Overview of the Liberalised Remittance Scheme — Rules and Limits

The Liberalised Remittance Scheme (LRS) is a foreign exchange policy framework launched by the Reserve Bank of India (RBI) in February 2004 under the Foreign Exchange Management Act (FEMA), 1999. The scheme allows resident individuals to freely remit a specified amount of money abroad every financial year for permissible capital and current account transactions. Prior to LRS, outward remittances required explicit prior approval from the central bank for most personal expenses and cross-border investments. The policy simplified foreign exchange management, promoted capital integration, and eased financial transactions for Indian residents traveling, studying, or investing abroad.

Institutional Framework and Eligibility

The legal foundation of LRS rests on the Foreign Exchange Management (Current Account Transactions) Rules, 2000, read with RBI Master Directions on Outward Remittances. Authorised Dealer (AD) Category-I banks and Authorised Dealers Category-II process all outward foreign exchange transfers under the scheme.

• Eligible Applicants: Only resident individuals, as defined under Section 2(v) of FEMA, 1999, are eligible to use LRS. This includes minors, provided the natural or legal guardian signs Form A2 on their behalf.
• Ineligible Entities: Corporate entities, partnership firms, Hindu Undivided Families (HUFs), trusts, and non-resident individuals cannot use LRS.
• Mandatory Identification: A Permanent Account Number (PAN) is mandatory for making any outward remittance under LRS.
• Form A2 Requirement: Remitters must submit Form A2 along with a self-declaration regarding the cumulative amount remitted across all authorised dealer banks during the ongoing financial year.

Remittance Ceiling and Evolution of Limits

The RBI sets the quantitative cap for outward remittances per financial year, which runs from April 1 to March 31. The ceiling applies to all current and capital account transactions combined.

• Transaction Frequency: There are no limits on the total number of transactions executed in a financial year, provided the aggregate amount stays within the USD 250,000 ceiling.
• Family Clubbing: Individual family members, including minors, can combine their individual USD 250,000 limits for a single permissible transaction. However, for capital account transactions like foreign property purchases or overseas bank accounts, all clubbed members must be joint owners or co-investors.
• Exceeding Limits: Remittances exceeding USD 250,000 per year require prior written approval from the Reserve Bank of India, except for specific education or medical treatment expenses that are supported by university estimates or hospital documentation.

Categorization of Permissible Transactions

LRS divides outward transfers into current account transactions (recurring personal or operational expenses) and capital account transactions (creation of foreign assets).

Permissible Current Account Transactions

• Private visits to any foreign country, excluding Nepal and Bhutan.
• Gifts or donations to non-residents or overseas charitable entities.
• Expenses related to overseas employment, emigration, and visa processing.
• Maintenance expenses for close relatives residing abroad.
• Medical treatment abroad, including travel and boarding costs for the patient and an accompanying attendant.
• Educational expenses, including tuition fees, accommodation, and living costs for studying abroad.
• Business travel expenses incurred by an individual partner or employee.

Permissible Capital Account Transactions

• Opening, maintaining, and funding foreign currency bank accounts with overseas financial institutions.
• Purchasing real estate and immovable property outside India.
• Investing in foreign equity shares, debt securities, mutual funds, and venture capital funds abroad.
• Overseas Direct Investment (ODI) and Overseas Portfolio Investment (OPI) in foreign entities under the Overseas Investment Rules, 2022.
• Extending Indian Rupee (INR) loans to Non-Resident Indian (NRI) or Overseas Citizen of India (OCI) relatives as defined under the Companies Act, 2013.

Prohibited Transactions and Regulatory Restrictions

The RBI imposes strict prohibitions on specific outward remittances under LRS to prevent illegal capital flight, money laundering, and speculative activity.

• Schedule-I Prohibitions: Transactions explicitly banned under Schedule-I of FEMA Current Account Rules, such as purchasing lottery tickets, sweepstakes, banned magazines, or football pools.
• Speculative Foreign Exchange Activities: Remittances for foreign exchange trading abroad, margin calls, or margin payments to overseas exchanges and counterparties.
• Secondary Market Capital Instruments: Purchasing Foreign Currency Convertible Bonds (FCCBs) issued by Indian companies in the overseas secondary market.
• FATF Non-Cooperative Jurisdictions: Direct or indirect capital account transfers to countries classified as non-cooperative or high-risk by the Financial Action Task Force (FATF).
• Sanctioned Entities: Remittances to individuals or entities identified as security risks or listed under RBI terrorism sanctions.

Tax Collected at Source Provisions

Outward remittances under LRS fall under Section 206C(1G) of the Income-tax Act, 1961. Authorised Dealer banks collect Tax Collected at Source (TCS) at the time of debiting the account or processing the transfer.

TCS is an advance tax credit, not an additional tax penalty. Remitters adjust the collected TCS against their total tax liability while filing their annual Income Tax Return (ITR), or claim a refund if excess tax was collected.

Key Facts

• Launched by the Reserve Bank of India in February 2004 under the Foreign Exchange Management Act (FEMA), 1999.
• Current remittance ceiling is USD 250,000 per individual per financial year (April 1 to March 31).
• Available exclusively to resident individuals, including minors; corporate bodies, HUFs, and trusts are excluded.
• PAN card submission is mandatory for all transactions under LRS.
• Remittances to Nepal and Bhutan are completely prohibited under LRS.
• Foreign exchange margin trading, foreign lottery purchases, and foreign currency debt trading are banned.
• Family members can pool their individual USD 250,000 limits for joint investments or property purchases.
• Tax Collected at Source (TCS) applies under Section 206C(1G) of the Income-tax Act, 1961.
• The basic threshold for TCS applicability on self-funded education, medical, and general LRS remittances is ₹10 lakh per financial year.
• Remittances for overseas education funded through an approved financial institution loan under Section 80E carry a 0% TCS rate.