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.
Liberalised Remittance Scheme- What is it?
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.
Regulation for the Liberalised Remittance Scheme
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.
What is the meaning of Capital Account and Current Account Transaction?
Under the Foreign Exchange Management Act, 1999 transactions which are undertaken are categorised into the following:
- Capital Account Transactions
- Current Account Transactions
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.
Points to be considered under the Liberalised Remittance Scheme
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:
- The liberalised remittance scheme would only apply to individuals, including any minor individuals.
- The amount which the individual can remit is limited to USD 2, 50,000 per financial year. If an individual would want to remit more than the above amount, then individual consideration would be taken on a case to case basis.
- Under the liberalised remittance scheme only permitted capital account transactions, as well as current account transactions, will be allowed. It can either be a capital account transaction or a current account transaction, or a combination of both of these transactions.
- Under Schedule III of the FEM (CAT) Regulations, 2015 only up to USD 2, 50,000 are allowed to be remitted.
- Under the LRS scheme, only individuals would be allowed to remit funds to another country. The funds remitted cannot be undertaken by proprietorship concerns, partnership concerns, limited liability partnerships, companies and any other form of entity that has a legal status.
- While making these provisions, the RBI has considered the requirement of individuals who have to send funds outside India.
Prohibited Transactions 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:
- Transfer of funds which are prohibited as per the guidelines issued by the RBI. These activities would be prohibited under Schedule-I of the CAT provisions.
- Activities would include the purchase and sale of lotteries.
- Investment in any form of sweepstakes.
- Investment in proscribed magazines.
- Apart from this, investment under the LRS scheme would not be allowed for any form of transaction which is present under Schedule II of the Foreign Exchange Management (CAT) Rules, 2000.
- Any form of transfer under the LRS scheme for margin calls to overseas exchanges or similar stock exchange is not permitted.
- Transfer of funds for the trading in an overseas registered stock exchange.
- Any form of remittance used for purchasing Foreign Currency Convertible Bonds (FCCBs) which are issued by any Indian companies in the overseas securities market.
- Any transactions which are mentioned under Capital Account to countries which are grey listed as per the Financial Action Task Force (FATF). The RBI has issued respective guidelines for countries that are present in the list of FATF. The remitter has to take diligence when considering these countries for investment.
- Any form of remittance which occurs either directly or indirectly to countries that are grey listed by the FATF and known for carrying out terrorist financing and other forms of activities. Independent consultation would be required from the RBI on a case to case basis.
What can the funds under the Liberalised remittance scheme be used for?
As per the Foreign Exchange Management (CAT) Amendment Rules, 2015, the fund which is transferred under LRS can be used for the following purposes:
- Any form of private visits to any country. Private Visits would also include tourism activities. However, individual transferring funds has to ensure that they are used for legitimate purposes.
- Donations and Gifts are permitted under the LRS scheme. However, if a transfer is made to an NRI or PIO, it must be credited to the NRO/ FCNR account.
- If the individual is going abroad for employment purposes, then such transfer is permissible under the LRS scheme. However, the individual has to show valid proof of employment abroad.
- Migrating to another country.
- Any form of maintenance of close relatives abroad. For interpreting the meaning of close relatives, we have to go by the definition provided by the Companies Act, 2013. Any form of a close relative would include an individual who is related through blood.
- The liberalised remittance scheme can be used for educational purposes. Apart from this, medical expenses would also be included. Travelling abroad to attend some form of specialised training under an agency would also be included under the LRS scheme.
- Any form of medical-related expenses would also be included under the LRS scheme.
- Any other type of current account transaction which is not included under the definition of the FEMA, 1999.
What is the Procedure of Transferring Funds under the Liberalised Remittance Scheme?
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:
- The individual has to approach the authorised dealer with the information for transferring funds.
- The applicant has to fill up the application form for the LRS scheme. The prescribed application form will be Form A2.
- The applicant has to provide details for remittance such as the purposes of remitting the funds. Information such as the purpose of remitting funds in the transaction is mandatory as there are specific prohibited purposes of remitting transaction under this.
- The applicant or the remitter has to ensure that all the information is true and correct as per his/her knowledge. With such information, the applicant has to provide the Permanent Account Number (PAN) to the authorised dealer.
- The applicant also has to make sure that compliance has been maintained respectively for transferring funds under the LRS scheme.
- Once this is carried out, the authorised dealer will check the information and carry out the process of transfer of funds. For every transaction, the authorised dealer will not take specific permission from the RBI. Only for transactions, which involve high security or concerning a FATF country, the RBI will be involved.
Is it possible for any other agency to send funds under the Liberalised Remittance Scheme?
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 FFMC has to comply with the norms as made by the RBI from time to time under the Liberalised Remittance Scheme.
- Only up to a specific limit can be transferred by an FFMC. The limit which is permissible by the FFMC is similar to that of authorised banks, which is USD 2, 50,000.
- Funds which are transferred by FFMC can only be used for private and business purposes abroad. Apart from this, funds which are transferred by the FFMC cannot be utilised for other purposes.
- The FFMC has to ensure that due diligence guidelines are followed when remitting money to the foreign country. However, before accepting the transaction of the customer, the FFMC has to ensure that KYC (Know Your Client) and other forms of money laundering regulations.
Compliance required by the Applicant
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:
- The applicant has to make the transaction through an authorised dealer. In certain circumstances, the transaction would be permissible through the FFMC.
- The applicant has to maintain an account with the authorised dealer.
- This account has to be maintained at least for one year before carrying out the transaction.
- If a new form of current account remittance is made, then the authorised dealer has to ensure proper due diligence is carried out on the applicant. Apart from this, the bank has to fulfil the guidelines related to KYC.
- The authorised dealer has to obtain documentation from the applicant related to the transfer of funds. For this purpose, the following documentation would be permissible:
- Previous year’s bank statement has to be submitted by the applicant to the bank.
- If this is not present, then the applicant has to submit returns which are filed with the respective income-tax authority.
- Apart from this, the applicant can get the income tax assessment order from the authority.
- The applicant has to state that he controls the funds for the LRS.
- All this information must be declared in Form A2.
- Apart from this, the applicant must adhere and fulfil the guidelines as required by the authorised dealer and the RBI.
Is interest or any other receipt repatriable under the Liberalised Remittance Scheme?
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.
The RBI has brought out a scheme whereby an individual is allowed to transfer money outside India. This transfer can be made under the Liberalised remittance scheme. Under the LRS scheme there is a limit up to USD 2, 50,000 which can be transferred. Only up to the limit can be transferred by an individual in a financial year. This scheme can only be availed by individuals and entrepreneurs. Other forms of entities cannot avail this scheme. Through this scheme, individuals can benefit from transfers which come under permissible limits.
Read our article:FEMA Guidelines: Inward Remittance