The Liberalised Foreign Remittances Scheme (LRS) is a regulatory framework introduced by the Reserve Bank of India to facilitate the remittance of foreign exchange by resident individuals for current and capital account transactions. The scheme allows Indian residents to remit a specified amount of foreign currency for various permissible purposes without prior approval from the central bank, subject to certain limits and conditions.
Background of Foreign Exchange Remittances Before LRS
Before the introduction of the Liberalised Remittance Scheme, the drawal of foreign exchange by resident individuals was governed by the Foreign Exchange Management (Current Account Transactions) Rules, 2000. These rules categorized transactions into three schedules.
Schedule I contained completely prohibited transactions, where foreign exchange remittance was not allowed under any circumstances. Schedule II included remittances allowed only with prior approval of the concerned Ministry of the Central Government. Schedule III listed permissible transactions, some of which had prescribed limits and required adherence to specific procedures or approvals when those limits were exceeded.
There were no restrictions or limits on current account transactions that were not covered by these three schedules. Remittances for capital account transactions were governed separately by independent Capital Account Notifications, which specified permissible capital account transactions and related procedures.
Introduction to the Liberalised Remittance Scheme
The Liberalised Remittance Scheme was introduced on February 4, 2004, initially with a limit of USD 25,000 per financial year for resident individuals. It was introduced as a step towards partial capital account convertibility, allowing remittances for both current account and capital account transactions or a combination thereof under a unified limit.
Originally, LRS was permitted over and above the existing limits prescribed under Schedule III of the Current Account Transactions Rules for certain transactions by resident individuals. Later, through the circular issued in December 2006, the Reserve Bank subsumed various facilities for foreign exchange release under the LRS limit, consolidating current account transactions under one overall ceiling.
Subsequent clarifications issued by the Reserve Bank in 2013 addressed misconceptions about remittances for capital account transactions. Before these clarifications, it was perceived that certain capital account transactions, including the incorporation of entities abroad for strategic purposes, were allowed freely under the scheme without specific provisions.
The limit for remittances under LRS has increased over the years with some fluctuations based on economic considerations such as foreign exchange reserves. The scheme currently allows a remittance ceiling of USD 250,000 per financial year for resident individuals. Remittances from Exchange Earners’ Foreign Currency Accounts and Resident Foreign Currency Accounts are also included within the LRS ceiling.
Eligibility and Scope of the Scheme
The Liberalised Remittance Scheme is available to all resident individuals, including minors. The scheme permits remittances for various purposes such as education, travel, medical treatment, gifts, donations, investment, and maintenance of close relatives abroad. Remittances made under the scheme can be consolidated in respect of family members, but certain restrictions apply to capital account transactions when family members are not co-owners or co-partners of the overseas assets or accounts.
Resident individuals cannot gift foreign currency to another resident for credit in the latter’s foreign currency account abroad under the LRS. The use of international credit cards while overseas was proposed to be brought under the LRS limits; however, recent notifications have temporarily exempted such payments from the LRS limit and related tax provisions until September 30, 2023.
Transactions Prohibited Under the Liberalised Remittance Scheme
Remittances under the LRS are subject to specific prohibitions. Remittances for purposes prohibited under Schedule I of the Foreign Exchange Management (Current Account Transactions) Rules are not allowed. These include transactions such as the purchase of lottery tickets, sweepstakes, proscribed publications, and other forbidden items.
Remittances for transactions not permissible under the Foreign Exchange Management Act and those related to margin payments or margin calls to overseas exchanges or counterparties are also prohibited. The scheme disallows remittances for the purchase of Foreign Currency Convertible Bonds issued by Indian companies in overseas secondary markets and remittances for foreign exchange trading abroad.
Capital account remittances, directly or indirectly, to countries identified by the Financial Action Task Force as non-cooperative countries and territories are barred. Remittances to individuals or entities identified by the Reserve Bank as posing significant risks related to terrorism financing are also prohibited.
Understanding Current and Capital Account Transactions
Foreign exchange transactions under the Liberalised Remittance Scheme fall broadly into two categories: current account transactions and capital account transactions. These categories are distinct in their nature, regulatory treatment, and permissible limits under the scheme.
Definitions of Capital Account Transactions
Capital account transactions refer to those transactions thatalter the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India. This definition is based on the provisions of the Foreign Exchange Management Act and its related regulations.
Capital account transactions include the transfer of ownership of capital assets such as shares, securities, immovable property, or investments outside India by residents. They also cover transactions related to borrowings, lending, and guarantees involving foreign entities, as well as transactions affecting the equity capital of foreign entities by residents in India.
The regulation of capital account transactions is aimed at controlling the movement of capital and managing foreign exchange reserves, thereby ensuring economic stability and compliance with national policies.
Definitions of Current Account Transactions
Current account transactions are those that are not capital account transactions. These generally pertain to transactions related to foreign trade, business, services, and short-term banking and credit facilities in the ordinary course of business. The scope of current account transactions includes payments due as interest on loans, net income from investments, and remittances for personal expenses such as living expenses, education, medical care, and travel of close relatives residing abroad.
The regulatory approach to current account transactions is comparatively liberal since these transactions represent routine payments necessary for day-to-day economic activities and personal needs. The Liberalised Remittance Scheme facilitates many such transactions within prescribed limits without requiring prior approval.
Permissible Transactions under Current Account
Several types of transactions are permissible under the current account component of the Liberalised Remittance Scheme. These include private visits abroad for tourism, business, or personal reasons, except for visits to Nepal and Bhutan. Resident individuals can remit funds for gifts or donations to persons or organizations outside India. The scheme allows remittance for employment abroad and emigration-related expenses, subject to limits prescribed by the country of immigration.
Maintenance of close relatives abroad is another permitted transaction under the current account, allowing resident individuals to remit funds for the upkeep of their family members living overseas. Business trips undertaken for attending international conferences, specialized training, or seminars fall under the scope of current account transactions and are covered by the LRS limits.
Medical treatment abroad is a significant category within the current account transactions. Resident individuals can remit foreign exchange for the treatment of themselves or accompanying attendants without requiring prior approval, subject to prescribed limits. Similarly, funds can be remitted for studies abroad, including tuition fees and living expenses for students enrolled in foreign educational institutions.
Other current account transactions permissible under the scheme include payments for objects of art, travel-related expenses, and other incidental costs connected with permitted travel and treatment abroad. The scheme allows remittances via demand drafts in the name of the resident individual or the beneficiary as per the self-declaration format prescribed.
Permissible Transactions under Capital Account
Capital account transactions under the Liberalised Remittance Scheme primarily involve investments and acquisitions outside India by resident individuals. These include opening foreign currency accounts abroad with banks without requiring prior approval from the Reserve Bank. The funds in these accounts may be used for transactions connected with or arising from remittances eligible under the scheme.
Acquisition of immovable property abroad is permitted under the scheme, subject to compliance with the Overseas Investment Rules. Resident individuals may acquire property abroad using remittances sent under the LRS, including consolidation of remittances with relatives who meet the scheme conditions.
Overseas Direct Investment is another important category of capital account transactions allowed under the scheme. This involves investment by way of acquisition of equity capital or subscription to the memorandum of association of foreign entities. Investments include the acquisition of at least ten percent of paid-up equity capital in listed or unlisted entities or investments with control in a foreign entity.
Certain conditions apply to Overseas Direct Investment under the scheme, including the exclusion of investment in entities engaged in financial services, restrictions on acquiring control in subsidiaries or step-down subsidiaries, and compliance with valuation norms on an arm’s length basis. Obligations such as obtaining a Unique Identification Number, timely submission of share certificates, repatriation of dues, and incorporation of timelines for deferred consideration are also mandated.
Overseas Portfolio Investment is distinct from direct investment and involves investment in listed foreign securities other than unlisted debt instruments or securities issued by persons resident in India outside the International Financial Services Centre. Portfolio investments can include reinvestment of earnings, capitalisation of dues, acquisition through rights issues or bonus shares, gifts, inheritance, and acquisition of sweat equity or employee stock ownership plan shares under prescribed conditions.
The scheme also permits resident individuals to extend interest-free loans to Non-Resident Indian relatives under specified conditions, including restrictions on the utilization of such loans, crediting loans to Non-Resident Ordinary accounts, and repayment procedures. Certain sectors and activities are prohibited from such lending, including chit funds, agricultural activities, real estate business, and trading in transferable development rights.
Restrictions and Compliance Requirements
While the Liberalised Remittance Scheme facilitates broad remittance capabilities, it imposes restrictions to prevent misuse and ensure regulatory compliance. Banks and financial institutions are required to ensure that remittances conform to the scheme’s prescribed purposes and limits. They must verify the bona fides of transactions, maintain records, and adhere to reporting requirements stipulated by the Reserve Bank.
The scheme prohibits banks from extending credit facilities for facilitating capital account remittances under LRS. Additionally, remittances to countries identified as non-cooperative by international regulatory bodies or to individuals or entities flagged for terrorism-related risks are strictly barred.
The scheme allows retention and reinvestment of income earned from overseas investments under the LRS, subject to compliance with the scheme’s provisions and timely repatriation or surrender of unspent foreign exchange. A provision exists for retention of a limited amount of unspent foreign exchange beyond prescribed periods under specific conditions.
Remittances to International Financial Services Centres
The scheme extends provisions for remittances to International Financial Services Centres (IFSCs) for investments in securities, subject to restrictions that the securities should not be issued by entities resident outside the IFSC in India. Resident individuals can open non-interest-bearing foreign currency accounts in IFSCs to facilitate such investments. However, domestic transactions through these accounts are not permitted.
Authorised dealers may allow remittances for purposes such as payment of fees to foreign educational institutions located in IFSCs, expanding the scope of the scheme to encompass emerging financial hubs and global investment opportunities.
Permissible Current Account Transactions Under Liberalised Remittance Scheme
The Liberalised Remittance Scheme permits resident individuals to remit foreign exchange for various current account transactions, subject to the overall financial year limit. These transactions generally pertain to personal expenses, travel, maintenance of relatives abroad, and other routine payments essential for international travel and personal needs.
Private Visits Abroad
Resident individuals are allowed to remit foreign exchange up to the prescribed limit for private visits abroad, except for visits to Nepal and Bhutan. The scheme does not restrict the number of visits an individual can undertake in a financial year, provided the total remittance remains within the overall limit. This facilitates travel for tourism, personal business, or other personal reasons.
The scheme also allows remittance of all travel-related expenses such as the cost of transportation by rail, road, water, or air, including tickets and passes purchased outside India. Overseas lodging and hotel expenses may also be covered within the limit. Tour operators may collect payments for these expenses either in Indian rupees or in foreign currency directly from the traveler. This integration of travel-related costs under the scheme simplifies compliance and reduces the need for multiple foreign exchange transactions.
Gifts and Donations Abroad
Resident individuals can remit foreign exchange within the prescribed limit as gifts to persons residing outside India. Gifts can also be made as donations to organizations abroad. Gifts remitted in Indian rupees must be made by crossed cheque or electronic transfer and credited to the Non-Resident Ordinary account of the recipient, provided the recipient is a Non-Resident Indian or Person of Indian Origin. Such gifts in rupees also fall under the limits of the scheme.
The facility to remit gifts under the scheme provides residents the flexibility to support family members, friends, or charitable causes outside India without requiring specific prior approval from regulatory authorities.
Going Abroad for Employment
Individuals who are going abroad for employment purposes can avail themselves of foreign exchange under the Liberalised Remittance Scheme. Remittance is permitted up to the overall prescribed limit per financial year, which covers expenses related to relocation, travel, and other employment-related costs.
The scheme’s provision simplifies the process of obtaining foreign exchange for employment abroad, reducing the compliance burden on individuals while ensuring that remittances are within regulatory limits.
Emigration Related Remittances
Residents intending to emigrate are allowed to remit foreign exchange up to an amount prescribed by the country of immigration or the overall limit under the scheme, whichever is lower. The remittance is intended to cover expenses incidental to emigration, such as travel, initial settlement, and other costs specified by the immigration authorities of the destination country.
Remittances exceeding this limit are generally not allowed for purposes aimed at earning points or credits for immigration eligibility through investments in government bonds, land, commercial enterprises, or other avenues. This distinction ensures that emigration-related remittances are used for genuine settlement expenses rather than investment-driven immigration benefits.
Maintenance of Close Relatives Abroad
The scheme permits resident individuals to remit funds up to the prescribed limit per financial year for the maintenance of close relatives residing outside India. Close relatives are defined as per the Companies Act and include family members such as spouse, parents, children, and siblings.
This provision facilitates regular financial support for family members abroad and allows remittances for living expenses, education, and other personal needs.
Business Trips and Related Expenses
Remittances for business trips abroad, including attendance at international conferences, seminars, specialized training, and apprenticeships, are permitted under the Liberalised Remittance Scheme. The expenses related to such trips are covered within the overall remittance limit per financial year, regardless of the number of trips undertaken.
When an employee is deputed abroad by an entity and the employer bears the expenses, such costs are treated as residual current account transactions and are generally permitted outside the LRS limit. Authorised dealers may permit these transactions, subject to verification of the bona fidesof the expenses and compliance with regulatory requirements.
Medical Treatment Abroad
Resident individuals can remit foreign exchange up to the prescribed limit per financial year for medical treatment abroad for themselves or close relatives. No estimate or prior approval from a hospital or doctor is required for remittances within this limit. The scheme also allows for remittance exceeding the limit with the production of estimates from treating doctors or hospitals,, either in India or abroad.
If a person falls ill after arriving abroad, authorised dealers may release foreign exchange for medical treatment without prior approval from regulatory authorities. This provision ensures timely access to necessary funds for urgent medical needs.
The scheme also provides for remittance of funds for accompanying attendants traveling with the patient for medical treatment or check-up abroad. Such remittances are permitted up to the overall limit for medical treatment and do not require separate approval.
Students Studying Abroad
The scheme allows resident individuals to remit foreign exchange up to the prescribed limit per financial year for the purpose of education abroad. This includes payment of tuition fees, living expenses, and other related costs for students enrolled in foreign educational institutions.
For remittances exceeding the limit, authorised dealers may permit transactions based on estimates or invoices from educational institutions abroad without requiring prior approval from regulatory authorities. This facility supports access to higher education overseas while maintaining regulatory oversight.
Other Permissible Current Account Transactions
In addition to the main categories of private visits, gifts, employment, emigration, maintenance, business trips, medical treatment, and education, the scheme allows remittances for other current account transactions permitted under the Foreign Exchange Management Act and related regulations. These may include payments for objects of art, travel-related incidental expenses, and other payments connected with permitted travel abroad.
Resident individuals may remit funds via demand drafts in their name or the name of beneficiaries as long as the remittance is for permissible transactions under the scheme. A self-declaration in the prescribed format must accompany such remittances.
Banks and authorised dealers are required to ensure that remittances are made only for permissible purposes and that the total amount remitted in a financial year does not exceed the overall prescribed limit. They must verify documentation and maintain records to comply with regulatory reporting requirements.
Compliance and Documentation Requirements
All remittances under the Liberalised Remittance Scheme must be accompanied by a declaration by the remitter regarding the purpose of the remittance and confirmation that it conforms to the scheme’s provisions. Banks use standardized forms for such declarations, ensuring consistency and facilitating regulatory compliance.
Authorised dealers are responsible for verifying the identity of the remitter, the source of funds, and the legitimacy of the transaction. They must also ensure that the remittances do not contravene any other regulatory or legal requirements.
In cases where remittances exceed prescribed limits or involve complex transactions, additional documentation such as invoices, estimates, contracts, or letters from educational or medical institutions may be required.
Impact of Liberalised Remittance Scheme on Individuals and Economy
The introduction and evolution of the Liberalised Remittance Scheme have significantly impacted the ability of resident individuals to access foreign exchange for a wide range of personal and business purposes. The scheme has enhanced flexibility, simplified regulatory processes, and aligned India’s foreign exchange regulations with global practices.
The liberalisation of remittances has also supported the internationalisation of Indian individuals, students, professionals, and entrepreneurs by facilitating overseas travel, education, employment, investment, and medical treatment.
From an economic perspective, the scheme helps manage foreign exchange outflows by imposing reasonable limits while enabling genuine needs to be met. It also aids in monitoring and regulating foreign exchange transactions to prevent misuse or illegal transfers.
Permissible Capital Account Transactions under Liberalised Remittance Scheme
The Liberalised Remittance Scheme permits resident individuals to undertake capital account transactions within the overall prescribed financial year limit. These transactions primarily relate to investments abroad, acquisition of immovable property, opening foreign currency accounts outside India, overseas direct investment, portfolio investments, and lending to relatives who are Non-Resident Indians or Persons of Indian Origin.
Opening Foreign Currency Accounts Abroad
Resident individuals are permitted to open, maintain, and hold foreign currency accounts with banks outside India without requiring prior approval from the Reserve Bank. Such accounts facilitate remittances and transactions connected with or arising from foreign exchange remitted under the scheme.
Unused or unspent foreign exchange held in such accounts must be repatriated to India or surrendered to an authorised dealer within 180 days. This requirement extends to income earned on investments made under the scheme unless the income is reinvested within the stipulated period.
A provision exists allowing retention of unspent foreign exchange beyond 180 days up to a limited amount, subject to regulatory guidelines. This facilitates convenience in managing overseas funds while ensuring repatriation of funds to maintain regulatory oversight.
Acquisition of Immovable Property Abroad
Resident individuals are allowed to acquire immovable property outside India using remittances sent under the Liberalised Remittance Scheme, subject to compliance with the Overseas Investment Rules. The acquisition may be for residential, commercial, or other lawful purposes.
Remittances for property acquisition may be consolidated with relatives who are resident individuals, provided such relatives comply with the scheme’s terms and conditions. The investment must be held in joint mes,, proportional to the amount remitted by each individual.
Acquisition of immovable property abroad under the scheme requires adherence to prescribed documentation, payment norms, and regulatory disclosures to ensure transparency and compliance with foreign exchange regulations.
Overseas Direct Investment by Resident Individuals
Overseas Direct Investment (ODI) refers to investment made by resident individuals by acquiring equity capital in foreign entities or subscribing to their memorandum of association. This includes the acquisition of at least ten percent of the paid-up equity capital in listed or unlisted foreign companies or investments that grant control over the foreign entity.
ODI is subject to specific conditions. Investments should be made in operating foreign entities not engaged in financial services activities, with certain exceptions such as sweat equity shares or employee stock ownership plans. Resident individuals should not acquire control over subsidiaries or step-down subsidiaries of the foreign entity in contravention of regulatory provisions.
Control is defined as the right to appoint a majority of directors, control management or policy decisions, or hold ten percent or more of the voting rights. Investments falling below this threshold without control are treated as portfolio investments rather than ODI.
Investments must comply with arm’s length valuation norms, and resident individuals are required to obtain a Unique Identification Number and submit evidence of shareholding within the stipulated timelines. Obligations include repatriation of dues within prescribed periods and incorporating deferred consideration timelines in the memorandum of association if applicable.
Overseas Portfolio Investment by Resident Individuals
Overseas Portfolio Investment (OPI) involves investments in foreign securities other than direct equity capital acquisition, typically limited to listed entities. OPI excludes investments in unlisted debt instruments or securities issued by Indian residents outside International Financial Services Centres.
OPI transactions under the scheme may include reinvestment of income earned on overseas investments, capitalisation of dues, acquisition of equity through rights issues or bonus shares, gifts, inheritance, and acquisition of sweat equity or employee stock ownership plan shares under specified conditions.
Resident individuals can undertake OPI within the overall limit prescribed by the scheme. Investments in entities that have been delisted continue to be treated as OPI until further investments are made.
Extending Loans to Relatives Abroad
Resident individuals may extend interest-free loans to Non-Resident Indian relatives,, subject to specified conditions. The loan amount must be within the overall LRS limit and have a minimum maturity of one year.
Loans extended under the scheme must be used for the borrower’s personal or business purposes in India and cannot be utilized for prohibited activities such as chit funds, agricultural or plantation activities, real estate business, or trading in transferable development rights.
Loan amounts must be credited to the Non-Resident Ordinary account of the borrower, and repayment must be made through normal banking channels or by debiting accounts or sale proceeds of assets against which the loan was granted.
Restrictions and Prohibitions under the Scheme
Certain transactions are strictly prohibited under the Liberalised Remittance Scheme. These include remittances for purchasing lottery tickets, sweepstakes, proscribed publications, and other prohibited items. Remittances related to margin payments or margin calls to overseas exchanges or counterparties are also disallowed.
Remittances for trading in foreign exchange abroad or for the purchase of Foreign Currency Convertible Bonds issued by Indian companies in overseas secondary markets are prohibited.
Capital account remittances to countries identified as non-cooperative by the Financial Action Task Force or to individuals and entities flagged by the Reserve Bank for terrorism-related risks are barred under the scheme.
Banks and authorised dealers must ensure compliance with these restrictions and report suspicious transactions to the appropriate authorities.
Compliance and Reporting Obligations
Banks and financial institutions facilitating remittances under the Liberalised Remittance Scheme are required to obtain declarations from remitters about the purpose and nature of the transaction. They must verify documents, ensure transactions fall within prescribed limits, and maintain detailed records.
Authorised dealers are obligated to report specified transactions and comply with Reserve Bank reporting requirements. They must also ensure that remittances do not contravene any other legal or regulatory provisions.
Resident individuals making overseas investments must comply with documentation submission timelines, valuation norms, and repatriation obligations. Failure to comply may attract penalties or regulatory action.
Retention and Reinvestment of Income Earned Abroad
Income earned on investments made abroad under the Liberalised Remittance Scheme can be retained or reinvested by resident individuals,, subject to regulatory provisions. The scheme allows reinvestment of such income by the conditions laid down for Overseas Direct Investment and Portfolio Investment.
Unspent or unused foreign exchange in overseas accounts must generally be repatriated within 180 days. However, limited retention beyond this period is allowed under specific regulations.
Reinvestment provisions support continued investment abroad and provide flexibility to resident individuals in managing their foreign assets and income.
Remittances to International Financial Services Centres
The Liberalised Remittance Scheme permits remittances for investment in securities issued by entities located within International Financial Services Centres (IFSCs). Resident individuals may open non-interest-bearing foreign currency accounts in IFSCs to facilitate such investments.
Transactions involving these accounts must be confined to permissible investments and are not allowed to settle domestic transactions with other residents. Authorised dealers may permit remittances for payment of fees to foreign educational institutions located in IFSCs under prescribed conditions.
The extension of the scheme to IFSCs broadens the scope for resident individuals to participate in global financial markets and emerging financial hubs.
Role of Banks and Authorised Dealers
Banks and authorised dealers play a crucial role in implementing the Liberalised Remittance Scheme. They are responsible for verifying compliance with regulatory requirements, obtaining necessary declarations, scrutinizing the purpose of remittances, and ensuring that the aggregate remittances do not exceed the prescribed limits.
They must also report transactions to the Reserve Bank and other regulatory agencies as mandated. In case of non-compliance or suspicious transactions, authorised dealers are required to take appropriate action,, including reporting and rejecting remittances that violate the scheme.
Banks must also ensure that credit facilities are not extended to facilitate capital account remittances under the scheme and maintain records for audit and regulatory inspection.
Impact and Significance of the Liberalised Remittance Scheme
The Liberalised Remittance Scheme represents a significant step towards easing foreign exchange regulations and aligning India’s foreign exchange management with global standards. It empowers resident individuals to manage their foreign exchange needs for personal and investment purposes efficiently.
By facilitating a broad range of permissible transactions while maintaining regulatory oversight, the scheme balances flexibility and control. It supports India’s growing integration with the global economy by enabling outbound investments, international education, medical treatment abroad, and other personal and business requirements.
The scheme also aids in managing foreign exchange outflows prudently and ensuring transparency in overseas transactions by resident individuals.
Conclusion
The Liberalised Remittance Scheme provides resident individuals with a structured and regulated framework to remit foreign exchange for a wide range of personal and capital account transactions. Since its introduction, the scheme has progressively liberalised the limits and expanded the scope of permissible transactions, reflecting India’s evolving economic landscape and integration with the global economy.
Under the scheme, individuals can access foreign exchange for private travel, education, medical treatment, maintenance of relatives abroad, gifts, donations, business trips, and emigration-related expenses. It also facilitates capital account transactions such as overseas direct investment, portfolio investment, acquisition of immovable property abroad, opening of foreign currency accounts, and lending to relatives who are Non-Resident Indians or Persons of Indian Origin.
The scheme incorporates necessary safeguards and restrictions to prevent misuse, including prohibitions on remittances for prohibited activities, transactions with non-cooperative countries, and entities flagged for security risks. Compliance and reporting requirements ensure transparency and regulatory oversight, while authorised dealers play a vital role in enforcing these provisions.