad as NRIs.
The definition of relatives aligns with the Companies Act, 2013, and includes close family members such as parents, siblings, spouses, and children. The loans should be bona fide and for genuine purposes.
While LRS permits these loans, individuals must ensure that the terms of the loan are formalised and comply with tax and foreign exchange laws to avoid complications.
Opening and Maintaining Foreign Currency Accounts Abroad
Resident individuals can open and maintain foreign currency accounts abroad with banks without seeking prior approval from the Reserve Bank of India. These accounts can be used for all transactions connected with or arising from remittances made under the Liberalised Remittance Scheme.
This facility provides flexibility and convenience for managing funds abroad, including making investments, meeting expenses, and receiving income from overseas sources.
The foreign currency accounts should be properly maintained and declared as per Indian tax and foreign exchange regulations.
Remittance for Education and Medical Treatment Abroad
LRS facilitates outward remittances for education and medical treatment abroad. Resident individuals can remit funds for tuition fees, living expenses, and medical treatment costs within the prescribed limit.
Authorised Dealers may release foreign exchange up to USD 2,50,000 without insisting on fee or medical estimates from institutions or hospitals. For amounts exceeding this limit, estimates from the foreign institution or hospital may be required.
If a person falls sick after traveling abroad, additional foreign exchange may be released by Authorised Dealers for medical treatment without prior RBI approval.
The scheme also allows remittance of funds for an attendant accompanying a patient abroad for medical treatment or check-up within the prescribed limit.
Foreign Exchange for Business Trips and Private Visits
Resident individuals traveling abroad for business purposes such as attending conferences, seminars, specialized training, or apprenticeships can avail of foreign exchange up to the LRS limit per financial year.
Similarly, individuals traveling abroad for private visits, excluding Nepal and Bhutan, can obtain foreign exchange within the limit irrespective of the number of visits.
All travel-related expenses including transport, lodging, and tickets are included within the LRS limit. Tour operators can collect payments in Indian rupees or foreign currency, which will count towards the individual’s LRS usage.
Emigration and Maintenance of Close Relatives Abroad
Individuals emigrating from India may remit foreign exchange up to USD 2,50,000 or the amount prescribed by the country of emigration, whichever is lower. Any excess remittance beyond this limit requires prior RBI approval and must be for incidental expenses in the country of immigration.
Maintenance of close relatives abroad, as defined under the Companies Act, is allowed under LRS. Individuals can remit funds up to the prescribed limit for the upkeep and welfare of family members residing outside India.
Such remittances must be genuine and not intended to circumvent foreign exchange laws or facilitate unregulated capital movement.
Reporting and Monitoring of Remittances under LRS
Authorised Dealers (ADs) are required to report details of all remittances under the Liberalised Remittance Scheme to the Reserve Bank of India. The reporting framework ensures transparency, monitoring, and compliance with foreign exchange regulations.
The reports include information such as the remitter’s details, amount remitted, purpose of remittance, beneficiary details, and other prescribed particulars. These reports help the Reserve Bank track the flow of foreign exchange and detect any irregularities or violations.
Resident individuals are also responsible for maintaining accurate records and furnishing necessary documentation to the ADs for verification and compliance purposes.
Compliance and Penalties under LRS
Compliance with the Liberalised Remittance Scheme guidelines is mandatory. Any violation of the scheme provisions or FEMA regulations can attract penalties under the Foreign Exchange Management Act.
Penalties may include fines, confiscation of foreign exchange, and prosecution in serious cases. For instance, remitting funds exceeding the prescribed limit without prior approval, or remitting for prohibited purposes, can lead to enforcement actions.
To avoid penalties, individuals must ensure that their remittances comply with all scheme conditions, provide accurate information in Form A2, and adhere to reporting and documentation requirements.
Recent Amendments and Regulatory Changes
The Liberalised Remittance Scheme has evolved over the years with several amendments to address changing economic conditions and regulatory needs.
Recent changes include the introduction of Tax Collection at Source (TCS) provisions on foreign remittances and overseas tour packages, with specified thresholds and rates effective from mid-2023 and revised in October 2023.
Another important update is the clarification that payments made abroad through International Credit Cards are not considered remittances under LRS and are exempt from TCS. This eases the burden on individuals making foreign transactions via credit cards.
Regulatory relaxations have also been extended to allow remittances and Foreign Currency Account operations in International Financial Services Centres (IFSCs), encouraging greater participation in these specialized zones.
Interaction of LRS with Income Tax Laws
While the LRS facilitates outward remittances, resident individuals need to consider the tax implications under the Income Tax Act.
The Income Tax Department requires disclosure of foreign income and assets acquired through LRS remittances. Income earned abroad, such as dividends, interest, or capital gains, must be declared in the resident’s income tax returns.
Non-disclosure or misreporting can lead to penalties and scrutiny. The TCS mechanism under LRS also assists tax authorities in tracking foreign remittances and ensuring compliance.
Individuals are advised to consult tax professionals for proper filing and compliance related to foreign income and assets acquired through LRS.
Interaction with Other FEMA Regulations
The Liberalised Remittance Scheme operates within the broader framework of Foreign Exchange Management Act (FEMA) regulations. It coexists with other rules governing foreign exchange transactions, investments, and capital flows.
For instance, overseas direct investment outside the LRS limits requires prior approval or separate reporting under FEMA regulations. Similarly, remittances for prohibited purposes under FEMA are disallowed under LRS.
Residents must understand that LRS is a liberalised scheme but still subject to FEMA rules, including those relating to prohibited transactions, reporting, and compliance.
Benefits and Objectives of the Liberalised Remittance Scheme
The scheme was introduced as a liberalisation measure to enable resident individuals to access foreign exchange for legitimate current and capital account transactions without cumbersome prior approvals.
It promotes ease of doing business, encourages education and medical treatment abroad, facilitates global investments by individuals, and supports international travel and professional development.
By setting a reasonable annual limit, the scheme balances the need for foreign exchange outflows with the country’s macroeconomic stability and foreign exchange reserves.
Conclusion
The Liberalised Remittance Scheme (LRS) serves as a significant regulatory framework that empowers resident individuals in India to freely remit funds abroad up to a prescribed annual limit for a wide range of permissible current and capital account transactions. Instituted as a liberalisation measure, it balances facilitating legitimate cross-border financial activities, such as education, medical treatment, overseas investments, property purchase, and family maintenance, with necessary regulatory safeguards to protect India’s foreign exchange reserves and comply with international obligations.
The scheme’s structured documentation requirements, compliance norms, and tax provisions, including the Tax Collection at Source, ensure transparency and adherence to both foreign exchange and income tax regulations. While enabling individuals to participate in global economic opportunities, the LRS maintains restrictions on prohibited transactions, helping prevent misuse and financial crimes.
Overall, LRS represents a carefully calibrated mechanism that promotes ease of access to foreign exchange for Indian residents, encouraging personal growth and international business engagement, while safeguarding the country’s economic interests through prudent monitoring and enforcement.