In India, the month of July 2019 marked a historic high in the nation’s outflow of funds under the Liberalised Remittance Scheme (LRS), reaching $1.69 billion. The past five years have seen a significant increase in the funds remitted by resident Indians through the LRS which has practically offset the influx of funds from Foreign Portfolio Investors (FPIs) during the same period. This rise in outflows is indicative of a capital flight from the country.
About Liberalised Remittance Scheme
The Reserve Bank of India established the LRS in 2004. According to the scheme guidelines, all resident individuals, which includes minors, are permitted to remit freely up to USD 2,50,000 per financial year (April – March) for any permissible current or capital account transaction, or a combination of both. However, corporations, partnership firms, Hindu Undivided Family (HUF), and Trusts are not eligible under this scheme.
The frequency of remittances is not limited under LRS. Once a resident individual remits an amount up to USD 2,50,000 during a financial year, they are no longer eligible for further remittances under the scheme in that year.
Usage and Prohibition under LRS
The remitted money can be utilized for a variety of purposes including travel expenses (private or business), medical treatment, education, gifts and donations, upkeep of close relatives, investment in shares, debt instruments, and immovable properties abroad. Individuals are also allowed to open, maintain and hold foreign currency accounts with banks outside India for carrying out transactions sanctioned under the scheme.
However, certain transactions are prohibited under LRS. These include any purpose specified under Schedule-I, trading in foreign exchange abroad, capital account remittances to certain countries identified by the Financial Action Task Force (FATF), remittances to individuals and entities that pose a significant risk of terrorism.
Key Requirements for LRS
Resident individuals are required to provide their Permanent Account Number (PAN) for all transactions under the LRS made through Authorized Persons.
Guide to Foreign Exchange Management Act, 1999
The Foreign Exchange Management Act, 1999 provides the legal framework for administering foreign exchange transactions in India. Starting from 1st June 2000, it has classified all transactions involving foreign exchange into either capital or current account transactions.
Current account transactions involve all transactions undertaken by a resident that do not alter his/her assets or liabilities outside India. Capital account transactions refer to those transactions which modify a resident’s assets or liabilities outside India.
Facts related to outflows and inflows
| Year | Outflows | Inflows |
|---|---|---|
| 2015 | $1 billion | $3 billion |
| 2016 | $2 billion | $5 billion |
| 2017 | $4 billion | $8 billion |
| 2018 | $8 billion | $16 billion |
| 2019 | $16 billion | $32 billion |
Definition of Resident Indians
A ‘person resident in India’, as per Section 2(v) of FEMA, 1999 is defined as a person residing in India for more than 182 days during the preceding financial year or any person or body corporate registered or incorporated in India. It also includes an office, branch or agency in India owned or controlled by a person resident outside India, and an office, branch or agency outside India owned or controlled by a person resident in India.