While making an international transaction, we have to convert Indian currency into Dollars to spend abroad or make investments. The rules that govern such international transactions fall under the realm of Liberalised Remittance Scheme (LRS). Putting succinctly, for Indian residents, to buy dollars in exchange for Indian rupees, we have to approach an Authorised Dealer (AD), the bank in India. The dollars can be then remitted or spent abroad to buy assets or acquire new property or purchase equity shares. Here, we are mentioning foreign exchange in terms of dollar though you can get your Indian currency exchanged freely under the LRS for any foreign currency other than dollars.
What is Liberalised Remittance Scheme?
a Liberalised Remittance Scheme is one which:
- facilitates Indian individuals to remit Indian currency to dollars not exceeding $2,50,000 or equivalent figure for foreign purchases in one financial year for permitted capital or current account transactions or combining the both.
- You can spend your money legally in foreign nations for various purposes like education, buying assets, shares or for availing medical treatments and more. The money remitted can also be used for serving relatives living abroad or to give donations or gifts. You can also maintain a foreign currency account with the help of overseas banks to carry foreign transactions.
What procedure needs to be followed under the Liberalised Remittance Scheme?
The Reserve Bank of India (RBI) confers upon the Authorised Dealer (AD) with the power to decide so that the remittance or withdrawals of foreign currency is not enabled contradictory to Income Tax Act or FEMA. Hence, every AD needs to ascertain that the foreign exchange complies with “Anti Money Laundering” and “Know Your Customer” rules before making a new remittance.
All the applicant applying for an LRS needs to complete an application criterion cum declaration which has been mentioned in the Form A2 and present the same to the AD or Full-Fledged Money Changer (FFMC) claiming:
- Name of the AD Branch, Applicant name and Foreign Bank details.
- The reason behind the remittance and code under which the resident is remitting the amount.
- A self-declaration form attested by the applicant stating that the amount remitted throughout a financial year will not exceed the pre-determined limit. The declaration must also include that the funds belong to the remitter and the payment must be received either in the form of a cheque drawn under the remitter’s account or debited in his account or issue by pay order/demand draft or in debit/credit card held by the applicant. The declaration also mentions that the remitter will not use the exchanged amount for reasons other than mentioned in the application form.
- After filing initial document’s, you need to provide your PAN number and NOC certificates if remittance is applied by another bank than the bank where the remitter has his/her account.
- You will need to produce bank statements and IT return so that AD banks can verify them prior LRS remittance.
- A minimum of 12 months relationship needs to be established between AD and remitter to remit under LRS.
- Disclosure of financial assets in the ITR forms is mandatory. Moreover, ADs are not permitted to remit money to lend the amount to someone.
- In few cases, the RBI may verify documents maintained by AD also AD can decline remitting a transaction where the applicant fails to comply with any of the above requirements.
Who all are prohibited to use Liberalised Remittance Scheme?
- The Liberalised Remittance Scheme cannot be used by Partnership firms, Corporates, Trusts, HUF and a few others. Also, if the remittance is made by a minor resident, the declaration form must be countersigned by the natural guardian of the minor.
- For sole-proprietorship businesses as there is no separate business entity, the business and the owner are assumed to be one. Hence, the permitted remittance limit remains the same i.e., $250,000. This means the owner cannot exceed the remittance capacity even under the name of his/her business.
- The LRS provides every family member with an opportunity to remit foreign exchange after complying with predetermined rules. However, clubbing is not allowed with other family members particularly when they are not the owners or co-partners of the Capital Account transactions or the acquired capital assets.
- Although you can apply for multiple remittances under the LRS, the amount must not exceed the limit. Once the remittance is made for up to $250,000 in a financial year, the resident will not be allowed for further remittances under LRS even if the proceeds have been returned to India.
What are the permissible current account transactions under Liberalised Remittance Scheme?
- Medical treatment in a foreign country
- Private visit to a friend or a relative other than in a country such as Bhutan and Nepal
- Donation or gift including rupees to non-resident Indian or person of Indian origin who is a relative
- Pursuing studies in a foreign university, college or school
- Overseas business trip
- Close relative’s maintenance cost
- Going for employment outside India
What is not permissible under the Liberalised Remittance Scheme?
- Exchange of Indian currency for prohibited activities such as lottery or margin trading
- Remitting money for trading under foreign exchange abroad
- Capital account remittance to countries directly or indirectly as identified by Financial Action Task Force like “Non-Co-operative countries and territories” timely
- Remittance to those individuals or business entities posed risk-oriented for committing crime and terrorism as advised by the RBI to Ads.
Which Capital account transactions are permissible under the Liberalised Remittance Scheme?
- While purchasing a property in a foreign country
- Opening a bank account outside India to keep money in foreign currency
- Investing in shares, mutual funds or securities abroad
- Setting a completely new entity under the remitter’s name or with a joint venture account abroad for a business in compliance with international trade laws
- Extending loans to NRI relatives in Indian currency as mentioned in Companies Act 2013.
Can we remit the amount exceeding $250,000 in a financial year?
Although the above limit is set for every remittance made under LRS, RBI can provide you with an extension above the pre-determined limit. In case you require to remit more, you have to give a suitable reason for an extension such as medical treatments charged by the foreign institute, emigration or university charges. Though the extension to the limit is subject to certain norms and the remitter’s background. In all other cases, you have to take permission from the RBI to remit funds exceeding $250,000.
What are the restrictions on the frequency of remittance under Liberalised Remittance Scheme?
At present, there is no restriction on the frequency of remittances under this scheme. But, the sum total of the remitted amount in the form of foreign exchange or remitted through every source in India during one financial year must be within the pre-determined limit.
Once the limit is completed, you may be restricted to remit more. Even if you try to remit more than the limit, the remitted amount will be brought back to the country once RBI identifies the same.