Liberalised Remittance Scheme (LRS)

Liberalised Remittance Scheme (LRS) is a measure to facilitate Resident Individuals (including minors) to remit funds outside India up to USD 250,000 or its equivalent in any freely convertible foreign currency per financial year (April-March) for any permissible capital or current account transaction or a combination of both.

The scheme was introduced by Reserve Bank of India vide A.P. (Dir Series) circular no 64 dated 4^th February, 2004 with the remittance limit of USD 25,000 and was subsequently amended over the years to incorporate changes according to the prevailing economic conditions.

The Scheme is not applicable to Corporates, Partnership firms, HUF, Trusts etc. Also, where the remittance is made by the minor, LRS declaration form must be countersigned by Minor’s natural guardian.

In case of Sole proprietorship since there is no separate business entity, owner and business is considered as one, so the consolidated permissible remittance limit under LRS remains restricted to USD 250,000. That is, if the owner in his individual capacity remits USD 250,000, he cannot remit another USD 250,000 in the capacity of sole proprietorship.

Remittances under the scheme can be consolidated in case of family members, provided each family member complies with its terms and conditions. But clubbing is not permitted with other family members in case of Capital Account Transactions if they are not the co-owners or co-partners of that acquired capital asset.

There can be multiple remittances under LRS but the cumulative amount of all the transactions should be within the limit prescribed under LRS i.e. USD 250,000. Once a remittance is made for an amount up to USD 2,50,000 during the financial year, a resident individual would not be eligible to make any further remittances under this scheme, even if the proceeds of the investments have been brought back into the country.

Individuals can open and maintain foreign currency accounts with a bank outside India for putting through all transactions from remittances eligible under this scheme.

Permissible Current Account Transaction

Resident Individuals can avail foreign exchange facility as mentioned in Para 1 of Schedule III of FEM (CAT) Amendment Rules 2015, dated May 26, 2015, within the limit of USD 250,000.

1. Private visit to any country (except Nepal and Bhutan)

2. Gift or Donation

3. Going abroad for employment

4. Emigration

5. Maintenance of close relatives abroad

6. Travel for business, attending international conference, seminar, specialised training, apprentice training

7. Expenses in connection with medical treatment abroad

8. Studies abroad

9. Any other current account transaction – for which the authorised dealer Bank should be satisfied with the authenticity of the transaction. E.g. purchase of object of art subject to other applicable laws.

Exceptions allowed under the scheme:

1. For the purposes mentioned in point no. 4, 7, 8, individuals may avail the exchange facility for an amount in excess of the limit prescribed under the Liberalised Remittance Scheme if it is required by the country of emigration, medical institute offering the treatment or the university, respectively.

2. Resident Individuals (who are not permanently residents in India) can remit up to net salary (after deduction of taxes, contribution to provident fund and other deductions). Also, if they wish to remit any other income apart from their salary, they may approach RBI with all the relevant documents through their Authorised Dealer Bank for consideration.

Permissible Capital Account Transaction

The permissible capital account transactions by a resident individual under LRS are:

1. Opening of foreign currency account abroad with a bank and transferring money to it

2. Purchase of property abroad

3. Making investments abroad: acquisition and holding of shares of listed and unlisted overseas company, debt instruments, mutual funds, Venture Capital funds etc.

4. Acquisition of qualification shares of an overseas company for holding the post of Director or acquisition of shares of a foreign company towards professional services rendered or in lieu of Director’s remuneration.

5. Setting up Wholly owned subsidiaries and Joint Ventures abroad for any bonafide business purpose subject to rules framed under Overseas Direct Investment (ODI) Regulations.

6. Extending Loans/Gifts in Indian Rupees to Non-resident Indians (NRIs) or persons of Indian Origin (PIO) who are relatives as defined in Companies Act, 2013. (Relatives as per the Act are Members of HUF, Husband, Wife, Father, Step Father, Mother, Step Mother, Son, Step son, Son’s wife, Daughter, Daughter’s husband, Brother, Step Brother, Sister, Step Sister)

Rupee Loan can be made to NRI/PIO’s close relative through a crossed cheque or through electronic transfer subject to following conditions:

1. Loan should be given free of interest and maturity period should be minimum 1 year.

2. Loan amount should be credited to NRO account of NRI/PIO close relative.

3. Loan amount should not be remitted outside India.

4. Loan amount should be utilized for personal requirements or business in India.

5. Loan amount should be within the LRS limit of USD 250,000 per financial year and it will reduce the LRS limit by the amount of loan given.

6. Loan amount cannot be utilized for investment in Chit Funds, Nidhi Company, Agricultural or plantations activities, real estate business or construction of farmhouses (development of townships, construction of commercial or residential premises, roads or bridges are not excluded)

7. Repayment of loan shall be made through inward remittances or through debit to Non Resident Ordinary (NRO)/ Non Resident External (NRE)/ Foreign Currency Non Resident (FCNR) account of the borrower or out of the sale proceeds of the security against which the loan was granted.

Rupee Gift can be made to NRI/PIO close relative through a crossed cheque or through electronic transfer. It should be credited to NRO account of NRI/PIO close relative. The gift amount should be within the prescribed limit of USD 250,000 per financial year under LRS for resident individuals.

Resident Individual cannot gift in foreign currency to another resident for crediting the latter’s foreign currency account opened under LRS.

Prerequisites for Capital Account Transactions:

Applicants who wish to make remittances for Capital Account Transactions are required to maintain bank account with the bank for a minimum period of one year prior to the remittance. Due diligence is carried out to ensure the source of funds and remittance is made as per the instructions given under the scheme.

Prohibited Transactions

Remittance facility under the scheme is prohibited for the following transactions:

1. Capital Account Transactions – Remittances directly or indirectly to countries identified by the Financial Action Task Force (FATF) as “non cooperative countries or territories” from time to time.

2. Current Account Transactions – Remittance for any purpose specifically prohibited under Schedule I (for purchase of lottery tickets/ sweep stakes, banned/ proscribed magazines etc) or any item restricted under schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000 are not allowed

3. Others:

a. Remittance from India for margins or margin calls to overseas exchanges / overseas counterparty.

b. Remittances for purchase of FCCBs issued by Indian companies in the overseas secondary market.

c. Remittance for trading in foreign exchange abroad.

d. Remittances directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by the Reserve Bank to the banks.

LRS Procedure

RBI confers upon Authorised Dealer the power to carry out due diligence to ensure that remittance/ drawal of Foreign currency is not in contravention to FEMA or Income Tax Act. Therefore, AD must ensure the compliance of ‘’Know Your Customer’’ guidelines and “Anti Money Laundering” rules before remittance is made.

1. Applicant needs to furnish an application cum declaration in the prescribed Form A2 to the Authorised Dealer (AD)/Full Fledged Money Changer (FFMC) stating:

• Applicant Name, Name of AD Branch, Receiver & Foreign Bank details
• Purpose and its code for which the individual is remitting the amount,
• Self-Declaration by the applicant that the amount remitted throughout the financial year does not exceed the limit. Also, declaration to the effect that the funds belong to the remitter (payment should be received either through the cheque drawn on his own account or debit to his account or by demand draft / pay order or by debit/credit card of the applicant) and will not be used for any of the prohibited purposes prescribed.

2. Mandatory quoting of PAN (Permanent Account Number)

3. Resident Individual needs to designate a single branch of an AD through which all the remittances under LRS will be undertaken. NOC is required if remittances are from different banks.

4. Source of funds through prior bank statements/IT returns can be verified by AD banks prior to LRS remittances.

5. Minimum banking relationship of 12 months for remittances towards capital account transactions under LRS

6. It is not mandatory to repatriate LRS proceed i.e. funds or income generated out of this investment made under the Scheme back to India. It can be retained or reinvested overseas. However, if Overseas Direct Investment (ODI) is made under this scheme in the equity shares or compulsory convertible debentures/preference shares, the guidelines and regulations as specified under the ODI regulation needs to be adhered.

7. It is required to disclose foreign assets in ITR forms – Schedule FA, acquired through the remittance made under the Scheme and held at any time during the relevant accounting period.

8. AD bank is not permitted to lend money to anyone for the purpose of making any remittance under this Scheme.

9. AD should maintain records of any information or documentation which can be verified by RBI later. Also, AD can decline to undertake any remittance transaction where in applicant refuses to comply with any such requirements.

10. AD will be guided by the nature of transaction as declared by the remitter in Form A2 and will thereafter certify that the remittance is in conformity with the instructions issued by the Reserve Bank in this regard from time to time. However, the ultimate responsibility is of the remitter to ensure compliance to the extant FEMA rules/regulations

Tax Collected at Source (TCS) on LRS Remittances

With a view to widen the tax-net, the Indian Government through the Finance Act, 2020 has extended the scope of Tax Collected at Source (TCS) provided under Section 206C of the Income Tax Act, 1961 by insertion of new sub section (1G) in Section 206C. This new provision came into effect from 1^st October, 2020.

1. Scope of new provision – As per the extended scope, tax is required to be collected at source on foreign remittances under the Liberalised Remittance scheme and on sale of overseas tour package (only air ticket booking does not make it a package hence TCS will not be applicable). Also when remittance is made by resident individual to NRO account as gift/loan, TCS shall not be collected. Further, the amount being remitted will not be considered for computing the threshold limit of INR 7 Lakhs per Financial Year.

2. Authorised Dealer will collect TCS from Buyer (which as per the new section means who remits the amount outside India or the one pay for the overseas tour package)

3. TCS Collection – It is to be collected either

a. at the time of receipt of remittance amount by any mode from the buyer or

b. at the time of debiting the amount payable by the buyer, whichever is earlier

4. Exclusions for the applicability of Section 206C (1G) – The liability to collect TCS under LRS or overseas tour program package will not be applicable in case of below categories of buyer:

a. Central Government, State Government, an embassy, a High Commission, legation, commission, consulate, and the trade representation of a foreign State.

b. A local authority as defined in Section 10(20) of the Act.

c. Any person specified by the Central Government through a notification in the Official Gazette. However, no such person has been notified till date.

d. A buyer who is liable to deduct tax at source (“TDS”) under any other provision of the Act and has deducted the same.

It is to be noted that public sector undertakings, government companies are not excluded from the scope of section and provisions of this sub-section would be applicable on them.

5. TCS is not the additional cost on fund transfer. This amount can be claimed as the credit against tax payable at the time of filing ITR on the basis of TCS amount appearing on Form 26AS.

6. TCS is not applicable on foreign remittance transactions which are not covered LRS.

7. GST will not be applicable on TCS amount.

TCS rates will be applicable as below:

S.No	Purpose of Remittance	Threshold	Rate of TCS
1.	If the amount being remitted by a buyer is for purchase of overseas tour programme	No minimum amount of payment has been prescribed under Income tax Act, 1961 for such  transaction	5%
2.	If the amount being remitted out is a loan obtained from any financial institution as defined in section 80E, for the purpose of pursuing any education	TCS shall be collected on amount exceeding INR 7 Lakhs in a financial year	0.5%
3.	If the remittance is for the purpose of pursuing any education out of own funds	TCS shall be collected on amount exceeding INR 7 Lakhs in a financial year	5%
4.	For any other purpose as mentioned in Liberalized Remittance Scheme of RBI	TCS shall be collected on amount exceeding INR 7 Lakhs in a financial year	5%

TCS Calculation:

The new provision came into effect from 1-10-2020, the threshold for the calculation of TCS will be considered for the entire financial year. Transactions prior to this date will not be eligible for any tax deduction.

Illustration 1:

Transaction Date	Amount of Remittance	Cumulative Remittance for the Financial Year	TCS Applicability
08-08-2020	INR 6,50,000	INR 6,50,000	TCS not applicable before 1-10-2020
13-10-2020	INR 3,50,000	INR 10,00,000	TCS Applicable INR 3,00,000 (10,00,000 – 7,00,000)
20-12-2020	INR 2,00,000	INR 12,00,000	TCS Applicable INR 2,00,000 As the limit of 7 Lakh already exhausted on 13-10-2020

Illustration 2:

Transaction Date	Amount of Remittance	Cumulative Remittance for the Financial Year	TCS Applicability
10-09-2020	INR 10,00,000	INR 10,00,000	TCS not applicable before 1-10-2020
13-10-2020	INR 1,50,000	INR 11,50,000	TCS Applicable INR 1,50,000 As the limit of 7 Lakhs already exhausted on 10-09-2020. But transaction prior to 1-10-2020 not eligible for TCS.

About the Author

Author is Neeraj Bhagat, FCA helping foreign companies in setting up of business in India and complying with various tax laws applicable to foreign companies while establishing a business in India. He is also founder of Neeraj Bhagat & Co. Chartered Accountants, a Chartered Accountancy firm established in the year 1997 with its head office at New Delhi.