Till the time you are non-resident, RBI is not concerned what you do with your foreign earnings, where do you send it etc. But once you become a resident, there are restrictions on sending money outside India, as India still does not have a full capital account convertibility. In this regard, there may be a situation whereby you’ve returned back and settled to India, but you have your kids/parents/relatives back outside India (for e.g. your kid is still in her college in US), and wish to remit funds to such relatives.
First option is that at the time of return to India, you keep some portion of your investment portfolio in NRE/FCNR/RFC accounts so that it remains freely repatriable. In case of FCNR/RFC, since they are foreign currency accounts, even the exchange risk is nullified.
Second option is the Government’s Liberalised Remittance Scheme (LRS) of RBI. Today, let us understand more about this scheme and how returning NRIs can take benefit of this scheme to manage their overseas payments & expenses.
What is a Liberalised Remittance Scheme (LRS)
Government of India launched this scheme in 2004, thereby opening up the window for Indian residents to transfer money out of India. With the passage of time, this scheme has been truly “liberalised” in terms of how much can be remitted out of India. The provisions on LRS have been given in the Master Circular No. 6/2015-16 dated 1-7-2015 issued by RBI.
Broadly speaking, under the scheme, a resident of India can transfer, for permissible capital and current account transactions (like gifts, private visits, education, maintenance of relatives etc.), an amount not exceeding USD 2,50,000 (~ INR 1.62 CR as per existing exchange rates) in a financial year. Till previous year, the limit was USD 1,25,000 however since June 2015, this limit has been doubled, reflecting relaxation in the foreign exchange control norms.
Main features of the scheme
The main features of this scheme are as follows:
- The scheme is available to resident individuals for any permitted current or capital account transactions or a combination of both. Thus, the scheme is not available to residents out of India.
- Individuals can acquire shares or debt instruments or any other assets outside India, without prior approval of the Reserve Bank. They can also open, maintain and hold foreign currency accounts with banks outside India. However remittance from India for margin or margin calls to overseas exchanges/overseas counterparty are not allowed under the scheme.
- The limit for withdrawal of foreign exchange under the scheme is restricted to USD 2,50,000 per person per financial year (April – March). In case remittance exceeds this limit, prior approval of RBI shall be required.
- While allowing the facility to resident individuals, Authorised Dealers are required to ensure that “Know Your Customer” guidelines have been implemented in respect of bank accounts. They should also comply with the Anti-Money Laundering Rules in force while allowing the facility.
- As per RBI guidelines, if the customer proposing to use this facility is a new customer of the bank, bank needs to carry out due diligence/ KYC procedures and also should obtain bank statement for the previous year from customer to satisfy themselves regarding the source of funds. If such a bank statement is not available, copies of the latest Income Tax Assessment Order or Return filed by the applicant may be obtained.
- Under the scheme, resident individuals can acquire and hold immovable property. The individual will have to designate a branch of an AD through which all the remittances under the scheme will be made.
- It is mandatory to have and quote PAN number to make remittances under the Scheme.
- The banks should not extend any kind of credit facilities to resident individuals to facilitate remittances under the Scheme.
- The applicants should have maintained the bank account with the bank for a minimum period of one year prior to using this facility for capital account transactions (e.g. purchase of immovable property abroad).
- The bank should ensure that the payment is received by way of a cheque drawn on the customer’s bank account or by debit to his account or by Demand Draft / Pay Order.
For what purposes can LRS be used?
The scheme can be used for permitted capital and current account transactions.
Some examples of capital account transactions are as follows:
- Acquire and hold shares or debt instruments or any other asset including immovable property outside India without prior approval of the Reserve Bank.
- Set up Joint Ventures (JV)/ Wholly Owned Subsidiaries (WOS) outside India for bonafides business activities
- Purchasing objects of art subject to the provisions of other applicable laws such as the extant Foreign Trade Policy of the Government of India.
- Acquisition of ESOPs (in addition to acquisition of ESOPs linked to ADR / GDR and acquisition of qualification shares).
- Invest in units of Mutual Funds, Venture Capital Funds, unrated debt securities, promissory notes, etc. under this Scheme. Further, the resident can invest in such securities out of the bank account opened abroad under the Scheme (see 12.13)
- Repay the loan taken as a non-resident, on return to India.
Some examples of current account transactions are as follows:
- Private visits
- Remittance by tour operators / travel agents to overseas agents / principals / hotels,
- Film shooting
- Medical treatment abroad*
- Disbursement of crew wages
- Business travel,
- Remittance under educational tie up arrangements with universities abroad
- Remittance towards fees for examinations held in India and abroad and additional score sheets for GRE, TOEFL, etc.
- Fee for participation in global conferences and specialized training,
- Remittance for participation in international events / competitions (towards training, sponsorship and prize money)
- Visa fees
- Processing fees for registration of documents as required by the Portuguese / other Governments
- Overseas education*
- Employment and processing, assessment fees for overseas job applications
- Emigration and emigration consultancy fees*
- Skills / credential assessment fees for intending migrants
- Registration / subscription / membership fees to International Organisations
* Please note that for these expenses, remittance > USD 2,50,000 is allowed without RBI approval provided that an estimate is submitted from concerned educational institution/hospital abroad.
Under LRS, a resident is also permitted to give a loan to NRI subject to specified conditions.
What the scheme does not permit
The scheme does not allow the following:
- Capital account remittances to countries identified by Financial Action Task Force (FATF) as non-co-operative countries and territories as available on FATF website www.fatf-gafi.org or as notified by the Reserve Bank.
- Remittances for any purpose specifically prohibited under Schedule I or any item restricted under Schedule II of Foreign Exchange Management (Current Account Transaction) Rules, 2000.
Documentation requirements
For using this scheme, banks generally require individuals to fill Form A-2 & an application-cum-declaration form as per the format specified by RBI. In the application, applicant is required to quote his/her PAN.
However, in case of small value remittances (i.e. not exceeding USD 25,000 or equivalent), a simpler documentation process is in place. You’ll have to provide a simple letter to the bank containing the basic information, viz., names and the addresses of the applicant and the beneficiary, amount to be remitted and the purpose of remittance.
Hope the post has been helpful for you, and provides you some clarity on the LRS scheme. If you need personal consultation to your specific situation, you can reach out to me on contact@abhinavgulechha.com