Master Direction – Liberalised Remittance Scheme (LRS): An Overview and Compliance Framework

1. Introduction

The Liberalised Remittance Scheme (LRS) was introduced by the Reserve Bank of India (RBI) on February 4, 2004, vide A.P. (DIR Series) Circular No. 64, read with Government of India Notification G.S.R. No. 207(E) dated March 23, 2004. The scheme represents a significant liberalisation under India’s foreign exchange regulatory regime, enabling resident individuals to remit funds abroad for permitted current and capital account transactions, or a combination of both, within a specified annual limit.

The LRS framework operates under the Foreign Exchange Management Act, 1999 (FEMA) and is supported by rules, regulations, and directions issued thereunder. Over the years, the scheme has been progressively liberalised in line with evolving macroeconomic conditions and India’s increasing integration with the global economy.

2. Regulatory Framework and Nature of the Master Direction

While FEMA and its allied rules lay down the substantive law, the RBI, in exercise of its powers under Section 11 of FEMA, issues directions to Authorised Persons (APs)—primarily banks and money changers—on the manner in which foreign exchange transactions are to be conducted.

The Master Direction on Liberalised Remittance Scheme (LRS) consolidates all existing instructions relating to LRS at one place, ensuring clarity, uniformity, and ease of reference. Reporting-related requirements are dealt with separately under the Master Direction on Reporting under FEMA (Master Direction No. 18 dated January 1, 2016).

Given the frequent regulatory updates, the RBI issues amendments through A.P. (DIR Series) Circulars, and the Master Direction is updated simultaneously. The present Master Direction has replaced earlier versions due to significant amendments.

3. Scope and Applicability of the LRS

Eligible Persons

• The scheme is available only to resident individuals, including minors.
• In case of a minor, Form A2 must be countersigned by the natural guardian.
• The scheme is not available to corporates, partnership firms, HUFs, trusts, or similar entities.

Annual Remittance Limit

• Resident individuals may remit up to USD 2,50,000 per financial year (April–March).
• This limit is aggregate, covering all permitted current account and capital account transactions.
• Any remittance beyond this limit requires prior approval of the RBI.

Evolution of the LRS Limit

The remittance ceiling has evolved from USD 25,000 in 2004 to the current USD 2,50,000, reflecting gradual liberalisation in response to economic conditions.

4. Permissible Transactions under LRS

A. Capital Account Transactions

Resident individuals may use LRS for:

• Opening and maintaining foreign currency bank accounts abroad.
• Acquisition of immovable property abroad.
• Overseas Direct Investment (ODI) and Overseas Portfolio Investment (OPI) in accordance with the Overseas Investment Rules, Regulations, and Directions, 2022.
• Extending interest-free loans in Indian Rupees to NRI relatives, subject to prescribed conditions.

B. Current Account Transactions (subsumed within USD 2,50,000 limit)

These include:

• Private visits abroad (excluding Nepal and Bhutan)
• Gift or donation to persons or organisations outside India
• Employment abroad
• Emigration
• Maintenance of relatives abroad
• Business travel
• Medical treatment abroad (including attendant expenses)
• Education abroad

5. Key Restrictions and Prohibitions

• Transactions not permissible under FEMA are not allowed.
• Remittances for margin trading or margin calls overseas are prohibited.
• The scheme is not available for transactions prohibited under Schedule I or restricted under Schedule II of the FEMA (Current Account Transactions) Rules, 2000.
• Capital account remittances to FATF-identified non-cooperative jurisdictions or to persons/entities linked to terrorism are strictly prohibited.
• Banks are prohibited from extending credit facilities to facilitate capital account remittances under LRS.

6. Documentation and Operational Mechanism

• Remitters must designate one Authorised Dealer branch for all LRS transactions.
• Form A2 is mandatory for purchase of foreign exchange.
• PAN is compulsory for all LRS remittances.
• Funds must originate from the remitter’s own bank account.
• Unutilised foreign exchange must be repatriated and surrendered within 180 days, unless reinvested or otherwise permitted.

Compliance Checklist under Liberalised Remittance Scheme (LRS)

A. Compliances for Resident Individuals

1. Ensure remittances are within USD 2,50,000 per financial year.
2. Confirm that the purpose of remittance is permissible under FEMA and LRS.
3. Furnish PAN and duly filled Form A2.
4. Route all remittances through one designated Authorised Dealer branch.
5. Ensure funds are remitted from own sources only.
6. Avoid remittances to FATF non-cooperative countries or prohibited entities.
7. Repatriate and surrender unutilised foreign exchange within 180 days, unless exempted.
8. Comply with Overseas Investment Regulations, 2022, where applicable.
9. Ensure loans or gifts to NRIs are:
   • Within LRS limit
   • To qualifying “relatives”
   • Routed through appropriate NRO/NRE accounts
10. Maintain proper records for tax and FEMA compliance.

B. Compliances for Authorised Dealers (Banks / APs)

1. Verify compliance with FEMA, rules, regulations, and RBI directions.
2. Obtain declarations and information under Section 10(5) of FEMA.
3. Conduct KYC and AML checks before processing remittances.
4. Ensure the customer relationship is at least one-year-old for capital account transactions, or conduct enhanced due diligence.
5. Verify source of funds and obtain bank statements / ITRs where required.
6. Ensure remittances are not made to prohibited jurisdictions or entities.
7. Do not extend credit facilities for capital account remittances under LRS.
8. Maintain proper documentation and audit trails for RBI inspection.
9. Comply with Income-tax provisions, including TDS, where applicable.
10. Report transactions accurately in FETERS and comply with Master Direction No. 18 on Reporting under FEMA.
11. Seek prior RBI approval before marketing foreign currency deposit or overseas investment schemes to residents.

7. Conclusion

The Liberalised Remittance Scheme is a cornerstone of India’s outward remittance framework, balancing individual financial freedom with regulatory oversight. While the scheme offers significant flexibility to resident individuals, strict adherence to FEMA provisions, RBI directions, and reporting requirements is essential. Both remitters and Authorised Dealers must exercise due diligence to ensure that the benefits of liberalisation are achieved without compromising compliance, transparency, or financial integrity.

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