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Resident Indians or people resident in India are allowed to transfer foreign currency under the foreign exchange regulations. The transfer of foreign currency outside India is governed by the Foreign Exchange Management Act, 1999 (FEMA). The Reserve Bank of India (RBI) has authorised remittance up to a specific limit under the Liberalised Remittance Scheme. Individuals (Resident Indians) have to comply with the norms of transferring funds under the Liberalised Remittance Scheme.
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Liberalised Remittance Scheme is a system which is brought out by the RBI in 2004. Under this scheme, resident Indians are allowed to transfer funds abroad. However, to regulate the system, the amount of funds which are permitted to be transferred abroad is limited to a particular extent. The remitter must take diligence when transferring funds and comply with the respective norms.
The liberalised remittance scheme is also known as the LRS. Under the LRS, an individual is permitted to transfer only up to USD 2, 50,000 per financial year. When introducing this system of LRS, the RBI had a defined limit which is amended from time to time. This limit has been extended to USD 2, 50,000.
The Liberalised Remittance Scheme is regulated under the Foreign Exchange Management Act, 1999. RBI is the primary regulatory authority for FEMA regulation in India. Transactions which occur under FEMA can be classified into Capital Account Transactions and Current Account Transactions.
Apart from this, the Liberalised remittance scheme is governed by the Foreign Exchange Management (Current Account Transactions) Rules 2000. These rules have been amended from time to time and include the Foreign Exchange Management (Current Account Transaction) Rules, 2015. These rules are also known as the CAT rules. These regulations affect the transactions under the Liberalised Remittance Scheme.
Under the Foreign Exchange Management Act, 1999 transactions which are undertaken are categorised into the following:
Capital Account Transactions: Under section 2(e) of the Foreign Exchange Management Act, 1999, a capital account transaction is understood, as a transaction which changes or alters the assets and liabilities outside India. For understanding capital account transactions, the alteration happens to the assets and liabilities outside India of a person who is resident in India.
Current Account Transaction: A transaction which is not defined as a capital account transaction is known as a current account transaction. So basically a transaction which is not categorised as a capital account transaction is known as a current account transaction. Transactions which do not change the current assets and liabilities are known as a current account transaction.
To understand the Liberalised remittance scheme, it is crucial to understand the difference between a capital account transaction and a current account transaction.
An individual who is planning to remit or transfer funds outside India must follow the guidelines related to the LRS. If compliance is maintained under the LRS, then the individual can transfer or remit funds outside abroad.
The following guidelines have to be considered under the Liberalised Remittance Scheme:
For routes of investment, the RBI has permitted sectors of investment and prohibited sectors of investment.
Similarly, individuals under the LRS scheme are not permitted to carry out the following transactions under the LRS:
As per the Foreign Exchange Management (CAT) Amendment Rules, 2015, the fund which is transferred under LRS can be used for the following purposes:
Under the LRS scheme funds would be transferred through banks authorised by the RBI. Such banks are known as authorised agencies or authorised dealers. Authorised Banks are defined and have meaning under the FEMA, 1999. An individual who wants to use the scheme must follow the prescribed procedure.
The following steps have to be considered for using the LRS:
Apart from authorised banks, institutions such as Fully Fledged Money Changers (FFMCs) can provide funds under the liberalised remittance scheme.
However, there are specific requirements for the FFMCs to comply with:
The applicant under the liberalised remittance scheme has to comply with specific requirements.
Apart from complying with respective foreign exchange regulations, the applicant has to comply with the following:
Under the liberalised remittance scheme, funds can be transferred in any currency. The currency does not require being in USD. It can be in any other currency. Any interest which is received from funds transferred under this scheme is not repatriable. Hence, the applicant under this scheme can reserve the interest and deposit for the purpose of local use. If the funds were subject to repatriation then they would be subject to tax treatment under the respective FEMA regulation.
Hence under the LRS scheme funds can be transferred to a resident outside India. As long as compliance is maintained by the individual, this transaction would be permitted.
Read our article:FEMA Guidelines: Inward Remittance
Varun Hariharan has completed the Legal Practice Course from BPP Law School, Manchester. He has a Masters in Commercial and Corporate Law from the Queen Mary University of London and LLB Honours from Bangor University, UK. He specialises in law related to corporate, artificial intelligence and technology law.
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