Private Client Series
Series 1 | Article 1
Over the last 20 years or so there has been a considerable increase in the amount of money Indians either send or spend abroad. These expenditures include current account expenses such as expenses on foreign travel, education, medical treatment, supporting relatives, etc. Additionally, Indian residents have made investments in capital assets abroad, obtained foreign tax residencies, and in some cases even citizenship. Each of these expenses as well as purchases involves sending money overseas.
Over the years, our Clients, intending to diversify and de-risk their Indian holdings, have shown a keen interest in understanding the law and practical implications of holding overseas assets and the reporting requirements in India.
The articles on the topic are split into two parts, Series 1 is for Resident Indians and is intended to cover the ground on current and capital account transactions with a focus on planned capital investments for transferring wealth overseas. Series 2 is for Non-Residents and covers the law and practicalities involved in investing in India and repatriating money realised and lying in India.
An introduction to the law regulating foreign exchange transactions for Resident Indians.
The general law regulating foreign exchange transactions in India is the Foreign Exchange Management Act, 1999. The Reserve Bank of India is responsible for managing India’s foreign currency reserves and issues guidelines, directions, and circulars relating to foreign exchange transactions from time to time.
In 2004, as a liberalisation measure to the then existing regime, the Reserve Bank of India introduced the Liberalised Remittance Scheme, commonly known by its abbreviation, LRS. The LRS sets out the law for resident individuals to remit funds abroad for certain current and capital account transactions including those mentioned above. Over the years, the LRS has undergone various changes with the most recent and significant changes introduced as recently as 24th August 2022. It is around this time that the Indian Government brought about considerable clarity in investments that may be made by resident Indians in overseas capital assets, including the manner in which these investments may be made.These are notified under the Foreign Exchange Management (Overseas Investment) Rules, 2022, and related Directions and Guidelines issued contemporaneously. In addition to these laws, every remittance involves tax considerations and in most cases compliance under the Income Tax Act, 1961. In the following articles I will touch upon the more obvious tax aspects that you must consider.
The next article will deal more specifically with the determination of status as a Resident. Needless to say, if you are carrying out transactions that involve foreign exchange it is advisable to get the advice of experts. Non-compliance comes at a very heavy financial cost as well as potential penal actions.
About the Author
Pranay Mangharam is a founding member of MZD Legal Consultancy. He leads the firm's private client; technology; and transaction advisory practices. Pranay advises high-net-worth individuals, closely held businesses, and family offices on a range of private matters including their investments, succession planning, trans-border holdings, etc. He can be contacted at pranay@mzdlegal.in
About MZD Legal Consultancy
MZD Legal Consultancy is a boutique law firm in Mumbai, India. The firm was established in 2011 and comprises professionally qualified lawyers with varied levels of experience and expertise in specific practice areas. To know more, click here www.mzdlegal.in
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