LRS: a gateway to International Portfolio for global goals

As we become more involved in planning our money matters, and aligning our goals to investment decisions, we often miss noticing a scheme, relevant now more, than ever before. Every goal-sheet these days, has an International side to it, be in vacation, children’s education, investment for diversification, or medical treatment.

The scheme, LRS as it is popularly called, permits an individual to make transfers overseas. Let us explore its relevance more broadly, before we dive deeper into the regulatory details.

A lot of families, who have someone overseas, for studies, on vacation or for medical treatment, utilise this route to remit money frequently (within the prescribed limits).

The other group, who plans for an international goal, but builds rupee assets (factoring current exchange rate), undertakes unnecessary exposure to the volatile currency exchange rate risk. A better approach could be, to plan for the goals by investing in the respective country, and in their currency.

This can be done through LRS – as a strategy, in planning for a cross-border goal.

The LRS is a scheme under RBI, which allows a Resident Indian, to transfer foreign currency outside the country. Currently, one can transfer USD250,000 each financial year per person, including minors. This is not available to corporates, partnership firms, HUF, Trusts etc.

An individual must have a Permanent Account Number (PAN) to make remittance under the Scheme.

 The LRS limits, has undergone revision in stages over the years (shown below), as per India’s prevailing economic conditions.

 As the name suggests, the LRS symbolises how liberal or otherwise, the country’s Central Bank has managed to stay on the face of globalisation.

 There has been a significant increase in the amounts sent as outward remittance, under LRS, in the last few years.

The broad categories within which the outward remittances have taken effect under LRS, can be classified as: 

1.   Capital Account transfers
2.   Current account transfers

 Capital Account:

 The permissible Capital Account transactions by an individual are:

1. Opening of foreign currency account abroad with a bank,
2. Purchase of property abroad,
3. Making investments abroad
4. Setting up wholly owned subsidiaries and joint ventures outside India, subject to terms and conditions under FEMA
5. Extending loans in India Rupees to NRI relatives (as per Companies Act 2013)

 Current Account:

 The permissible Current Account transactions include:

1. Private visits,
2. Gift/Donation,
3. Going abroad on employment,
4. Emigration – relocation to overseas for good
5. Maintenance of close relative abroad
6. Business trip
7. Medical treatment
8. Studies abroad

 The prohibited items spelt out under the Scheme, are:

1. No remittance for any purpose prohibited under Schedule-I (like purchase of lottery tickets/sweep stakes, etc.) or any item restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000.
2. No remittance from India for margins or margin calls to overseas exchanges / overseas counterparty.
3. No remittances for purchase of FCCBs issued by Indian companies in the overseas secondary market.
4. No remittance for trading in foreign exchange abroad.
5.  No Capital account remittances, directly or indirectly, to countries identified by the Financial Action Task Force (FATF) as “non- cooperative countries and territories”, from time to time.
6.  No remittances directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by the Reserve Bank to the banks.

There are multiple such Schedules under FEMA, referring to the Current & Capital Account transactions, and there are on-going amendments to each of these.

As an example, in the recent budget for FY2020-21, there will be a 5% levy in the form of Tax Collected at Source (TCS). In that, the government has tasked ADs with ensuring that a charge of 5% as TCS is collected and deposited on all payments above approx. $10,000.

 Things like these make it imperative that one consults a professional before using such schemes.

Moreover, with a holistic view to the financial plan, an advisor may bring a wider scope of choices, than just checking the regulatory boxes of do’s/don’t.