Liberalised Remittance Scheme (LRS) - Rau's IAS (2024)

Context: The utilisation of RBI’s Liberalised Remittance Scheme (LRS) has been scaling new highs due to the surge in the number of Indians travelling, investing and studying abroad. The money sent abroad under this scheme during April 2023-January 2024 was the highest ever, at $27.4 billion.

About Liberalised Remittance Scheme (LRS)

• As per the Foreign Exchange Management Act, 1999 (FEMA), persons resident in India are free to buy or sell foreign exchange for any current account transaction except for those transactions for which drawal of foreign exchange has been prohibited by the Central Government.
• Under the Liberalised Remittance Scheme, all resident individuals, including minors, are allowed to freely remit up to USD 2,50,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both. There are no restrictions on the number of transactions but the cumulative amount should not exceed USD 2,50,000.
• The Scheme was introduced on February 4, 2004, with a limit of USD 25,000. The LRS limit has been revised in stages consistent with prevailing macro and micro economic conditions.
• Remittances under the LRS facility can be consolidated (clubbed together) in respect of close family members subject to the individual family members complying with the terms and conditions of the Scheme.
• The remittances can be made in any freely convertible foreign currency (apart from dollars).
• Only certain capital account transactions are allowed under LRS rules such as opening a bank account abroad i.e. a Foreign Currency Account, purchasing real estate property overseas, for making investments overseas which includes investing in shares, mutual funds, and debt instruments amongst others.
• The Scheme is not available to corporates, partnership firms, HUF, Trusts etc.

Who is Covered Under this Scheme?

Individuals can avail of foreign exchange facility for the following purposes within the LRS limit of USD 2,50,000 on financial year basis:

• Private visits to any country (except Nepal and Bhutan)
• Gift or donation
• Going abroad for employment
• Emigration
• Maintenance of close relatives abroad
• Travel for business, or attending a conference or specialised training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/ check-up
• Expenses in connection with medical treatment abroad
• Studies abroad
• Any other current account transaction which is not covered under the definition of current account in FEMA 1999.

Changes to LRS

• The investor who has remitted funds under LRS can retain and reinvest the income earned from his investment made under the scheme. However, the received/unused foreign exchange, unless reinvested, shall be repatriated and surrendered to an authorised person within a period of 180 days from the date of such realisation.
• This new rule restrains the residents from keeping money beyond six months in offshore bank accounts. The rule requires them to ‘Reinvest’ the unused income earned from investments made under LRS from India in foreign securities, mutual funds, properties and other permitted assets.
• Union government has decided to cancel its plan to impose a 20% tax on overseas credit card spending, exempting individuals from the levy for payments up to ₹7 lakh per year.
• The Finance Ministry stated that it aims to address concerns raised about the applicability of Tax Collection at Source (TCS) to small transactions under the Liberalised Remittance Scheme (LRS).

Issues with the new rule:

• Typically, a foreign bank will have a requirement of maintenance of minimum balance but the new LRS framework does not provide flexibility to retain excess funds in the bank account beyond a period of 180 days.
• Until now, the unutilised funds would mostly be parked in a bank account, which offer minimal risk of capital loss, but now the same money which needs to be invested in securities incurs a potential risk.

Need for changes:

Along with change in LRS rules, Finance minister increased tax collection at source for foreign remittances to 20%. These measures were aimed to curb remittances outflows:

• LRS remittances by Indians saw a sharp uptick in the last few years, thanks to booming stock markets and other lucrative investment opportunities including cryptocurrencies.
• In 2021-22, Indians sent $20 billion overseas via LRS, up from $13 billion in FY21, RBI data showed. In the period between October to December 2022, residents sent $6 billion via LRS.
• Such outward remittances add pressure to the forex reserves of the country, especially when there is FPI sell-off in Indian markets due to fed-tapering or when global oil prices are already high.

Related