RBI Updates Liberalized Remittance Scheme: Key Changes to Note

Inward and outward remittances are regulated under the Foreign Exchange Management Act, 1999 (”FEMA”). Under the FEMA, the Reserve Bank of India (”RBI”) is empowered to issue any direction/ order to the Authorised Person dealing in foreign exchange (also known as Authorised Dealer). Therefore, as a liberalization measure, the RBI has put in place the Liberalized Remittance Scheme (”LRS”) to allow resident Indians to remit funds within a specified limit without any prior approval from the RBI. Any remittance exceeding the limit prescribed under LRS scheme requires prior permission from the RBI.

The LRS Scheme has become an increasingly popular option for individuals in India looking to remit funds overseas for various purposes. Since its introduction in 2004, the LRS scheme has undergone several revisions, making it easier for individuals to diversify their investment portfolio, pursue higher education or medical treatment abroad, and engage in other permissible current or capital account transactions abroad.

In this blog post, we will explore the key features of the LRS scheme and some recent changes introduced in the scheme through recently notified Foreign Exchange Management (Overseas Investment) Rules, 2022, Foreign Exchange Management (Overseas Investment) Regulations, 2022 and the Foreign Exchange Management (Overseas Investment) Directions, 2022 (collectively referred as “OI Guidelines”).

Features of LRS scheme

• As of March 2023, an Indian resident can remit upto USD 250,000 ($0.25 million) in a financial year (April to March) without any approval from the Reserve Bank of India.
• This cap/limit includes both current and capital account transactions. However only certain transactions are permissible.
• The permissible capital account transactions are-
  • opening of foreign currency account abroad with a bank;
  • acquisition of immovable property abroad, Overseas Direct Investment (ODI) and Overseas Portfolio Investment (OPI). However, these transactions have to be in accordance the provisions contained in the OI Guidelines.
  • extending loans including loans in Indian Rupees to Non-resident Indians (NRIs) who are relatives as defined in Companies Act, 2013.
• All current account transactions are permissible except the ones specifically prohibited under the Foreign Exchange Management (Current Account Transactions) Rules, 2000. Few important permissible current account transactions are-
  • Private visits to any country (except Nepal and Bhutan);
  • Gift or donation;
  • Going abroad for employment;
  • Emigration;
  • Maintenance of close relatives abroad;
  • Travel for business, or attending a conference or specialised training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment / check-up;
  • Expenses in connection with medical treatment abroad;
  • Studies abroad.
• Remittances under the LRS scheme can be consolidated in respect of the family members for current account transactions.
• After recent notification of OI Guidelines, remittances under LRS can also be consolidated in respect of relatives for purchase of immovable property outside India.
• Clubbing in respect of family members is not permitted for other capital account transactions such as opening a bank account/investment, if the family members are not the co-owners/co-partners of the overseas bank account/ investment. Subsequent to recently notified rules,

Recent changes introduced by the OI Guidelines in respect of foreign remittances

1. Precise distinction has been made between an Overseas Direct Investment (”ODI”) and an Overseas Portfolio Investment (”OPI”). Under the previous regime, there was no segregation between a direct investment and a portfolio investment.
   1. Under the new OI Guidelines, ODI means: (a) acquisition of any unlisted equity capital or subscription as a part of the memorandum of association of a foreign entity, or (b) investment in 10% or more of the paid-up equity capital of a listed foreign entity, or (c) investment with control where investment is less than 10% of the paid-up equity capital of a listed foreign entity.
   2. OPI means any overseas investment which is not ODI, other than investment in any unlisted debt instruments or any security issued by a person resident in India who is not in an IFSC.
2. Clubbing of remittances under LRS was not permitted for purchase of immovable property outside India. Now, the same has been permitted in respect of relatives. The term relatives includes members of a Hindu Undivided Family, husband and wife, father (including step father), mother (including step mother), son (including step son), son’s wife, daughter, daughter’s husband, brother (including step brother), and sister (including step sister).
3. Earlier, resident individuals were not required to repatriate the funds or income generated out of investments made under the LRS. However, with effect from 24.08.2022, the received/realised/unspent/unused foreign exchange, unless reinvested, shall be repatriated and surrendered to an authorised person within a period of 180 days from the date of such receipt/ realisation/ purchase/ acquisition or date of return to India. This implies that the individuals can not allow their funds to remain parked in a bank account for more than 180 days.

Recent changes introduced by the Budget in respect of foreign remittances

The Budget also made certain provisions in respect of the tax collected at source (”TCS”) for foreign remittances. The rate of TCS for foreign remittances ( except for education and for medical treatment) has been increased from 5 per cent to 20 per cent.

Concluding Remarks

The latest OI guidelines have made certain aspects of investing overseas more straightforward and have also brought clarity to several concepts that were previously open to interpretation by different stakeholders. However, there are only few changes in respect of the LRS scheme.

The provision allowing clubbing of remittance in respect of relatives for purchase of immovable property outside India is a welcome step as acquisition of property in joint name was practically difficult. At the same time, the provision requiring repatriation of unused funds after 180 days would expose individuals to certain amount of risk as now, to avoid repatriation, the unutilized funds have to be mandatorily invested in securities, which come with a downside risk.