Liberalised Remittance Schemes

Reference 

The government is considering bringing credit card expenditure back under the 'Liberalised Remittance Scheme' (LRS). This scheme has been started to make it easier for Indian residents to remit money from or to foreign countries. 

What is Liberalised Remittance Scheme (LRS)

• As per Section 5 of FEMA, a person resident in India is free to buy or sell foreign currency for any current account transaction except those transactions for which withdrawal of foreign currency has been prohibited by the Central Government.
• This scheme was launched by the Reserve Bank of India (RBI) on February 4, 2004 with a limit of $25,000. Later, the LRS limit was revised in various phases in accordance with the prevailing macro and micro economic conditions.
  • It is known that before the year 2004, the work of transferring money from India to other countries was done with severe restrictions under the Foreign Exchange Management Act, 1999.
• At present, under the Liberalised Remittance Scheme, all resident individuals, including minors, are permitted to freely remit up to USD 2,50,000 per financial year for acceptable current and capital account transactions or a combination of both.
  • This scheme is not available to corporates, partnership firms, Hindu Undivided Families (HUF), trusts etc.
• The individual resident is required to provide Permanent Account Number (PAN) for all transactions made under LRS through persons authorised by him. Also, remittances can be made in any freely convertible foreign currency.

Items prohibited under the scheme

• Remittance facility under this Scheme is not available for the following :
  1. (Remittance for any purpose specifically prohibited under Schedule I of Foreign Exchange Management (Current Account Transactions) Regulations, 2000 (such as purchase of lottery tickets/ gambling bets, purchase of prohibited magazines, etc.) or for any item prohibited under Schedule II 
  2. (Remittance from India to Overseas Exchanges/ Overseas Counterparty for margin or margin calls
  3. Remittance for purchase of foreign currency convertible bonds issued by Indian companies in the overseas secondary market
  4. Remittance for trading in foreign currencies abroad
  5. For capital account transactions, the scheme is not available to countries that have been identified by the Financial Action Task Force (FATF) as ‘non-cooperative countries and jurisdictions’ from time to time. 
  6. Remittances, either directly or indirectly, to individuals or entities identified as high risk for involvement in terrorist activities and as specifically reported to banks by the Reserve Bank are also not permitted.
  7. Gifts in foreign currency by a resident to another resident for credit to a foreign currency account maintained abroad under LRS. 

Rate of Tax Collected at Source (TCS) for LRS

• Tax collected at source is the amount collected by the seller from the buyer at the time of sale, to be deposited with the tax authorities.
• The TCS rate for foreign remittances under LRS has been increased from 5% to 20% in Budget 2023. This includes international travel, sending money abroad and other remittances.
• This new rate came into effect from October 1, 2023, removing the Rs 7 lakh limit for applying TCS on LRS.
  • However, these changes will not apply in case of education and medical expenses.

Benefits of Liberalised Remittance Scheme in India

• Diversification of Investment Portfolio: LRS allows individuals to diversify their investment portfolio by investing in foreign assets such as stocks, bonds, mutual funds and real estate.
• Overseas Education: It provides students the opportunity to pursue higher education in foreign universities and colleges and enables individuals to send money to cover education-related expenses such as tuition fees, living expenses and books.
• Medical Treatment: It allows individuals to send money for medical treatment outside India.
• Travel: LRS enables individuals to send money for travel-related expenses such as tickets, hotel bookings and other expenses.
• Start-ups permitted: It allows investments in foreign businesses, start-ups and joint ventures.
• Gifts and Donations: This scheme enables individuals to gift or donate money to their family members or charitable organisations outside India.

Conclusion

Spending money abroad using credit cards is currently not under the ambit of the liberalised remittance scheme, but that might change in the near future and if it does, credit card users might have to pay 20% on tax collected at source (TCS).