What is Liberalised Remittance Scheme (LRS)?

Indians residing abroad for education or other purposes often need funding from their family and friends in India. However, before 2004, the act of fund transfer from India to other countries came with severe restrictions under the Foreign Exchange Management Act of 1999. 

Thus, RBI (Reserve Bank of India) introduced the LRS to facilitate smooth foreign transactions. Scroll down for a detailed insight into this scheme.

What is LRS?

The LRS full form is Liberalised Remittance Scheme. It is a foreign exchange policy initiative introduced by the Reserve Bank of India in 2004. It intended to simplify and streamline the process of remitting funds outside India. 

This scheme helped Indians overcome international fund transfer restrictions as set by the FEMA (Foreign Exchange Management Act), 1999. Under LRS, resident individuals can freely remit funds up to a certain limit for various permissible transactions involving a current or capital account.

LRS scheme for NRIs

The LRS scheme applies to the residents of India, and thus, the remittance takes place through a savings account. Non-Residential Indians are not supposed to have any savings accounts in Indian banks. Thus, they cannot remit funds from India, but they are permitted to transfer funds from NRO, NRE, and FCNR accounts abroad as per the regulations and requisite documentation:

• They are permitted to transfer up to USD 10,000 from an NRO account.
• No limitations apply to payments made from an NRE or FCNR account.
• The Liberalised Remittance Scheme has made it simpler for Indian citizens to manage financial transactions abroad. 
• You can use the funds for debt repayment, education, and other needs. You can also invest outside of India, which is a great method of diversifying your investment portfolio.

Liberalised Remittance Scheme availability

The Liberalised Remittance Scheme is available to the following individuals and circumstances:

• The Foreign Exchange Management Act states that LRS is available to all resident individuals, including minors and students.
• The eligible citizens must have an Indian bank account, a valid Permanent Account Number (PAN), and a passport.
• They can use the remitted amount for educational, business, personal, or other purposes.

Liberalised Remittance Scheme limit

Under the LRS, a resident individual can remit up to USD 250,000 per financial year for permissible transactions. The LRS limit for education, medical treatment, employment, emigration, travel, investment, etc., is the same as mentioned. However, you can not use the remittances for margin trading, buying lottery tickets, real estate, etc.  

Tax on Liberalised Remittance Scheme

Profits gained from overseas investments made through LRS are taxable in India depending on the investment's holding period. Investments over two years are considered long-term capital gains and impose a tax of 20% on the total profit earned. Profits earned from investments below two years are taxed at normal income tax slab rates.

Under the LRS scheme, you are liable to pay a 5% TCS (Tax Collected at Source) for remittances exceeding the limit of Rs. 7,00,000. However, you can claim a refund for the deducted TCS while filing ITR (income tax return) using Form 26AS.

RBI guidelines for outward remittance 

Outward remittance indicates the transfer of funds from an Indian account to a foreign account. As per the RBI guidelines, outward remittance can be paid through a demand draft issued in the individual or the beneficiary's name. You can also open a bank account outside India to maintain foreign accounts. Here are some of the steps to do the same:

• Choose a bank branch that is an authorised dealer through which all payments will be made.
• Make sure to carry your PAN card.
• Follow the Anti-Money Laundering (AML) and KYC (Know Your Customer) guidelines.
• Fill out Form A2 to purchase foreign currency.
• Last but not least, banks are prohibited from providing any credit facilities to residents under LRS.

Benefits of Liberalised Remittance Scheme in India

Some of the notable benefits of LRS are as follows:

• Diversification of investment: The LRS allows individuals to diversify their investment portfolio by investing in foreign assets such as stocks, bonds, mutual funds, and real estate.
• Overseas education: The LRS enables individuals to remit money for education-related expenses such as tuition fees, living expenses, and books. This allows students to pursue higher education in foreign universities and colleges.
• Medical treatment: The LRS allows individuals to remit money for medical treatment outside India. This is particularly helpful for those requiring specialised medical treatment unavailable in India.
• Travel: The LRS enables individuals to remit money for travel-related expenses such as tickets, hotel bookings, and other expenses.
• Start-ups and business investments: The LRS allows individuals to invest in foreign businesses, start-ups, and joint ventures. This helps entrepreneurs and business owners expand their businesses globally.
• Gift and donations: The LRS enable individuals to gift or donate money to their family members or charitable organisations outside India.

Since its introduction, the Liberalised Remittance Scheme has paved the way for international trade, foreign investment, and more. However, you need what the Liberalised Remittance Scheme stipulates, especially its eligibility criteria and documentation requirements for a hassle-free transaction.

FAQs

What is the LRS scheme?

The RBI introduced the LRS scheme or Liberalised Remittance Scheme to facilitate hassle-free foreign exchange. Under this scheme, an Indian resident can transfer funds of up to USD 250,000 in a financial year outside India.

Who is eligible for LRS?

Indian residents, apart from corporates, partnership firms, HUFs, etc., are eligible for LRS. Even minors are eligible for LRS, given that their guardian signs Form A2.

What is the current LRS limit?

The current limit for Liberalised Remittance Scheme is USD 250,000 for a given financial year. You can remit a higher amount after taking prior permission from the Reserve Bank of India.

What is the benefit of LRS?

There are multiple benefits of the LRS scheme. It allows you to diversify your investment portfolio, buy foreign products, transfer money for educational and medical aid to family members residing abroad, etc.

Is LRS taxable?

Profits earned from investments with more than 24 months of holding periods are eligible for 20% taxation. You need to pay a 5% TCS for a transfer of Rs 7,00,000 and more,

Can I claim TCS on LRS?

Yes, you can claim the TCS deducted as refunds. All you need to do is fill out Form 26AS while filing ITR. 

Can we receive money under Liberalised Remittance Scheme? 

The Liberalised Remittance Scheme only covers the provisions of foreign remittance, i.e., sending money outside India. The Foreign Contribution (Regulation) Act, 2010, covers the provisions for accepting and utilising foreign income for individuals and companies in India.

When was the Liberalised Remittance Scheme introduced?

The Reserve Bank of India introduced Liberalised Remittance Scheme in 2004. It streamlines the foreign exchange procedure.