Liberalised Remittance Scheme (LRS): Meaning, Rules, Limits and How It Works

The Liberalised Remittance Scheme (LRS) is a facility offered by the RBI and allows resident individuals to remit up to a certain amount every financial year. Let us learn more about what it means, the applicable rules, limits and other aspects below.

Key Takeaways

• Individuals who are residents may make remittances of up to USD 250,000 each financial year under the LRS without having to obtain prior approval from the RBI.
• The LRS includes eligible uses such as studying abroad, travel, medical treatment, gifts and investments overseas.
• Remittances have to be sent through a Category-I Authorised Dealer (AD) bank together with the necessary documentation.
• Any overseas investments which are subject to the LRS must also adhere to the Overseas Investment Rules, 2022 and the RBI regulations.
• Some transactions, such as speculative activities and payments to prohibited entities, are not allowed.
• TCS could be applied according to the purpose and the amount of the remittance and is generally treatable as a tax credit.
• Every individual resident has their own LRS limit, and family members can make payments independently within their respective limits, provided they comply with FEMA and RBI regulations.

What is the Liberalised Remittance Scheme (LRS)?

The LRS, or Liberalised Remittance Scheme, is an RBI mechanism that permits resident individuals, including minors, to remit up to USD 250,000 freely every financial year. It is applicable for allowed capital or current account transactions.

These cover education, travel, medical treatment, foreign investments (real estate or stocks) and gifts. Any remittances excluding the limit mentioned above will need prior approval from the Reserve Bank of India (RBI).

However, several transactions are also prohibited under the LRS, such as buying lottery tickets, to cite an instance. As per Indian tax rules, remittances exceeding a certain threshold are also subject to tax collected at source (TCS).

How the Liberalised Remittance Scheme Works

The Liberalised Remittance Scheme works in the following ways:

• Only resident individuals (including minors) can use the scheme.
• Funds may be remitted for capital and current account transactions.
• Current account: Medical treatment, overseas education, maintaining close relatives abroad, sending donations or gifts and travel costs.
• Capital account: Investments in foreign stocks, overseas real estate, mutual funds and opening/maintaining foreign currency accounts overseas.
• Remittances under LRS may be subject to TCS based on the transaction amount and type. It is tracked using the remitter’s PAN card across all banks. Remittances financed by education loans from recognised institutions usually attract lower TCS rates.
• You have to fill out the standard Form A2, mentioning the transfer purpose and fund source, followed by signing the LRS declaration that confirms whether your usage is within the limit and is permitted. Natural guardians have to countersign for minors.
• You can then visit your authorised dealer (AD-I) bank for processing the transaction.

Who is Eligible to Use LRS?

There are stringent eligibility guidelines for the Liberalised Remittance Scheme (LRS), as outlined below:

• Resident individuals are only eligible. You should be an Indian resident under FEMA (while citizenship is not a strict requirement, residency status is non-negotiable).
• Minors are eligible, although remittances have to be executed and countersigned by their natural or legal guardians.
• An individual who is a sole proprietor can make use of LRS only in their capacity as a resident. The rules regarding business-related payments abroad are determined by other FEMA provisions.

Who cannot use LRS:

• NRIs (non-resident Indians)
• Partnership firms
• Limited liability partnerships (LLPs)
• Companies and corporate entities
• HUFs (Hindu Undivided Families)
• Charitable institutions and trusts

*Each resident individual has an independent remittance limit of USD 250,000 per financial year under LRS. One individual cannot use another person's LRS limit.

However, where permitted under FEMA and RBI regulations, multiple eligible family members may each independently remit funds from their own LRS limit towards the same overseas investment or asset, subject to proper documentation and regulatory compliance.

Permitted and Restricted Transactions Under LRS

Permitted transactions under LRS include:

• Educational purposes: Living, tuition and other costs for pursuing overseas education.
• Travel: Business and private visits, along with employment-linked expenditure.
• Medical treatments: Costs for medical care abroad, along with maintenance of accompanying support personnel.
• Donations and gifts: Gifts or donations sent to organisations or individuals outside the country.
• Family support: Financially supporting or maintaining close relatives residing abroad.
• Acquiring assets: Opening foreign currency accounts overseas, purchasing real estate abroad or buying foreign mutual funds and shares.
• Loans: Offering rupee loans to NRIs or PIOs (persons of Indian origin) who are close relatives.

Prohibited/restricted transactions under LRS:

• Speculative trading: Remittances are not allowed for margin calls, margins or any type of Forex trading overseas.
• Banned categories: This segment includes buying lottery tickets, sweepstakes participation or any banned/proscribed magazines.
• Financial instruments: Buying FCCBs (foreign currency convertible bonds) issued by Indian companies in overseas secondary markets is not allowed.
• Resident-to-resident gifting: Gifting foreign currency to another resident Indian for crediting his/her foreign currency account that is held abroad.
• High-risk jurisdictions: Sending funds indirectly/directly to jurisdictions identified by FATF (Financial Action Task Force) as high-risk or subject to countermeasures.
• Sanctioned people/entities: Transactions with any entity or individual flagged by the RBI or sanctioned for terrorism.

LRS Limits and RBI Guidelines

Resident Indians may remit up to US$250,000 per financial year (April-March) without prior RBI approval through an authorised dealer bank under the LRS for permissible capital or current account transactions. This limit applies per individual.

Consequently, four eligible resident family members may each remit up to USD 250,000 in a financial year, allowing total remittances of up to USD 1 million.

However, each remittance must be made independently by the respective individual from their own LRS entitlement and comply with applicable FEMA and RBI regulations.

LRS for Investing in US Stocks and Other Foreign Assets

As per the RBI LRS mechanism, up to $250,000 can be invested per financial year in US stocks, foreign ETFs, and other permissible assets abroad.

The limit is reset on 1st April and cumulatively applies across all allowed purposes and banks. Equities/stocks, mutual funds, ETFs (exchange-traded funds) and overseas real estate (non-repatriable) are allowed for investments under the scheme.

Resident individuals may carry out eligible overseas investments, including those in foreign companies, provided that the Overseas Investment Rules, 2022 and the relevant RBI regulations are followed.

However, you cannot invest in any speculative activities overseas, including Forex trading, margin trading and cryptocurrencies.

Any capital gains or dividends that you earn should be declared as a part of your global income. Your foreign assets and bank accounts have to be revealed in Schedule FA of the ITR.

Also, while you can retain and reinvest income from overseas assets, any realised/un-invested foreign exchange should be brought back or repatriated to India within a period of 180 days (from receipt).

Documentation Required Under LRS

The mandatory documentation under LRS includes:

• Form A2, which is the standardised application-cum-declaration form for buying foreign exchange. It mentions the remittance source, amount and specific purpose.
• PAN Card: It is compulsory for all LRS transactions and is used by the bank to monitor your cumulative annual remittance and TCS (tax collected at source) limits.
• Identity and address proof: Standard KYC documents are needed, including your passport, Aadhaar or voter card.

The other documents depend on the purpose of the remittance:

• Education: Offer letter from the overseas college/university, student ID or fee invoice.
• Employment/Emigration: Job offer letter, employment contract or visa documents.
• Medical Treatments: Hospital bills, doctor’s prescription and medical estimate from any overseas healthcare facility.
• For Property/Investment: Legal documents or broker statements that verify and substantiate the investment.
• For Travel: Confirmed itinerary, air tickets and valid copy of the visa.

Additional documents may include the following:

• Income/tax proof: You may have to submit your bank statements, CA (chartered accountant) certificate or ITR (income tax return) to prove the fund source. It is sometimes required in case of large remittances or if you have held your account with the bank for less than one year.
• Beneficiary information: This includes the beneficiary (the person or entity getting the funds) address, full name, overseas bank address, account number and the SWIFT code.

Tax Collected at Source (TCS) Under LRS

Outward remittances are subject to TCS (tax collected at source) under the Income Tax Act. The key TCS details include:

• Education Loans: Remittances funded through loans from specified financial institutions enjoy concessional TCS treatment as prescribed under the Income Tax Act.
• Education/Medical Treatment: 2% TCS applies for amounts crossing ₹10 lakh in a financial year.
• Overseas Tours: 2% TCS applies for amounts crossing ₹10 lakh in a financial year.
• Gifts, Investments and Other Remittances: 20% TCS applies for amounts crossing ₹10 lakh in a financial year.

The TCS that the bank or Forex provider deducts will show on your Form 26AS and the AIS (Annual Information Statement) as per the Income Tax e-filing portal.

When filing the ITR, you may apply the TCS amount to offset the total tax liabilities. If the TCS paid exceeds the total tax payable, the excess amount will be refunded directly to your bank account.

How to Make an Overseas Investment under LRS

Here are the key steps for making overseas investments under the Liberalised Remittance Scheme (LRS):

• Select an Authorised Dealer (AD) Bank: Remittances can only be processed through authorised Indian banks where you have active savings or current accounts.
• Fill out the Form A2 and specify the exact purpose of the remittance.
• Submit your PAN card while completing the standard KYC verification.
• Verify TCS (tax collected at source), noting that remittances over ₹10 lakh in a financial year attract TCS (which may be claimed as a credit while filing your income tax returns).
• Initiate the transfer by providing the bank the SWIFT code of the beneficiary or designated foreign broker and overseas bank details. This will help in executing the transaction.

Benefits of the Liberalised Remittance Scheme

The key benefits of the Liberalised Remittance Scheme include:

• Diversifying the investment portfolio: You can take advantage of this scheme to invest in overseas stocks/equities, ETFs, bonds, mutual funds and even real estate without bureaucratic and legal restrictions.
• Covering healthcare and education costs abroad: You can easily cover medical bills for overseas treatments, along with living costs and tuition fees for higher education.
• Convenient family support/gifting: Sending gifts or financial support to relatives need not be problematic anymore under this scheme. You can transparently deploy funds without any worries.
• Expanding businesses and social activities worldwide: Individuals and entrepreneurs can take this route to invest in overseas joint ventures, global causes and start-ups.

Common Challenges Faced Under LRS

The common challenges faced under LRS include:

Annual limits and other restrictions

You can only send a maximum of US$250,000 per financial year for eligible current/capital account transactions.

Also, individuals cannot remit funds on behalf of a partnership, HUF or company. It creates major hurdles when managing sizeable overseas corporate costs (forcing employers to use separate channels for corporate remittances).

TCS and added compliance

Remittances attract TCS of up to 20% depending on the category, in case the aggregate amount crosses ₹10 lakh in a financial year.

Since this is PAN-based, remittances pooled across multiple AD (authorised dealer) banks will need manual tracking to avoid sudden deductions.

Documentation and misclassification problems

Misclassifying any transaction on the Form A2, i.e. purpose code mismatches like labelling the equity investment as a donation, for example, will lead to compliance queries. It may also lead to penalties and delayed fund transfers.

International credit card spending is generally covered for TCS purposes under Income tax provisions, while FEMA treatment has undergone multiple clarifications.

Prohibited transactions

In practice, authorised dealer banks generally do not permit LRS remittances for overseas cryptocurrency investments.

Remittances are also blocked to non-cooperative countries (as per the FATF list). These may lead to issues at times.

Common Mistakes to Avoid While Using LRS

Here are some common mistakes to avoid while using LRS:

Not tracking cumulative remittances

The annual limit of $250,000 and TCS threshold of ₹10 lakh are PAN-based and cumulative throughout all your AD (authorised dealer banks). Using multiple banks without proper monitoring may lead to breaching the limits.

Always keep a separate ledger of overseas transfers and routinely check the remaining limit before initiating new transfers.

Using the wrong purpose code

While filling out Form A2, make sure you avoid choosing the wrong purpose code. This may attract higher TCS rates, flag you for compliance queries and scrutiny and lead to penalties.

Confirm the code and associated TCS with your bank before you submit the form.

Mismanagement of TCS

Many people forget to account for the TCS deduction upfront, which leads to a dip in the desired remittance amount.

Some may also forget to claim the TCS credit when filing the ITR.

Direct or capital transactions through cards

You should not try to make capital account transactions (opening overseas bank accounts, buying real estate and investing in foreign stocks/bonds) through international debit or credit cards.

These investments should pass through the right LRS channels and authorised dealers. Funds have to originate from your resident bank account.

Additional errors

Many people make the mistake of forgetting the guardian’s signature on the minor’s Form A2 or end up making such minor errors.

You should always double-check before submitting the form.

LRS Example: Investing in US Stocks

Let us understand LRS better with an example of investing in US stocks:

• Assume you want to invest USD 10,000 in the US market, which is within your per-year allowance of USD 250,000.
• You can transfer the funds from your local bank account to your Authorised Dealer (AD Category-I) bank.
• Now, as per the latest foreign exchange rates, your investment is ~₹9.63 lakh based on the conversion rates.
• So, it will not attract TCS, since your remittance is within ₹10 lakh.
• Once your LRS provider in India funds your US brokerage, you can use the platform to execute your trade.
• Banks may levy foreign exchange conversion charges and remittance fees, which vary by institution.
• Dividends are generally subject to US withholding tax at 25% under the India-US tax treaty (subject to eligibility and submission of Form W-8BEN).
• You will also have to report the foreign assets and your capital gains while filing your ITR in India.

Is LRS Right for Your Overseas Investment Needs?

LRS may be the right option for your overseas investment needs if you are seeking:

• A globally diversified portfolio with convenient investments in foreign stocks, mutual funds, ETFs and real estate to hedge against the depreciation of the Indian rupee (INR).
• Smooth implementation of permitted transfers through authorised dealer banks without needing the RBI’s permission every time.
• A pooled system where families can combine their individual limits to make sizeable investments jointly.
• For example, a family of three people can invest up to USD 750,000 in a foreign property, startup or other permitted assets.
• Holding or reinvesting your income, such as interest or dividends earned abroad, without having to repatriate it.

These are some scenarios when LRS may fall short:

• If your annual overseas investment requirements are more than USD 250,000 per financial year.
• If you are a corporate, trust, partnership firm, LLP or HUF.
• If you want to acquire or set up any foreign subsidiary or joint venture as a corporate entity from India. You will have to take the ODI (overseas direct investment) route instead of LRS in this case.
• You wish to participate in speculative activities and margin trading or are interested in foreign derivatives and cryptocurrencies.

Conclusion

The Liberalised Remittance Scheme (LRS) is thus a helpful facility if you want to diversify your global investment portfolio without going through a cumbersome and complicated process. However, it is always necessary to keep the annual investment limits, allowed categories of investments, and TCS thresholds in mind.