The Reserve Bank of India (RBI) has recently introduced a significant change to the Liberalised Remittances Scheme (LRS) by imposing a 20% tax on outward foreign remittances.
Understanding the Liberalised Remittance Scheme (LRS):
The Liberalised Remittance Scheme is a facility provided by the RBI that allows resident individuals, including minors, to freely remit funds for current and capital account purposes or a combination of both. Here are some key points about the LRS:
- Introduction and Regulations: The LRS was introduced in February 2004 under the Foreign Exchange Management Act (FEMA), 1999. It provides guidelines for resident individuals to remit funds abroad within specified limits.
- Revision of Limits: Over time, the LRS limits have been revised to align with prevailing economic conditions. The current limit for all resident individuals, including minors, is set at US $2,50,000 (approximately Rs. 1.5 crore) per financial year.
- Eligibility and Permitted Transactions under LRS: The LRS is applicable only to individual Indian residents, including minors. Other entities such as corporates, partnership firms, HUF, and trusts are excluded.
The scheme allows for various types of transactions, including:
- Opening Foreign Currency Accounts: Individuals can open foreign currency accounts abroad with authorized banks.
- Overseas Investments: Acquiring immovable property abroad, overseas direct investment (ODI), and overseas portfolio investment (OPI) are permitted under the LRS.
- Loans to Non-Resident Indians (NRIs): Individuals can extend loans, including loans in Indian Rupees, to non-resident Indians who are defined as relatives under the Companies Act, 2013.
- Personal and Medical Purposes: Private visits abroad (excluding Nepal and Bhutan), maintenance of relatives abroad, medical treatment abroad, and pursuing studies abroad are also covered under the LRS.
Introduction of Tax Collection at Source (TCS) on Outward Remittances:
The Union Budget 2023 introduced a significant change to the LRS by implementing a Tax Collection at Source (TCS) for outward foreign remittances. The key details of this tax regulation are as follows:
- Applicability: The TCS of 20% will be applicable to outward foreign remittances made under the LRS, excluding those for education and medical purposes.
- Taxable Profit on Foreign Investments: Any profit earned on foreign investments made under the LRS will be subject to taxation in India, based on the duration of the investment.
Implications and Conclusion:
- The introduction of the 20% TCS on outward foreign remittances under the LRS marks a significant change in the taxation of such transactions. This move aims to monitor and regulate the outflow of funds and prevent any misuse or tax evasion.
- It is essential for individuals undertaking foreign remittances under the LRS to be aware of the new tax regulations and comply with the reporting and payment requirements. Seeking guidance from tax professionals and staying updated with the RBI’s guidelines will help ensure adherence to the revised provisions.
