RBI Notification

Changes in TCS under Liberalised Remittance Scheme 

The Liberalised Remittance Scheme in India has undergone significant changes in Tax Collected at Source (TCS). These modifications by RBI aim to streamline tax compliance and curb money laundering. Starting October 1, 2023, TCS rates for foreign remittance under the Liberalised Remittance Scheme and purchases of overseas tour packages will rise to 20% up from the previous 5% applicable beyond the Rs 7 Lac threshold limit.  

Brief Understanding of LRS 

The RBI introduced the Liberalised Remittance Scheme (LRS) to facilitate hassle-free foreign exchange transactions for Indian residents. Under this scheme, individuals are allowed to remit up to $250,000 per financial year, which is permissible for current or capital account transactions or a combination of both with no permission from the RBI, but if the limit exceeds, then there will be prior approval from RBI.  

The scheme covers a wide range of uses, including education, travel, medical treatment, and property purchases outside India. Additionally, it allows investments in shares, debt instruments and other financial products outside India. The LRS aims to provide greater flexibility and convenience to residents by simplifying the process of transferring funds overseas, thereby supporting their global financial and investment needs.  

Recent Amendments by RBI under LRS 

In the recent amendment, changes were announced regarding the TCS under Liberalised Remittance Scheme for payments made under the LRS and overseas tour packages. It was also proposed that credit card payments would be included under the LRS or international credit card expenditures outside India included under the LRS schemes.  

The TCS rate for all LRS purposes and overseas tour packages, regardless of payment mode, will remain unchanged for the amount of Rs 7 lac per individual per annum. According to sub-section (1G) of section 206 C of the Income Tax Act, 1961, the TCS applies to foreign or outward remittance through LRS and the sale of overseas tour packages.  

The Finance Act in 2023 had initially increased the TCS under Liberalised Remittance Scheme rates from 5% to 20% for LRS remittance, which excludes remittance from education and medical purposes effective from 1^st October 2023. Also, the new TCS rates are 0.5% for education financed by loans and 5% for education or medical treatments.  

Taxation on Liberalised Remittance Scheme 

The profits from overseas investments made under the LRS scheme are taxable in India based on the holding period of the investment. The investments held for over two years are categorized as long-term capital gains and are taxed at 20% of the total profit. Profits from investments held for less than two years are taxed according to the normal income tax slab rates.  

Additionally, a 20% TCS under the Liberalised Remittance Scheme applies to remittances with a threshold limit of Rs 7,00,000. However, the individual can claim a refund for the deducted TCS when filing the ITR using Form 26AS.  

RBI’s Approach Towards Liberalised Remittance Scheme 

The Liberalised Remittance Scheme is a foreign exchange policy issued by the RBI in 2004 to ensure the procedure of sending funds outside India is simplified and streamlined and the rates charged for TCS under Liberalised Remittance Scheme are accurate. This initiative helped Indian residents direct and overcome restrictions on international fund transfers imposed by FEMA. 

Under the Liberalised Remittance Scheme, individuals are allowed to freely transfer up to the defined limit for a variety of permissible transactions, encompassing both current and capital accounts. It also reflects the RBI’s approach towards liberalizing foreign exchange controls and promoting greater economic integration with the global market. However, individuals need to ensure compliance with the specific guidelines and reporting requirements associated with the scheme to avoid any legal or regulatory issues. 

In the case of Outward Remittance, where the transfer of funds from an Indian account to a foreign account, the RBI guidelines state that such remittance can be made through a demand draft issued in the name of the individual and open a foreign account to manage these transactions. Below are the steps involved:  

• Select an authorized dealer bank branch to handle all payments.  
• Ensure that the person holds a PAN card.  
• Adhere to the Anti-money laundering and KTC regulations 
• Complete Form A2 to purchase foreign currency.  

Who can become a part of the Liberalised Remittance Scheme?  

The Liberalised Remittance Scheme (LRS) is a facilitative policy introduced by the RBI under the framework of the Foreign Exchange Management Act. It allows resident individuals in India to remit funds outside India up to a specified limit each financial year for various permissible transactions without requirements for prior approval from the RBI. LRS is accessible to all residents’ individuals of India, including:  

• Adults  
• Minors 
• Students 
• Person of Indian origin  
• Hindy Undivided Family 
• Sole Proprietorship  
• Partnership 

Where is the Remitted fund under the LRS permissible to use?  

The fund remitted under the LRS can be used for a variety of permissible transactions outside India, including but not limited to:  

1. Payment of education fees.  

2. Medical Treatment outside India.  

3. Maintenance of close relatives.  

4. Gifts and Donations.  

5. Investment in stocks, mutual funds, venture capital funds, debt instruments etc.  

6. Business Trips and travel expenses.  

7. Emigration 

8. Purchase of Foreign Currency Bonds issued by Indian companies outside India.  

What’s the limit under the Liberalised Remittance Scheme?  

As per the current regulation, the annual limit of remittance under the LRS per individual is $ 250,000 per financial year. This limit is cumulative for all permissible transactions and includes both current and capital account transactions.  

What is the Role of the LRS Scheme for NRIs?  

The LRS scheme is designed for Indian residents, facilitating remittance through their savings accounts. However, NRIs do not maintain savings accounts in Indian banks, preventing them from using this scheme for remittances. Instead, NRIs can transfer funds outside India from their NRO, NRE and FCNR accounts, following specific regulations and documentation requirements such as:  

• Up to $10,000 can be transferred from a Non-Resident Ordinary (NRO) account.  
• There are no limitations on transfers from Non-Resident External (NRE) or Foreign Currency Non-Resident (FCNR) accounts in Indian banks.  
• The LRS has significantly simplified financial transactions for Indian citizens outside India. It allows funds to be used for debt repayment, education and various other purposes.  
• Additionally, it enables investment outside India, offering NRIs an opportunity to diversify their investment portfolio effectively.  
• NRIs must adhere to the regulatory framework set by the RBI regarding the usage of NRO, NRE and FCNR accounts, ensuring compliance with FEMA.  

What are the advantages of a Liberalised Remittance Scheme?  

The Liberalised Remittance Scheme offers several advantages; below are the advantages of LRS:  

1. Investment Diversification 

LRS enables individuals to broaden their investment portfolios by investing in foreign assets such as stocks, bonds & real estate.  

2. Support for Overseas Education  

It facilitates remittance for fees of education, expenses of living and books making it easier for individuals to pursue education outside India.  

3. Medical Treatment Outside India 

LRS enables remittance for medical treatment outside India, especially for specialized healthcare facilities.  

4. Travel Expenses

It covers travel-related expenses for business trips, etc. 

5. Business and Entrepreneurship 

LRS supports entrepreneurs and businesses by permitting investment in foreign businesses, startups, and joint aiding in global business expansion.  

6. Gifts and Donation 

Individuals can use LRS to give gifts or donations to family members or charitable organizations outside India.  

How Does Repatriation and Reinvestment Work Under LRS?  

If an individual invests in foreign markets or property under the LRS, then he can retain and reinvest the income or profits earned from these investments. However, if an individual receives foreign currency and does not use or reinvest it, he must repatriate it to India and hand it over to an authorized person within 180 days.  

This 180-day period starts from the date of receipt, realization, purchase, acquisition or return to India. Additionally, investors may be required to surrender any extra records according to the regulation specified in the Overseas Investments Rules and Regulation 2022 and maintain compliance with FEMA.  

Conclusion  

The Liberalised Remittance Scheme (LRS) provides a flexible framework for Indian residents to remit funds outside India for various purposes, including education, medical treatment, travel and investments. With clear guidelines and an annual limit of $250,0000, LRS supports the financial needs of the Indian citizens while ensuring compliance with regulatory standards.

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