Under the Foreign Exchange Management Act (FEMA), 1999, all foreign exchange transactions are broadly classified as either current account or capital account transactions, depending on whether they result in a change in assets or liabilities of a person resident in India vis-à-vis the rest of the world.
The Liberalised Remittance Scheme (LRS), introduced by the Reserve Bank of India (RBI), permits resident individuals to remit funds abroad for a variety of permissible transactions, encompassing both current and capital account categories, subject to a specified annual limit.
1. Overview of LRS
- The LRS framework enables resident individuals to remit up to USD 250,000 per financial year (April–March) for any permissible capital or current account transaction or a combination thereof.
- This facility is available only to individuals and not to corporates, partnership firms, HUFs, or trusts.
2. Definition of Capital Account Transactions
As per FEMA, capital account transactions are those that lead to a change in the foreign assets or liabilities of a resident or a non-resident. These transactions involve movement of capital across borders and typically include:
- Opening foreign currency accounts abroad.
- Purchase of immovable property outside India.
- Investment in shares, bonds, mutual funds, or other securities issued by foreign entities.
- Setting up wholly-owned subsidiaries (WOS) or joint ventures (JV) overseas.
- Lending or gifting money to a non-resident which creates a financial claim outside India.
3. Application of LRS to Capital Account Transactions
Remittance Limit:
- The LRS limit of USD 250,000 is inclusive of both current and capital account transactions.
- Remittances under capital account must remain within the overall limit.
Examples of Capital Account Transactions Permitted under LRS:
- Acquisition of foreign securities (debt/equity instruments).
- Investment in overseas mutual funds.
- Purchase of real estate abroad.
- Opening and maintaining foreign bank accounts.
- Loans or gifts to non-resident relatives.
4. Regulatory Requirements and Restrictions
RBI Approval:
- Any capital account transaction exceeding the LRS limit requires prior approval from the Reserve Bank of India.
- Transactions involving investment in overseas entities may also require reporting under the Overseas Direct Investment (ODI) regulations.
Prohibited Transactions:
- Remittances for purposes such as:
- Purchase of lottery tickets or sweepstakes.
- Transactions involving virtual currencies or speculative foreign exchange trading.
- Remittances to countries identified as non-cooperative by the Financial Action Task Force (FATF).
Specific Guidelines:
- Certain capital account transactions, particularly involving immovable property abroad or establishment of entities, may have additional procedural requirements or sector-specific restrictions.
5. Compliance Considerations
- Authorized Dealer (AD) banks are responsible for verifying the purpose and documentation before processing capital account transactions under LRS.
- Non-compliance with LRS limits or FEMA regulations may lead to penalties, repatriation orders, or freezing of foreign assets.
- Proper reporting, including filing of Form A2 and maintaining disclosure in the Annual Information Statement (AIS) and Form 26AS, is essential.
Conclusion
The Liberalised Remittance Scheme provides an enabling environment for Indian resident individuals to invest or acquire assets abroad within a regulated framework. While LRS facilitates capital account transactions up to the prescribed annual limit, it is imperative for remitters to ensure full compliance with the applicable provisions of FEMA, RBI circulars, and income tax laws. Transactions beyond the permissible threshold or falling under the prohibited category must be carefully assessed and, where necessary, undertaken only with prior regulatory approval.
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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