Whether you plan to invest in foreign markets, take a vacation abroad, or send your children outside India to study, the RBI’s Liberalised Remittance Scheme (LRS) can help you solve all your currency-related concerns. In addition to remittances and transfers, you can use foreign exchange facilities covered under the LRS.
The Reserve Bank of India (RBI) oversees the Liberalised Remittance Scheme. The scheme allows resident individuals to pay for international investments and expenses in one fiscal year. An individual is said to be a resident in the tax year for 60 days or more in India in the relevant tax year and a total of 365 days or more in the previous four tax years.
Current laws and regulations allow residents to transfer up to $250,000 per tax year. They can use the money for travel expenses (personal or professional), medical care, studies, gifts and donations, care of relatives, etc.
The remitted funds can also be used to purchase stocks, bonds, and real estate in foreign markets. Individuals may open, manage, and maintain foreign currency accounts with banks outside India to complete program-approved transactions.
As the name suggests, the liberalised remittance scheme (LRS) is formulated for the remittances (investing in foreign lands) that a resident individual is permitted to make.
However, trade in foreign entities, including buying lottery tickets, proscribed magazines, etc., or any items prohibited under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000 is not allowed. Resident individuals cannot, directly or indirectly, send remittances to countries designated by the Financial Action Task Force (FATF) as non-co-operating countries and territories.
LRS and international transactions
Before international trade and transactions, you need to convert the Indian rupee into US currency for foreign investment or consumer purposes. The Liberalised Remittance Scheme describes how these transactions work. As an Indian resident, you must purchase dollars using the Indian rupees (INR) from an authorised dealer (the bank) in India.
The dollars can then be remitted or spent abroad for buying property or diversified assets like equity dividends. Here, the allusion of the dollar as a currency is easier as remittance can be in any openly adjustable foreign currency, including dollars.
Types of LRS transactions
LRS current account transactions
If you are engaging in international travel, the foreign exchange facility determines if LRS is allowed for you. In addition to remittance, you also have the forex facility at your disposal for specific purposes. These are referred to in Paragraph 1 of Schedule III of FEM (CAT) Amendment Rules 2015, which consist of the rules for the period of the surrender of foreign exchange. The individual must maintain the usage of forex within the limit of $2,50,000 only.
Purposes for which LRS can be utilised under current account transactions
- While making a private visit to any country except Nepal and Bhutan, this facility could be availed. You can use your credit card and ATM cash withdrawals if the card allows international transactions.
- Travelling for business or attending a conference or specialised training abroad are also legitimate reasons for this transaction.
- Medical overheads abroad or accompanying a patient going abroad for medical treatment/ check-up.
- It covers the costs of education/studies abroad and employment opportunities.
All such transactions are under the purview of current account transactions. In addition, the Authorised Dealer (banks) can initiate the remittance without RBI’s permission if the transactions are not listed in the prohibited category. However, the person remitting the funds must bear the responsibility to comply with the Foreign Exchange Management Act (FEMA) rules.
LRS capital account transactions
LRS rules define transactions such as investing abroad in shares, property etc., as capital account transactions. Only specific capital account transactions are allowed under LRS rules.
Purposes for which LRS can be utilised under capital account transactions
- Opening a bank account abroad, i.e., a Foreign Currency Account is covered.
- Purchase real estate property overseas can be done under this form.
- For making investments overseas, including investing in shares, mutual funds, debt instruments, etc., LRS can be used.
- It can also set up Wholly Owned Subsidiaries and Joint Ventures outside India for business operations.
Retaining and reinvesting the funds
When you invest in stocks and investments overseas, LRS rules allow you to hold and support your profits in that country (unless it is an overseas direct investment). Investing abroad and accruing interest or dividends on the deposits and investments made abroad do not need to repatriate. This allows you to retain the premium earned on your stocks or interest earned from the assets held as bonds and other foreign securities.
This type of earned income can then be utilised to reinvest or to fulfil other expenses abroad. Gains from investments in real estate and ETFs can be reinvested in foreign markets without sending it back to the domestic bank account.
Currently, all residents, including a minor (countersigned by an administrator), can remit up to 2.5 lakh US dollars (USD 2,50,000) per year, according to the Liberalised Remittance Scheme. At the exchange rate of Rs 76 for a dollar, the limit is about Rs 1.90 crore. There is no limit to the number of annual transactions. Even if one sends the remitted amount back in the same year, no further remittance is permitted as the limit is set for individual fiscal years.