Understanding RBI's Liberalized Remittance Scheme: A Comprehensive Guide
The Reserve Bank of India's Liberalized Remittance Scheme (LRS) provides a structured framework for resident Indians to transfer funds overseas for a variety of legitimate purposes. This mechanism facilitates global financial engagement while ensuring regulatory compliance. The recent Union Budget for 2026-2027 has introduced significant modifications to the Tax Collected at Source (TCS) rates applicable to these remittances, making it crucial for individuals to stay informed.
Permitted Uses and Investment Avenues
Under the LRS, residents are authorized to remit money abroad for multiple objectives. The scheme explicitly allows investments in foreign financial instruments, including listed shares, bonds, and exchange-traded funds (ETFs). Investment in overseas real estate is also permitted, offering diversification opportunities. Furthermore, participation in venture capital funds and mutual funds managed by regulators in the host country is allowed, provided the fund manager is duly regulated.
Beyond investments, the LRS covers essential cross-border expenses. This includes costs associated with foreign travel, business trips, overseas education, medical treatment abroad, and relocation for employment purposes. Residents can also utilize the scheme to provide financial support to close relatives residing in foreign countries.
Important Restrictions and Prohibitions
While the LRS offers considerable flexibility, it comes with specific prohibitions. Creating leverage in foreign currency, such as obtaining overseas loans, is strictly not permitted under this scheme. Additionally, trading in derivatives listed on foreign exchanges is disallowed. The use of borrowed funds for remittances related to capital account transactions is prohibited, even if the funds are sourced from relatives. However, gifted funds may be remitted, though clubbing provisions under the Income Tax Act could apply for spouses and minor children.
Investment in overseas fixed deposits remains a grey area, as it is neither explicitly permitted nor prohibited. Experts advise caution and recommend consulting with authorized dealers before proceeding. For under-construction properties, installment plans that extend beyond the possession date are considered implicit financing and are not permitted under the Foreign Exchange Management Act (FEMA).
Annual Limits and Strategic Utilization
At the heart of the LRS is an annual ceiling of $250,000 per resident individual per financial year, which is approximately ₹2.26 crore. This limit can be strategically optimized through careful timing. For instance, a remittance made before March 31 and another after April 1 fall into two separate financial years, effectively allowing an individual to remit up to $500,000 within a single calendar year.
Families can combine their individual LRS limits for joint investments, but accuracy in reflecting each person's contribution in the ownership of the overseas asset is paramount to avoid compliance issues.
Revised Tax Collected at Source (TCS) Rates
The Union Budget for 2026-2027 has announced revised TCS rates on remittances under the LRS, effective from the upcoming financial year. For overseas tour packages, a flat TCS rate of 2% will apply. Remittances for medical treatment and education purposes will attract a nil TCS rate up to ₹10 lakh, with a 2% rate applicable on amounts exceeding this threshold. For all other purposes under LRS, the TCS rate is nil up to ₹10 lakh, but 20% on transactions above this limit.
These changes aim to streamline the tax collection process while ensuring that essential remittances for education and healthcare remain relatively unaffected. It is advisable for individuals to consult with financial advisors or authorized dealers to fully understand the implications of these new rates on their specific remittance plans.
