Private Client Series
Series 1 | Article 4
The Reserve Bank of India introduced the Liberalised Remittance Scheme (“LRS”) in 1994. The LRS sets out the thresholds for the amount of money that may be remitted (transferred) out of India by individuals, without having to take the prior approval of the RBI. The LRS is not available to either partnerships, corporates, HUF, Trusts, etc. The LRS generally sets out the different purposes for which money may be remitted by Resident Indians and a negative list of the purposes for which the money, once remitted, may not be used.
This article will cover the thresholds for the amount of money that may be remitted from India and briefly discusses the purposes for which it may be remitted.
The Threshold
The amount that is permitted to be remitted is calculated for a financial year, i.e. 1st April to 31st March of the following year.
In 2004, Resident Indians were permitted to remit an amount of USD 25,000/- per financial year, which at the time equalled approximately INR 11,25,000/-, at an exchange rate of INR 45 to USD 1 or thereabouts. Over the years this gradually increased and was last revised in 2015. At present a Resident Indian is permitted to remit USD 2,50,000/- per financial year under the LRS. This is equivalent to INR 2,07,50,000/-, at an exchange rate of INR 83 to USD 1 approximately. For the purpose of the threshold, it is only the USD equivalent that is relevant.
The Purposes Permitted
The purposes for which money may be remitted out of India by a Resident Indian is classified generally as either a current account transaction or a capital account transaction. The threshold of USD 2,50,000/- applies to the total of the current and capital account transactions.
Current account transactions are best understood from the list below:
Expenses while travelling abroad, including payments for flights and other travel, hotels, personal expenses, etc.;
Medical expenses incurred abroad. However, the LRS provides for banks to permit remittances in excess of the LRS threshold for medical expenses in certain situations, without having to take prior permission of the RBI.
Student education expenses. Expenses for studies abroad exceeding the LRS threshold are also permitted, without the prior approval of the RBI, on the basis of an estimate from the foreign university.
Expenses either while employed abroad and while continuing to be a Resident Indian or emigrating from India, till such time as a person may continue to be classified as a Resident Indian;
Gifts to non-residents or donations to organisations outside India;
Payments to relatives (which is limited to one’s father, mother, brother, sister, son, daughter, son-in-law, daughter-in-law.)
Expenses incurred during a business trip, such as attending a seminar, training, etc. Expenses which are borne by a company for its employees for such business trips are not treated as expenses under the LRS.
While there has been considerable confusion on whether expenditures on International Credit Cards, while overseas are counted against the overall LRS threshold, at present, while dealing with the matter of crediting tax at source, the Ministry of Finance has excluded from the LRS threshold, amounts spent on your credit card while overseas.
Capital account transactions are the following:
Transferring money to one’s own foreign currency bank account abroad;
Purchase of immovable property;
Investments in overseas assets, subject to the regulations dealing with overseas investments; and
Making loans to non-resident Indians who are relatives.
The LRS prohibits banks from providing credit facilities for capital account transactions under the LRS. Remittances for capital account transactions can be clubbed / consolidated between family members so long as the family members are also compliant with the regulations and are co-owners / co-investors in the investment being made.
The Purposes Prohibited
The purposes for which money may not be remitted from India are listed in Schedule 1 & 2 of the Foreign Exchange Management (Current Account Transaction) Rules, 2000, which list is incorporated by reference in the LRS. The list of purposes includes: remittance of lottery winnings and income from racing / riding or other hobbies; remittance for purchase of lottery tickets, banned magazines, sweepstakes, football pools, etc. This is more specifically detailed later in the series.
The next article in the series will deal with the opening of an overseas bank account by a Resident Indian.
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, transborder 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