LIBERALISED REMITTANCE SCHEME
1. Context
THE CENTRAL Government, in consultation with the Reserve Bank of India, in a late night notification Tuesday amended rules under the Foreign Exchange Management Act, bringing in international credit card spends outside India under the Liberalised Remittance Scheme (LRS)
2.Background
India has come a long way in liberalising foreign exchange transactions for its residents
Before 2004, transferring money overseas was a cumbersome procedure involving numerous approvals from the Reserve Bank of India ('RBI')
The rationale behind these strict regulations was multifold:
First, India closely watched its foreign exchange reserves to maintain a comfortable cushion for meeting its debt and interest obligations
Second, it restricted the outflow of money from the country to prevent destabilisation and devaluation of the rupee
Third, high imports into the country required funding through foreign exchange reserves
In 2004, the Committee on Procedures and Performance Audit on Public Services ('CPPAPS') recommended a scheme for liberalising personal outward remittances
The same year, RBI introduced the Liberalised Remittance Scheme ('LRS'), allowing Indian residents to make individual foreign exchange transactions with relative ease
In the two decades since, LRS has been instrumental in simplifying overseas expenses and investments for Indian residents
In 2021-22, India recorded USD $19.6 billion in outward remittances under LRS, marking an increase of USD $7 billion from the previous year
3. Remittances of LRS
LRS allows Indian residents to freely remit up to USD $250,000 per financial year for current or capital account transactions or a combination of both
Any remittance exceeding this limit requires prior permission from the RBI
Only individual Indian residents are permitted to remit funds under LRS
Corporates, partnership firms, HUF, trusts, etc are excluded from its ambit
However, it is available to minors, provided that Form A2 is countersigned by the minor's natural guardian
4. Permitted types of transactions
4.1. Capital account transactions:
- Opening of foreign currency account abroad with a bank
- Acquisition of immovable property abroad, overseas direct investment (ODI) and overseas portfolio investment (OPI), in accordance with the Foreign Exchange Management (Overseas Investment) Rules, 2022, Foreign Exchange Management (Overseas Investment) Regulations, 2022 and Foreign Exchange Management (Overseas Investment) Directions, 2022
Extending loans, including loans in Indian Rupees to non-resident Indians (NRIs) who are relatives as defined in the Companies Act, 2013
4.2. Current account transactions1.Private visits abroad (excluding Nepal and Bhutan)2.Gifts/donations3.Going abroad on employment4.Emigration5.Maintenance of relatives abroad6.Business trips7.Medical treatment abroad8.Pursuing studies abroad
5. Prohibited transactions
Under LRS, the following types of transactions are expressly prohibited:
1) Transactions not permissible under Foreign Exchange Management Act, 1999
2) Remittance for margins or margin calls to overseas exchanges or overseas counterparty
3) Remittances for any purpose specifically prohibited under Schedule I or any item restricted under Schedule II of Foreign Exchange Management (Current Account Transaction) Rules, 2000
4) Capital account remittances to countries identified by Financial Action Task Force (FATF) as non-co-operative countries and territories or as notified by RBI
5) Remittances directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by RBI to the banks
Source: TOI
