The Liberalised Remittance Scheme, often referred to as LRS, is a significant component of India’s foreign exchange management framework. It provides a structured mechanism for resident individuals to remit funds abroad within a defined annual limit for specified purposes. The scheme has evolved from a more restrictive regime under the Foreign Exchange Management Act (FEMA) into a framework that balances liberalisation with safeguards to ensure stability in India’s external account.
Before exploring the scope and operational aspects of the scheme, it is important to understand the environment in which it was introduced and the regulatory principles that continue to shape its implementation.
Evolution from CAT Rules to LRS
Before the LRS came into effect, foreign exchange transactions by resident individuals were governed primarily by the Current Account Transaction Rules, 2000, issued under FEMA. These rules categorised transactions into three schedules.
Schedule I – Prohibited Transactions
This schedule contained transactions that were entirely prohibited for residents. The prohibition was absolute, meaning no approvals or exceptions were available under normal circumstances. Such prohibitions included certain forms of remittances for lottery winnings, racing, and similar speculative activities.
Schedule II – Transactions Requiring Prior Approval
The second schedule specified transactions that could only be undertaken with prior approval from the relevant Ministry of the Central Government. These were typically sensitive in nature or involved public policy considerations. The requirement of ministerial clearance acted as a safeguard against inappropriate use of foreign exchange.
Schedule III – Permissible Transactions with Limits
The third schedule dealt with transactions that were generally permissible but had prescribed monetary ceilings. If the amount of remittance exceeded the set limit, additional procedural requirements or prior approvals were necessary. This category provided a controlled level of flexibility for residents while maintaining oversight over larger transfers.
Transactions Outside the Schedules
It is important to note that any current account transaction not covered by the three schedules was allowed without restriction. This position was confirmed in the Authorised Dealers’ Association Circular No. 11 dated 4 May 2000. This meant that many everyday foreign payments could be made freely as long as they were not specifically regulated or prohibited.
Capital Account Transactions Before LRS
In contrast, capital account transactions were governed through independent notifications issued by the Reserve Bank of India. Each notification detailed the categories of permissible capital account activities, such as foreign investment, lending abroad, and acquisition of immovable property, subject to conditions. This separate treatment reflected the higher impact such transactions could have on India’s foreign asset position.
Introduction of the Liberalised Remittance Scheme
The introduction of the LRS marked a shift towards a more open framework for resident individuals. Under the scheme, a resident individual may remit up to USD 250,000 per financial year for a combination of permissible current and capital account transactions. The limit applies per individual, so each family member has an independent entitlement.
The scheme simplified the regulatory structure by offering a single annual ceiling rather than separate limits for different categories of transactions. This gave residents greater flexibility in planning overseas payments and investments, while still maintaining an upper bound to safeguard foreign exchange reserves.
Prohibited Remittances under LRS
Despite the increased flexibility, the LRS framework includes a clear list of prohibited purposes. These include remittances for speculative activities, purchase of lottery tickets, sweepstakes, racing, and certain forms of margin trading. Remittances for activities that are unlawful under Indian law or inconsistent with national policy objectives are also prohibited.
The list of prohibited transactions is binding and must be observed strictly. Authorised dealers are required to verify the stated purpose of remittances and ensure they do not fall within these restricted categories.
Understanding Current and Capital Account Transactions
An essential aspect of using the LRS is understanding the difference between current account transactions and capital account transactions. This distinction is important because while both categories are permitted within the annual limit, they are subject to different rules under FEMA.
Current Account Transactions
Current account transactions refer to payments connected with foreign trade, other current business, services, and short-term banking and credit facilities. They also include payments for living expenses abroad for individuals and dependents, as well as remittances for education, medical treatment, travel, gifts, and donations.
A key characteristic of current account transactions is that they do not result in a change in the foreign assets or liabilities of the resident individual.
Capital Account Transactions
Capital account transactions are those that alter the assets or liabilities outside India of persons resident in India. Examples include acquiring property abroad, purchasing shares in foreign companies, opening foreign currency accounts overseas, and extending loans to relatives abroad.
Because these transactions can have a more direct impact on India’s external balance sheet, they are more tightly regulated in terms of what is permissible.
Permissible Transactions under LRS
Within the LRS limit, both current and capital account transactions are allowed, provided they are not specifically prohibited by the RBI. The range of permissible purposes is broad, but it is essential that residents use the correct purpose code when making the remittance through an authorised dealer.
Permissible Current Account Transactions
The following are some examples of current account transactions permissible under the scheme:
- Private visits abroad for tourism or personal reasons
- Gifts and donations to persons or organisations abroad
- Employment-related expenses, such as relocation costs
- Emigration expenses for moving abroad permanently
- Maintenance of close relatives living overseas
- Business travel for meetings or conferences
- Medical treatment abroad, including hospital deposits and incidental costs
- Studies abroad, covering tuition fees, living expenses, and related charges
These transactions are generally straightforward, but the remitter must ensure that the amount remains within the annual limit and the stated purpose matches the nature of the payment.
Permissible Capital Account Transactions
Examples of permissible capital account transactions within LRS include:
- Opening a foreign currency account with a bank abroad
- Acquisition of immovable property abroad for permitted purposes
- Overseas direct investment in accordance with LRS provisions
- Extending loans to close relatives living abroad
These transactions may involve additional compliance obligations under FEMA, especially in the case of overseas direct investment or acquisition of property.
Clubbing of Family Members’ Limits
The LRS allows consolidation of remittances for certain purposes, subject to strict conditions. Clubbing of limits is permitted only if all remitters are co-owners or co-partners in the overseas asset being acquired. This rule prevents the misuse of LRS by pooling funds without genuine joint ownership.
For example, if three family members are buying a property abroad together, they may each remit their individual entitlement under LRS, provided the ownership proportion matches the payment contribution.
Clubbing is not allowed for some capital account transactions unless the co-ownership condition is met. It is also not permissible for a resident to gift foreign currency to another resident for credit to that person’s foreign currency account abroad under LRS.
Additional Compliance Aspects
The LRS framework also addresses how remitted funds can be managed once they are abroad.
Soliciting Deposits
All banks and financial institutions, whether Indian or foreign, must seek prior approval from the RBI before marketing overseas deposit schemes or acting as agents for foreign mutual funds and financial services companies in India.
Retention and Reinvestment
A resident who has remitted funds under LRS may retain and reinvest the income earned on those investments abroad, subject to Overseas Direct Investment rules. However, unspent or unused foreign exchange must be repatriated and surrendered to an authorised dealer within 180 days, unless reinvested. There is an allowance to retain up to USD 2,000 beyond 180 days in certain cases.
Remittances to IFSC
The scheme permits remittances to International Financial Service Centres in India for specified purposes, within the same overall LRS limits.
Procedure for Remittance under LRS
The remittance process is carried out through an authorised dealer bank. The resident must complete Form A2, declaring the purpose of the remittance and confirming that it falls within the permissible categories under LRS. The correct purpose code must be provided, as this determines whether the transaction is a current or capital account transaction and whether it is allowed.
The authorised dealer is responsible for ensuring compliance with RBI guidelines, verifying the source of funds, and maintaining records of the transaction. The remitter must also confirm that they have not already exceeded their annual limit under the scheme.
Tax Collection at Source on Foreign Remittances
The Finance Act introduced the mechanism of Tax Collection at Source on certain foreign remittances under LRS. This applies at the time of remittance and is collected by the authorised dealer.
Up to 30 September 2023, there is no TCS on remittances up to ₹7 lakh in a financial year. Any amount above this threshold attracts a TCS rate of 5 percent. From 1 October 2023, the rate increases to 20 percent for amounts above ₹7 lakh, except for education loan remittances from financial institutions, which continue to attract a concessional rate of 0.5 percent above the threshold.
Practical Application and Procedural Compliance
The Liberalised Remittance Scheme is not only a regulatory framework but also a practical tool for residents planning foreign transactions. While the concept is straightforward, its application requires careful attention to the purpose of remittance, compliance with documentation requirements, and adherence to procedural steps laid down by the Reserve Bank of India. We focus on the practical side of the scheme, detailing permissible categories, procedural aspects, and the steps needed to maintain compliance.
Categories of Permissible Transactions
The scheme covers both current account and capital account transactions, allowing flexibility to allocate the annual limit of USD 250,000 according to individual needs. Each transaction category has its own considerations, and the choice of purpose code is critical for classification and approval.
Current Account Transactions
Current account transactions are generally linked to personal or business needs that do not alter the foreign asset or liability position of the resident.
Private Visits Abroad
Residents may use the scheme for private travel to any foreign destination except those restricted by Indian law. This includes tourism, visiting family or friends, and short-term leisure trips. All travel-related expenses such as hotel bookings, internal travel, and incidental expenses can be covered within the remittance.
Gifts and Donations
Remittances as gifts to individuals abroad or donations to charitable, educational, or cultural institutions overseas are allowed within the limit. The remitter must ensure that the recipient is eligible to receive funds under the laws of the destination country.
Employment-Related Remittances
If a resident has secured employment abroad, the scheme can be used to remit relocation costs, initial accommodation expenses, and other incidental charges. The scheme also supports remittances for work-related training programs abroad.
Emigration
Emigration involves moving abroad for permanent settlement. Remittances under this purpose may include application fees, legal charges, and other costs directly related to the migration process. If a foreign authority specifies an amount to be deposited for immigration clearance, it can be remitted under LRS, subject to restrictions on investment-based immigration.
Maintenance of Close Relatives
Residents can remit funds for the maintenance of close relatives abroad. This may include parents, children, or other dependents. The remitter must establish the relationship and ensure that the funds are for living expenses.
Business Travel
Although business travel is generally funded by the sponsoring organisation, individuals who are self-employed or travelling for their own business purposes may use their LRS entitlement to cover expenses. Business travel for employees of a company is typically outside the LRS framework, as it is funded through the corporate account.
Medical Treatment Abroad
The scheme allows remittances for overseas medical treatment, including advance deposits with hospitals, travel expenses, and incidental costs for accompanying attendants. If a hospital provides an estimate exceeding the annual limit, additional remittances are allowed beyond the USD 250,000 ceiling for that purpose.
Studies Abroad
Residents pursuing education abroad can remit tuition fees, accommodation costs, and other educational expenses. In addition, living expenses for the student can be covered under the same category. Educational loans from financial institutions for overseas study are treated differently for tax collection at source purposes.
Capital Account Transactions
Capital account transactions alter the resident’s foreign asset or liability position and are subject to specific regulatory oversight.
Opening a Foreign Currency Account Abroad
Residents may open a foreign currency account with a bank outside India and remit funds under LRS to deposit into this account. Funds can be used later for permissible investments or expenses. The account must not be used for purposes prohibited under FEMA.
Acquisition of Immovable Property Abroad
Residents can purchase property abroad using their LRS entitlement, provided it is for a permissible purpose such as personal use or investment. The property cannot be purchased with borrowed funds from overseas unless permitted by RBI regulations. The ownership must reflect the contribution made by each individual in case of joint purchase.
Overseas Direct Investment
Residents can invest in equity or debt instruments of an overseas entity within the LRS limit, provided the entity is engaged in a bona fide business activity and not in financial services unless specifically allowed. Investments must comply with the Overseas Investment Rules, Regulations, and Directions.
Extending Loans to Relatives Abroad
Loans can be extended to close relatives who are non-residents, subject to conditions such as the maximum permissible limit and repayment terms. The loan should be interest-free if it is extended under LRS.
Clubbing of Family Members’ Limits
Clubbing of limits is allowed under specific circumstances. If multiple family members are co-owners or co-partners in the overseas asset, they may combine their individual limits to make a larger remittance. For example, a family of four could collectively remit up to USD 1,000,000 in a financial year for a joint property purchase, provided each is a co-owner to the extent of their contribution.
Clubbing is not permitted where joint ownership is absent or for purposes such as opening a bank account in only one person’s name. Residents cannot gift foreign currency to another resident for credit to that person’s overseas account under LRS.
Retention, Reinvestment, and Repatriation Rules
Income earned on investments made under LRS can be retained or reinvested abroad. However, any unspent or unused foreign exchange must be brought back to India within 180 days from the date of receipt or return.
Exceptions allow retention of up to USD 2,000 beyond this period. If funds are held in an overseas bank account, they must be utilised for permissible transactions or reinvested in compliant instruments.
Remittances to International Financial Service Centres
The scheme permits remittances to IFSCs in India for investment in specified products, including certain categories of securities. These are subject to the same annual LRS limit and must comply with applicable IFSC guidelines.
Step-by-Step Remittance Procedure
A systematic approach is essential to ensure compliance with LRS requirements. The following steps outline the general process.
Step 1 – Identifying the Purpose
The remitter must first identify the precise purpose of the transaction and ensure it is within the permissible list under the scheme. The choice of purpose determines the applicable rules and documentation requirements.
Step 2 – Approaching an Authorised Dealer
All remittances under LRS must be routed through an authorised dealer bank. The bank is responsible for verifying compliance with the scheme and collecting the necessary documents.
Step 3 – Completing Form A2
Form A2 is the primary declaration form for remittances under FEMA. The remitter must provide details such as the amount, currency, beneficiary details, and purpose code. The form also includes a declaration confirming that the remittance is within the LRS limit and for a permissible purpose.
Step 4 – Providing Supporting Documents
Depending on the purpose, supporting documents may include invoices, admission letters from educational institutions, hospital estimates, property purchase agreements, or immigration authority requirements. For maintenance of relatives, a relationship proof may be required.
Step 5 – Verification by the Bank
The authorised dealer will verify the information provided, ensure the remittance is within the annual limit, and check that the purpose is allowed. Banks also monitor cumulative remittances during the financial year to ensure the threshold is not exceeded.
Step 6 – Executing the Remittance
Once all checks are complete, the bank processes the remittance. The amount is debited from the remitter’s account and transferred to the beneficiary’s account abroad or deposited into the designated overseas account.
Step 7 – Record Keeping
Both the remitter and the bank must maintain records of the transaction. This is important for compliance audits and for tracking the utilisation of the LRS limit.
Tax Collection at Source Application
Tax Collection at Source is applicable at the time of remittance under LRS. The authorised dealer collects the tax from the remitter based on the applicable threshold and rate. Up to 30 September 2023, remittances up to ₹7 lakh in a financial year are exempt, while amounts above that attract a rate of 5 percent.
From 1 October 2023, the rate increases to 20 percent for amounts above ₹7 lakh, except for education loan remittances from financial institutions, which have a concessional rate of 0.5 percent above the threshold.
Practical Compliance Tips
To ensure smooth processing of remittances under LRS, residents should:
- Plan remittances in advance to avoid breaching the annual limit unintentionally
- Maintain clear records of all remittances and purposes for future reference
- Ensure that all supporting documentation is complete and accurate before submission
- Use the correct purpose code to prevent delays or rejection by the authorised dealer
- Be aware of the prohibited purposes to avoid regulatory breaches
- Monitor foreign investments for compliance with retention and repatriation rules
Interaction with Other FEMA Regulations
While LRS provides a comprehensive framework for individual remittances, it does not override other provisions of FEMA. For example, overseas direct investments must still comply with the specific rules governing such investments. Similarly, acquisition of immovable property abroad must meet the conditions set out in the relevant capital account transaction notifications.
Transactions that are permissible under LRS may still be subject to separate reporting or filing requirements, such as submitting specific forms to the RBI for overseas investments. Residents should be aware of these parallel obligations to maintain full compliance.
Employment and Immigration
Employment and immigration-related remittances often involve larger, upfront payments. Understanding the scope of permissible expenses and structuring remittances accordingly can ensure that all legitimate costs are met without breaching regulations.
Case Study: Employment Abroad
Mr. Rakesh Malhotra secures a job in Canada and is required to remit funds for relocation and settlement. Under the scheme, he can remit up to USD 250,000 during the financial year for purposes directly related to employment abroad. These include accommodation deposits, relocation charges, and transportation of household goods.
The scheme also permits additional remittances beyond the USD 250,000 ceiling if incidental expenses are justified under immigration requirements, such as deposits mandated by Canadian authorities. However, such additional allowances cannot be used for investment-based immigration programs that require purchasing property or securities as part of eligibility.
Rakesh’s wife, also a resident individual, is entitled to a separate USD 250,000 limit for her own remittances. If she travels with him, she can use her entitlement for personal relocation expenses. However, direct gifting of foreign currency from one spouse to another for overseas account credit is not allowed under LRS.
Strategic Note
Couples moving abroad can benefit from planning remittances separately to make use of both individual limits. Expenses should be categorised clearly between each person’s allocation to prevent any compliance issues with clubbing restrictions.
Education Abroad
Education remittances are a common category under LRS, often involving both tuition fees and living expenses. Care must be taken to route funds correctly and to avoid misclassification.
Case Study: Studies in Australia
Vijay Singh’s son secures admission to a university in Australia. Vijay intends to remit funds for tuition and living costs. The tuition fees can be sent directly to the university under the relevant purpose code, while living expenses may be remitted directly to the son’s overseas bank account or via maintenance allowance.
If Vijay prefers, he can gift funds in Indian currency to his son’s domestic account, allowing the son to initiate the remittance himself under his own USD 250,000 entitlement. This approach may be useful when tuition and living expenses combined exceed a single person’s limit.
Educational loans sanctioned by financial institutions for overseas study are subject to a concessional Tax Collection at Source rate. This distinction can reduce upfront costs for families funding education abroad.
Strategic Note
For higher-cost courses, splitting remittances between the student and parents can expand the effective remittance capacity. Documentation should clearly reflect the purpose and beneficiary to avoid reclassification by the authorised dealer.
Medical Treatment Abroad
Medical treatment is one of the few purposes where the LRS limit can be exceeded with proper documentation. The facility allows residents to access specialised healthcare services without financial disruption.
Case Study: Surgery in Germany
Mrs. Meena Rao requires specialised surgery in Germany. The hospital provides a cost estimate exceeding USD 250,000. She can remit USD 250,000 under LRS and an additional amount based on the hospital’s estimate for the medical procedure. This supplementary remittance requires supporting documents such as medical certificates and the official estimate from the overseas medical institution.
Travel and accommodation costs for Meena and one accompanying attendant can be included in the remittance. However, these expenses must be properly segregated in the documentation to distinguish between medical costs and ancillary expenses.
Strategic Note
Planning the remittance flow in stages aligned with hospital billing schedules can ensure that the funds are available when required while staying compliant with documentation requirements.
Business Travel and Professional Engagements
Business travel may fall outside LRS if funded by an employer, but self-employed professionals and business owners can use their entitlement for work-related trips.
Case Study: Self-Employed Consultant
An independent management consultant, Rajesh Verma, travels abroad to deliver training programs and meet clients. He uses LRS to cover airfare, accommodation, and incidental expenses. While his trips generate income, the expenses remain classified as current account transactions under LRS.
Rajesh must retain receipts and invoices to justify the purpose in case of scrutiny. Misclassifying the trip as personal travel when business receipts exist could create compliance issues.
Strategic Note
Self-employed individuals should maintain separate travel accounts and documentation to clearly demonstrate the professional nature of their expenses.
Opening a Foreign Bank Account
Opening a bank account abroad under LRS can be a useful tool for managing overseas expenses and investments, but it comes with specific retention and repatriation rules.
Case Study: Offshore Account for Investment
Mr. Nari Chhabaria remits USD 250,000 under the purpose code for opening a foreign currency account. He intends to use the funds for overseas investments in equities and bonds. The funds must be invested in permissible instruments and not in restricted activities such as derivatives or speculative products.
If Nari does not use the full balance within 180 days, he must either repatriate the unused funds or reinvest them in permissible assets. Retaining amounts beyond USD 2,000 after 180 days without reinvestment breaches the retention rules.
Strategic Note
Using a foreign account can streamline transactions, but careful monitoring of holding periods and reinvestment is essential to maintain compliance.
Property Purchase Abroad
Acquiring property abroad under LRS is permissible for both residential and commercial purposes, but financing options are limited.
Case Study: Joint Purchase in UAE
Mr. Pankit Mehta and his wife decide to purchase an apartment in Dubai. Each remits USD 250,000 in proportion to their ownership share. Since both are co-owners, clubbing of limits is allowed. They cannot, however, take a housing loan from an overseas bank to fund the purchase unless specifically permitted by RBI.
Payments should be made directly to the developer or seller, and instalment structures must be reviewed to ensure they comply with capital account transaction rules. Using an overseas entity solely for the purpose of property purchase is not allowed.
Strategic Note
Joint purchases should be documented clearly with ownership percentages matching the remittance amounts to avoid disputes during compliance audits.
Overseas Investments
Investment opportunities abroad range from direct business stakes to portfolio investments in listed securities. LRS enables such investments, provided they adhere to the guidelines for permissible instruments.
Case Study: Equity Stake in a Non-Listed Company
Mr. Ketan Mehta invests in a 5 percent equity stake in a technology company based in Singapore. Since the stake is below 10 percent, it does not trigger the requirement for filing an annual performance report under the Overseas Direct Investment rules. However, he must still submit the necessary forms at the time of investment.
Ketan also invests part of his entitlement in listed shares on an overseas stock exchange. He avoids unlisted debt instruments, which are prohibited under LRS. Dividends and capital gains from these investments may be retained abroad or reinvested in other permissible instruments.
Strategic Note
Diversifying investments between direct business stakes and portfolio holdings can balance returns and risk, but compliance requirements for each category must be addressed separately.
Tax Collection at Source Scenarios
TCS impacts cash flow and should be factored into remittance planning. The rate varies depending on the purpose and the timing within the financial year.
For example, a pleasure trip remittance of USD 100,000 after October 1, 2023, will attract a 20 percent TCS on the amount above ₹7 lakh. Conversely, an education loan remittance from a recognised financial institution will attract only 0.5 percent above the threshold.
Strategically, splitting remittances across financial years or aligning them with lower TCS categories can reduce the immediate tax outgo, though it does not alter the total tax liability.
Compliance and Risk Management
Beyond regulatory adherence, effective use of LRS involves proactive compliance management. This includes:
- Keeping a consolidated record of all remittances for personal tracking and audit readiness
- Maintaining consistency between declared purpose codes and actual fund utilisation
- Avoiding transactions that could be construed as prohibited under FEMA, such as speculative trading or certain margin-based products
- Reviewing the regulatory position annually to account for changes in RBI notifications and government policy
Scenario Planning for Families
Families can use scenario planning to optimise the combined remittance potential. For instance, a family of four could collectively remit USD 1,000,000 in a single year for a joint overseas investment if all are co-owners. Careful sequencing of transactions and alignment of purpose codes ensures that each remittance remains within its permissible scope.
Conclusion
The Liberalised Remittance Scheme has evolved into a versatile framework that enables resident individuals to access and participate in the global economy within clearly defined limits. By allowing remittances for both current and capital account transactions up to USD 250,000 per financial year, the scheme offers flexibility for education, medical treatment, overseas travel, investment, property acquisition, and other legitimate purposes. At the same time, its restrictions on prohibited activities, retention rules, and documentation requirements ensure that remittances remain consistent with national economic priorities and foreign exchange regulations.
The practical application of the scheme lies in understanding not just the permissible categories but also the nuances, such as purpose codes, clubbing rules, and procedural compliance. Families, professionals, and investors can significantly enhance their utilisation of LRS by aligning remittances with individual limits, staggering transactions across financial years, and taking advantage of provisions for additional remittances in special cases like medical treatment.
In an increasingly interconnected world, the scheme serves as both a facilitator of global engagement and a safeguard for foreign exchange stability. Those who approach it with informed planning, precise record-keeping, and an awareness of evolving regulatory changes can fully leverage its benefits while maintaining full compliance with the law.