Under the Liberalised Remittance Scheme (LRS), resident individuals are permitted to remit up to USD 250,000 per financial year for a wide range of permissible current and capital account transactions. In order to ensure transparency and regulatory compliance, the scheme imposes specific reporting and documentation obligations on both remitters and Authorised Dealer (AD) banks.
1. Documentation and Declaration Requirements
Form A2 Submission
- Every remittance under LRS must be accompanied by Form A2, which serves as a declaration of the remitter’s intent and transaction details.
- The individual must submit:
- Form A2 duly filled and signed,
- Permanent Account Number (PAN) card, and
- Any supporting documents relevant to the nature of the remittance (e.g., invoices, medical estimates, admission letters).
Purpose Code Selection
- A specific purpose code must be selected while filling out Form A2 to accurately classify the nature of the transaction.
- Proper classification is essential as different purposes may have varying implications under FEMA and the Income Tax Act (e.g., TCS applicability, regulatory limits).
Use of Authorised Dealer Banks
- All remittances under LRS must be routed through Authorised Dealer (AD) Category-I banks, which are entities approved by the RBI to deal in foreign exchange transactions.
2. Regulatory Reporting by Banks
Daily Transaction Reporting to RBI
- AD banks are required to upload transaction-wise details of all LRS remittances on a daily basis to the Reserve Bank of India (RBI) via the dedicated portal.
Nil Reporting Requirement
- Even on days when no LRS transactions are processed, AD banks are mandated to file a ‘Nil’ report to maintain continuity in reporting and oversight.
Retention of Documents
- Both banks and remitters are advised to retain copies of Form A2 and related documents for audit, verification, and future reference.
- The remitter must be prepared to furnish these documents upon request by tax authorities, the RBI, or the bank.
3. Additional Compliance Considerations
Tax Collected at Source (TCS)
- TCS is applicable under the Income Tax Act for LRS remittances exceeding INR 10 lakh in a financial year.
- Rates vary depending on the purpose:
- 0% for education funded by loans,
- 5% for education and medical purposes (without loans),
- 20% for all other general purposes (e.g., investments, tourism).
Exceeding the LRS Limit
- Any remittance that exceeds USD 250,000 in a financial year requires prior approval from the RBI.
- Transactions must be backed by valid reasons and substantiated documentation.
Prohibited Transactions
- Certain remittances are expressly prohibited under LRS, including:
- Transactions involving lottery winnings,
- Payments related to margin trading, speculative forex trading, or
- Remittances to entities/countries under FATF sanctions or non-cooperative jurisdictions.
4. Importance of Compliance
Strict adherence to the LRS framework, including accurate reporting, proper documentation, and regulatory compliance, is crucial. Non-compliance may result in:
- Penalties under FEMA,
- Rejection or reversal of the transaction,
- Scrutiny by tax authorities, or
- Restrictions on future remittances.
Conclusion
The LRS offers significant flexibility to resident individuals for undertaking foreign exchange transactions. However, with that flexibility comes a responsibility to comply with detailed reporting and regulatory obligations. Proper understanding and observance of the reporting requirements—particularly the use of Form A2, purpose codes, and timely coordination with Authorised Dealers—are vital to ensuring smooth and compliant remittance under the scheme.
Disclaimer
The information provided herein is intended solely for educational and informational purposes. It should not be construed as financial, legal, or investment advice. While efforts have been made to ensure accuracy, the content may be subject to change due to legislative amendments or judicial interpretations. Readers are advised to consult with qualified professionals for advice specific to their financial or legal circumstances.
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