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Liberalised Remittance Scheme (LRS)

March 5, 2023 /

The Liberalised Remittance Scheme (LRS) is a facility provided by the Reserve Bank of India (RBI) that allows resident individuals to remit money outside India for various purposes. Under this scheme, individuals can remit up to USD 250,000 per financial year (April-March) for permissible transactions.

What is Remittance?

Remittance refers to the transfer of money or funds from one place to another, typically from a migrant worker to their home country. It can also refer to the transfer of funds from one bank account to another or from one person to another, either domestically or internationally.

Remittances can be sent through various channels, including wire transfer, online banking, mobile banking, and money transfer services. The purpose of remittance can vary, including personal, business, or charitable reasons.

Remittances are an important source of income for many families and countries, particularly in developing countries. They can help to alleviate poverty, improve access to education and healthcare, and provide a boost to local economies.

Permissible Transactions under the Liberalised Remittance Scheme

  1. Overseas education and travel expenses: Payments made towards tuition fees, hostel expenses, and other fees related to education and travel abroad.
  2. Medical treatment abroad: Payments made towards medical treatment and healthcare expenses abroad.
  3. Purchase of immovable property abroad: Payments made towards the purchase of property abroad for personal use.
  4. Investment in shares, securities, and mutual funds: Payments made towards buying shares, securities, and mutual funds of overseas companies.
  5. Gift and donations: Remittances towards gifts and donations to non-residents and charitable institutions outside India.
  6. Maintenance of close relatives: Remittances towards the maintenance of close relatives living abroad.

The LRS is applicable to resident individuals only and not to companies or firms. The remittance can be made in any freely convertible foreign currency as per the prevailing exchange rate.

It is important to note that the LRS does not cover all types of transactions and there are certain restrictions and conditions that need to be adhered to. Any violation of these conditions can lead to penalties or legal action. It is advisable to consult a financial expert or the RBI guidelines before making any remittances under the LRS.

Example of Liberalised Remittance Scheme

Let us consider an example to understand how the Liberalised Remittance Scheme (LRS) works:

Suppose Mr. Kumar, a resident Indian, wants to pay for his daughter’s education expenses in the United States. The total amount payable towards tuition fees, hostel expenses, and other fees is USD 50,000.

Under the LRS, Mr. Kumar can remit up to USD 250,000 per financial year (April-March) for permissible transactions. Hence, he can use the LRS to remit the required amount of USD 50,000 for his daughter’s education expenses.

Mr. Kumar needs to follow the following steps to make the remittance:

  1. Open a bank account: Mr. Kumar needs to have an active bank account with a bank authorized by the RBI to provide remittance services under the LRS.
  2. Submit necessary documents: Mr. Kumar needs to submit necessary documents such as a copy of his PAN card, passport, and a declaration form to the bank.
  3. Make the remittance: Mr. Kumar can then make the remittance through the bank’s authorized channels such as wire transfer, internet banking, etc. He can remit up to USD 250,000 in a financial year for permissible transactions.
  4. Verify transaction: After the remittance is made, Mr. Kumar needs to verify the transaction details with the bank to ensure that the payment has been made correctly.

In this example, Mr. Kumar can use the LRS to remit the required amount for his daughter’s education expenses in the United States. He can also use the LRS for other permissible transactions such as medical treatment abroad, purchase of immovable property abroad, investment in shares, securities, and mutual funds, gift and donations, and maintenance of close relatives.

How it affects the Forex Resave of RBI?

The Liberalised Remittance Scheme (LRS) can have an impact on the reserves of the Reserve Bank of India (RBI) in multiple ways.

On the one hand, the LRS allows resident individuals to remit money outside India for various permissible transactions, which can result in an outflow of foreign exchange from the country. This can put pressure on the country’s foreign exchange reserves as it may result in a decrease in the amount of foreign currency held by the RBI.

On the other hand, the LRS can also result in an inflow of foreign exchange into the country. For instance, if a non-resident Indian (NRI) invests in shares or mutual funds of an Indian company, it would result in an inflow of foreign exchange into the country.

Overall, the impact of the LRS on the RBI’s reserves would depend on the net effect of the inflows and outflows resulting from the permissible transactions under the scheme. The RBI closely monitors the remittances made under the LRS and takes necessary measures to manage the impact on its reserves, if any.

How it will affect the USA economy? 

The Liberalised Remittance Scheme (LRS) is a policy framework established by the Reserve Bank of India (RBI) to regulate the remittance of money by resident individuals outside India. The impact of LRS on the US economy would depend on the nature and purpose of the remittance.
If the remittance is made by a resident Indian to pay for goods or services purchased in the United States, it can potentially benefit the US economy by boosting consumption and trade. For example, if Mr. Kumar, a resident Indian, uses LRS to pay for his daughter’s education expenses in the United States, the funds would be used to pay for the tuition fees, hostel expenses, and other fees in the US. This, in turn, would benefit the US education sector and the economy by increasing the revenue generated by educational institutions and creating jobs in the sector.
Similarly, if a resident Indian invests in shares, securities, or mutual funds of a US company, it can potentially benefit the US economy by providing funds for investment and supporting the growth of the US company.
However, if the remittance is made for speculative purposes or to evade taxes, it may not have a positive impact on the US economy. For example, if a resident Indian remits funds to an offshore account to avoid taxes, it can potentially reduce the tax revenue for both India and the United States.