Liberalised Remittance Scheme: Rules and Limits

The Liberalised Remittance Scheme (LRS) is the Reserve Bank of India’s framework that allows resident individuals to remit foreign exchange abroad for permitted current and capital account transactions. It is an important FEMA-based scheme that sets a yearly ceiling and prescribes the route, purpose and tax treatment for outward remittances.

Historical Context and Core Framework

• Introduced by RBI: The scheme was launched on 4 February 2004 under the Foreign Exchange Management Act (FEMA), 1999.
• Tarapore Committee link: It followed the recommendations of the Committee on Capital Account Convertibility, also known as the Tarapore Committee.
• Initial limit: The annual ceiling began at USD 25,000 per calendar year.
• Present limit: The limit was gradually increased to USD 250,000 per financial year, i.e. from April to March.
• Coverage: LRS covers both current account transactions such as travel, education, medical expenses, gifts and family maintenance, and permitted capital account transactions such as foreign equity, debt instruments and property acquisition.

Eligibility and Operational Rules

• Eligible persons: Only resident individuals can use LRS.
• Minors: Minors are also eligible, provided the form is countersigned by a guardian.
• Not eligible: Corporates, partnership firms, Hindu Undivided Families (HUFs) and trusts cannot remit under LRS.
• Bank route: All remittances must be made through an RBI-authorised Category-I Authorised Dealer (AD) bank.
• Form A2: A valid Form A2 is mandatory for outward remittances under the scheme.
• PAN requirement: A valid Permanent Account Number (PAN) and correct purpose code are required for processing.

Permitted Uses and Prohibited Transactions

• Permitted current account uses: Travel, education, medical treatment, gifts and maintenance of close family members abroad.
• Permitted capital account uses: Investment in foreign equity, debt instruments and purchase of property abroad, subject to the annual limit.
• Speculative use barred: Outward remittance cannot be used for speculative transactions such as margin trading or lottery tickets.
• FCCBs in secondary market: Purchase of Foreign Currency Convertible Bonds (FCCBs) in the secondary market is not allowed.
• High-risk jurisdictions: Payments to jurisdictions identified as high-risk by the Financial Action Task Force (FATF) are restricted.
• Foreign-currency gifting: Gifting foreign currency to another resident for credit to that person’s overseas foreign currency account is prohibited.
• Clubbing of limits: Family members’ LRS limits can be clubbed for current account transactions, but not for capital account transactions unless they are co-owners.

Tax Collected at Source (TCS) Framework

• Current legal basis: TCS on LRS remittances is consolidated under Section 394 of the Income-tax Act, 2025, effective from 1 April 2026, replacing Section 206C of the Income-tax Act, 1961.
• Tracking basis: TCS is monitored on a per-PAN basis across authorised dealers and payment channels.
• Threshold: A cumulative TCS-free limit of ₹10 lakh applies in a financial year.
• Education through loan: Remittances for education financed through a loan under Section 80E attract 0% TCS.
• Self-funded education and medical treatment: Nil TCS applies up to ₹10 lakh, and 2% TCS applies above that amount.
• Invalid PAN effect: If PAN is inoperative or invalid, the rate on self-funded education or medical remittances above ₹10 lakh rises from 2% to 5%.
• Other remittances: Equity investments, property purchases and similar LRS remittances attract Nil TCS up to ₹10 lakh and 20% above that threshold.
• Overseas tour packages: A flat 2% TCS applies from the first rupee on overseas tour programme packages.
• Nature of TCS: TCS is an advance tax, not an additional tax. It appears in Form 26AS or the Annual Information Statement (AIS) and can be claimed as credit or refund while filing the Income Tax Return (ITR).

Key Prelims Takeaways

• RBI framework: LRS is an RBI-regulated scheme under FEMA for resident individuals.
• Annual ceiling: The current limit is USD 250,000 per financial year.
• Eligible users: Only resident individuals, including minors with guardian countersignature, can use it.
• Mandatory routing: Remittances must go through an authorised dealer bank with Form A2 and PAN.
• Prohibited uses: Speculation, restricted FCCB purchases and certain high-risk payments are not allowed.
• TCS threshold: TCS is tracked on a PAN basis and a ₹10 lakh annual threshold applies.
• Tour package rate: Overseas tour programme packages attract a flat 2% TCS from the first rupee.