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After the opening up of the economy in 1991 following the balance of payment crisis, the Government

reviewed the Exchange Control regime in the country and in the year 2000, The Foreign Exchange

Management Act (FEMA) was enacted which replaced the earlier law The Foreign Exchange Regulation Act

(FERA) which regulated the foreign exchange transactions by Indian Residents as well as transactions in

Indian Rupees by Non Residents. The new regime is liberal and encouraged foreign investments in India

which helped India to improve its Foreign Exchange Reserves.

2. What is Capital Account Convertibility (CAC)?

The Committee on Capital Account Convertibility (1997, Chairman Dr S S Tarapore) in its report has

given a working definition for the CAC which is as following. “CAC refers to the freedom to convert local

financial assets into foreign financial assets and vice versa at market determined rates of exchange. It is

associated with changes of ownership in foreign/domestic financial assets and liabilities and embodies the

creation and liquidation of claims on, or by, the rest of the world.”

While all current account transactions, barring a few, are permitted freely under FEMA, the capital

account transactions are either restricted or regulated.

3. Definition of Capital Account & Current Account Transaction:

The Foreign Exchange Management Act (FEMA) defines Capital & Current Account Transactions as

under:

3.1. Section 2 (e) of FEMA defines Capital Account transactions as "a transaction which alters the assets

or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities

in India of persons resident outside India, and includes transactions referred to in sub-section (3) of section

6 "

(Note: Section 6(3) states certain specified transactions)

3.2. Section 2 (j) of FEMA defines Current Account transactions as "a transaction other than a capital

account transaction and without prejudice to the generality of the foregoing such transaction includes -

-payments due in connection with foreign trade, other current business, services, and short-term

banking and credit facilities in the ordinary course of business,

-payments due as interest on loans and as net income from investments,

-remittances for living expenses of parents, spouse and children residing abroad, and

-expenses in connection with foreign travel, education and medical care of parents, spouse and

children."

4. Liberalised Remittance Scheme (LRS):

Once the Foreign Exchange Reserves position was comfortable, the Government introduced the

Liberalised Remittance Scheme (LRS), applicable to all resident individuals, including minors, which is

nothing but a partial Capital Account Convertibility for Resident Indians.

All the provisions related to the LRS have been consolidated in the "FED Master Direction No. 7/2015-

16" which deals with Master Direction–Liberalised Remittance Scheme (LRS).

According to this scheme, the resident individual is freely allowed to remit an amount of USD 2,50,000

per financial year (FY) for a permitted capital or current account transaction or a combination of both.

The LRS limit has been revised in stages consistent with prevailing macro and micro economic

conditions. During the period from February 4, 2004 till date, the LRS limit has been revised as under:

- CA Viral Satra

LIBERALISED REMITTANCE SCHEME (LRS) LIBERALISED REMITTANCE SCHEME (LRS)

UNDER FEMAUNDER FEMA

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C.V.O. CA'S NEWS & VIEWSVOL. 22 - NO. 6 - DECEMBER 2018

Ÿ The Scheme thereby permits certain capital & current account transactions upto the current limit of USD 2,50,000. This limit is the overall limit for all permitted Capital & Current account transactions during a FY.

Ÿ 4.1. Permissible Capital Account Transactions:

Ÿ The following capital account transactions are permissible under the LRS scheme:

Ÿ Opening of foreign currency account abroad with a bank

Ÿ Purchase of property abroad

Ÿ Making investments abroad viz acquisition and holding shares of both listed and unlisted overseas company or debt instruments; acquisition of qualification shares of an overseas company for holding the post of Director; acquisition of shares of a foreign company towards professional services rendered or in lieu of Director's remuneration; investment in units of Mutual Funds, Venture Capital Funds, unrated debt securities, promissory notes

Ÿ Setting up Wholly Owned Subsidiaries and Joint Ventures outside India for bonafide business subject to certain terms & conditions. Detailed provisions are covered in Regulation 20A read with Schedule V of FEMA 120.

Ÿ Extending loans including loans in Indian Rupees to Non-resident Indians (NRIs) who are relatives. (Hence loans can also be given in FC to NRIs who are relatives).

Ÿ 4.2. Permissible Current Account Transactions:

Ÿ Further, the limit of USD 2,50,000/- per FY also includes remittances for current account transactions viz:

Ÿ Private visits: Any individual resident can spent an amount aggregating to USD 2,50,000 towards cost of rail/road/water transportation, cost of Euro Rail, passes/tickets, etc. outside India or overseas hotel/lodging expenses, etc as per this scheme.

Ÿ Gift/donation: Any resident individual may remit upto USD 2,50,000 in one FY as gift to a person residing outside India or as donation to an organization outside India.

Ÿ Going abroad on employment: A person going abroad for employment can draw foreign exchange upto USD 2,50,000 per FY in India.

Ÿ Emigration: A person wanting to emigrate can draw foreign exchange up to the amount prescribed by the Scheme. Remittance of any amount of foreign exchange outside India in excess of this limit may be allowed only towards meeting incidental expenses in the country of immigration and not for earning points or credits to become eligible for immigration by way of overseas investments in government bonds; land; commercial enterprise; etc.

Ÿ Maintenance of close relatives abroad: A resident individual can remit upto USD 2,50,000 per FY towards maintenance of relatives

Ÿ Business trip: For business trips to foreign countries, resident individuals can avail foreign exchange up to USD 2,50,000 in a FY irrespective of the number of visits undertaken during the year. Business trips include international conference, seminar, specialised training, apprentice training, etc

Ÿ Medical treatment abroad: Individual can raise USD 2,50,000 or its equivalent without any restrictions. For amount exceeding the above limit, Authorised Dealers may release foreign exchange under general permission based on the estimate from the doctor in India or hospital/ doctor abroad.

Ÿ Studies abroad: A resident individual can raise funds upto LRS limits without any estimate from the foreign University. However, remittances above USD 2,50,000 is allowed, without prior approval, based on the estimate received from the institution abroad.

Ÿ Further, remittances under the Scheme can be used for purchasing objects of art, subject to the provisions

DateFeb 4,

2004

Dec 20,

2006

M a y 8 ,

2007

Sep 26,

2007

Aug 14,

2013

J u n 3 ,

2014

May 26,

2015

LRS Limit (USD) 25,000 50,000 1,00,000 2,00,000 75,000 1,25,000 2,50,000

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of other applicable laws such as the extant Foreign Trade Policy of the Government of India.

Ÿ 4.3. Retention & reinvestment of funds & income:

Ÿ An investor who has remitted funds under LRS can retain, reinvest the income earned on the investments. At present, the resident individual is not required to repatriate the funds or income generated out of investments made under the Scheme. However, a resident individual who has made overseas direct investment in the equity shares; compulsorily convertible preference shares of a JV/WOS outside within the LRS limit, shall have to comply with the terms and conditions prescribed by the overseas investment guidelines under Notification No. FEMA 263/RB-2013 dated March 5, 2013.

Ÿ 4.4. Facility to grant loan in rupees to NRI/ PIO close relative under the Scheme:

Ÿ Resident individual is permitted to lend to a Non-resident Indian (NRI)/ Person of Indian Origin (PIO) close relative [where 'relative' means & includes those defined in Section 2(77) of the Companies Act, 2013] by way of crossed cheque/ electronic transfer subject to the following conditions:

Ÿ i. the loan is free of interest and the minimum maturity of the loan is one year;

Ÿ ii. the loan amount should be within the overall limit under the Liberalised Remittance Scheme of USD 2,50,000 per financial year available for a resident individual. It would be the responsibility of the resident individual to ensure that the amount of loan granted by him is within the LRS limit and all the remittances made by the resident individual during a given financial year including the loan together have not exceeded the limit prescribed under LRS;

Ÿ iii. the loan shall be utilized for meeting the borrower's personal requirements or for his own business purposes in India.

Ÿ iv.the loan shall not be utilized, either singly or in association with other person for any of the activities in which investment by persons resident outside India is prohibited, namely:

Ÿ a) The business of chit fund, or

Ÿ b)Nidhi Company, or

Ÿ c) Agricultural or plantation activities or in real estate business, or construction of farm houses or

Ÿ (Note: real estate business shall not include development of townships, construction of residential/ commercial premises, roads or bridges)

Ÿ d)Trading in Transferable Development Rights (TDRs).

Ÿ v. the loan amount should be credited to the NRO a/c of the NRI / PIO. Credit of such loan amount may be treated as an eligible credit to NRO a/c;

Ÿ vi. the loan amount shall not be remitted outside India; and

Ÿ vii. repayment of loan shall be made by way of inward remittances through normal banking channels or by debit to the Non-resident Ordinary (NRO) / Non-resident External (NRE) / Foreign Currency Non-resident (FCNR) account of the borrower or out of the sale proceeds of the shares or securities or immovable property against which such loan was granted.

Ÿ 4.5. Rupee gift to a NRI/PIO relative:

Ÿ A resident individual can make a rupee gift to a NRI/PIO who is a relative of the resident individual by way of crossed cheque /electronic transfer. Here, Relative means & includes all those defined under section 2(77) of the Companies Act, 2013.

Ÿ The amount should be credited to the Non-Resident (Ordinary) Rupee Account (NRO) a/c of the NRI / PIO and credit of such gift amount may be treated as an eligible credit to NRO a/c.

Ÿ The gift amount would be within the overall limit of USD 250,000 per FY as permitted under the LRS for a resident individual. It would be the responsibility of the resident donor to ensure that the gift amount is within the LRS limit.

Ÿ Further, the remitter should also consider other tax implications with regards to the gift to relatives.

Ÿ Say for example; in India, 'relative' defined under Income Tax Act, 1961 differs from the definition of relative under Companies Act, 2013. Thus, while remitting amount to a relative, care should be taken that the same is included in the purview of Income Tax definition.

Ÿ 1.Reporting Requirements:

Ÿ The resident individual seeking to make remittance should furnish Form A2 for purchase of foreign exchange under LRS. In case of remitter being a minor, the Form A2 must be countersigned by the minor's

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natural guardian. PAN is mandatory for making remittances under LRS. The individuals will have to mention the purpose code in the Form A2. The amount remitted should be used for the purpose specified in the said form. In case, the amount is not utilized for the specified purpose it will lead to contravention under FEMA. Further, the individual will have to designate a branch of an AD through which all the remittances under the Scheme will be made.

Ÿ AD Banks are required to submit information on remittances under LRS to RBI every month under Online Return Filing System (ORFS). (AP Dir Circular 50 dated 11-02-2016). AD Banks have been given List of 11 Purpose Codes for reporting transactions under LRS. While reporting, respective purpose code for particular transactions must be mentioned instead of reporting transactions collective under a single code.

Ÿ The following are the Purpose Codes for AD Banks:

Sr. No. Items under LRS Purpose Codes

1. Opening of Foreign Currency Account abroad S0023

2. Purchase of Immovable Property S0005

3. Investment in equity, debt, JV, WOS S0001, S0002, S0003, S0004,

S0021, S0022

4. Gift S1302

5. Donations S1303

6. Travel (business, pilgrimage, medical treatment, education,

employment)

S0301, S0303, S0304, S0305,

S0306

7. Maintenance of Close Relatives S1301

8. Medical Treatment S1108

9. Studies Abroad S1107

10. Emigration S1307

11. 'Others' such as loan to NRI close relative and health

insurance

S0011, S0603

1.

Thus, the LRS scheme permits resident individuals an opportunity to diversify their investment portfolio and

look at global investment options albeit within the limit of USD 2,50,000 per FY.

Conclusion: