CAIIB BFM Module A Unit 2 : Liberalised Remittance Scheme (LRS) and Other Remittance Facilities for Residents

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Aug 29

CAIIB Paper 2 BFM Module A Unit 2 : Exchange Rates and Forex Business (New Syllabus)

IIBF has released the New Syllabus Exam Pattern for CAIIB Exam 2023. Following the format of the current exam, CAIIB 2023 will have now four papers. The CAIIB Paper 2 (Bank Financial Management) includes an important topic called "Liberalised Remittance Scheme (LRS) and Other Remittance Facilities for Residents". Every candidate who are appearing for the CAIIB Certification Examination 2023 must understand each unit included in the syllabus.

In this article, we are going to cover all the necessary details of CAIIB Paper 2 (BFM) Module A (INTERNATIONAL BANKING) Unit 2 : Liberalised Remittance Scheme (LRS) and Other Remittance Facilities for Residents, Aspirants must go through this article to better understand the topic, Liberalised Remittance Scheme (LRS) and Other Remittance Facilities for Residents and practice using our Online Mock Test Series to strengthen their knowledge of Liberalised Remittance Scheme (LRS) and Other Remittance Facilities for Residents. Unit 2 : Liberalised Remittance Scheme (LRS) and Other Remittance Facilities for Residents

Introduction

Introduced w.e.f. 4th Feb 2004: Liberalised Remittance Scheme (LRS) for Resident Individuals
Facilitates resident individuals to remit funds abroad for permitted current or capital account transactions or a combination of both.
Available to

Resident individuals (including Minors),

Not Available

Corporates, Partnership Firms,
HUFs,
Trusts
NRI

Capital Account Transactions And Current Account Transactions

As per Sub-section 2 (e) of Foreign Exchange Management Act 1999 (FEMA), Capital account transaction means a transaction which alters the assets/liabilities, including contingent liabilities, outside India of persons resident in India or assets/liabilities in India of persons resident outside India.
Example: A resident individual by investing abroad in the equity of the Overseas company obtains shares allotted in his/her favor resulting in creation of an asset outside India.
Likewise, a resident individual by investing in property abroad gets the ownership of the property purchased resulting in creation of an asset outside India.
As per Sub- As section 2 (j) Current account transaction means a transaction other than capital account transaction and includes payments connected to trade, interest on loans and income on investments, expenses connected to travel, family maintenance, medical treatment, etc.
Example: A parent remitting funds to the dependent son/ daughter abroad towards education expenses, maintenance of the student abroad, etc.

Key Sections Under FEMA Vis-À-Vis Liberalized Remittance Scheme

Section 4: Save otherwise as provided in the Act, no person resident in India, shall acquire, hold, own, possess or transfer any foreign exchange or foreign security or any immovable property situated outside India, unless it was acquired while being a non-resident. However, under the contours of liberalization, resident individuals are permitted to invest abroad in property or equity - subject to adhering to the extant guidelines.
Section 6: Any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction ie., any class or classes of capital account transactions which are permissible and the limits up to which such transactions are permissible as per the extant regulations under the Act.
Section 10 (6): Any person (other than the Authorized Person) who has acquired or purchased foreign exchange does not use it for such purpose or does not surrender it to the authorized person within the specified period if such foreign exchange is not used or uses the foreign exchange so acquired or purchased, for any other purpose not permissible under the provisions of the Act, shall be deemed to have committed contravention of the provisions of the Act. In a nutshell, this section is about utilization of foreign exchange availed from an Authorized Dealer for the purpose for which such foreign exchange has been availed.
Section 11: To secure compliance of the provisions of this Act, RBI may give to the Authorized Person any directions with regard to making payments or desist from doing any act relating to foreign exchange or foreign security, with regard to furnish such information, in such manner as it deems fit, with regard to failure to furnish such information or filing any returns impose penalty which may extend to Rs. 10,000 and in case of continuing contravention, with an additional penalty which may extend to Rs. 2,000 for every day. In a nutshell, this section is about how foreign exchange business has to be conducted by Authorized Persons and the power of RBI to penalise APs in case of any breach in procedure.
Section 13: Any person contravenes any of the provisions of the Act or contravention of any rule, regulation or notification, shall upon adjudication be liable to pay penalty up to thrice the amount involved in such contravention where such amount is quantifiable or up to Rs. 2,00,000 where the contravention is not quantifiable. Where the contravention is a continuing one, further penalty may extend up to Rs. 5,000 for every day after the first day during the period of such contravention. In a nutshell, this section is about the penalties which may be imposed for contraventions of the provisions of the FEMA.

Permissible/Non-Permissible Remittances Under LRS

Schedule I – Non-permissible remittances (Prohibited remittances) The following remittances are not permitted
Schedule II – remittances permissible subject to approval of the respective Government Departments/Ministries
Schedule III - Remittances for resident individuals – permissible under the delegated powers of the Authorized Dealers

Schedule I – Non-permissible remittances (Prohibited remittances)

The following remittances are not permitted:

Remittances for margins or margin calls to Overseas exchanges/Overseas Counterparties.
Payment of commission on exports made towards equity investments in JVs/WOS abroad.
Payment related to "Call Back Services" of telephones. Remittance towards banned/proscribed magazines. Purchase of FCCBs issued by Indian companies abroad.
Remittance of dividends by any company to which the requirement of dividend balancing is applicable.
Remittance of interest income on funds held in Non Resident Special Rupee accounts.
Remittance out of lottery winnings, remittance for purchase of lottery tickets. Remittance of income from racing, riding or any other hobby.
Payment of commission on exports under Rupee State Credit Route.

Schedule II – remittances permissible subject to approval of the respective Government Departments/Ministries

Remittances towards Cultural tours – approval from Department of Education and Culture - Ministry of Human Resources Development.
Advertisements in Foreign Print Media by State Governments/PSU Undertakings – Ministry of Finance.
Remittances towards Freights of Vessels chartered by PSUs – Ministry of Surface Transport.
Payment of Imports through Ocean Transport on CIF basis by Government dept/PSUs – Ministry of Surface Transport.
Remittances of hiring charges of transponders by TV Channels, Internet Service Providers, etc. – Ministry of Information & Broadcasting, Ministry of Information Technology.
Remittance of prize money, sponsorship of sports activities abroad by a person other than International/ National/State level sports bodies and where the amount involved exceeds USD100,000 - Department of Youth Affairs & Sports, Ministry of Human Resources Development.

Schedule III - Remittances for resident individuals – permissible under the delegated powers of the Authorized Dealers

Private visits to any country (other than Nepal & Bhutan)
Gift or donation
Going abroad for employment
Emigration
Maintenance of close relatives abroad
Travel for business by resident individuals - attending international conferences, specialized training, etc.
Accompanying as attendant to a patient going abroad for medical treatment
Expenses in connection with medical treatment abroad
Studies abroad
Purchase of Objects of Art subject to Foreign Trade Policy
Others viz., remittances towards health insurance, etc.

Operational Guidelines

General Guidelines

PAN is mandatory under the scheme irrespective of the amount of remittance.
Remit funds abroad for permissible current (Sch III remittances) or permissible capital account transactions or a combination of both.
AD Banks to frame appropriate guidelines for Customer Interface
Customer to designate a particular branch of the Bank through which all remittances (under LRS) are to be made, especially, with regard to capital account transactions.
Transactions freely allowed up to an overall limit of USD 250,000 per FY for any permissible current or capital account transactions or combination of both. No restrictions on the frequency of remittances in an FY.
However, once a remittance of USD 250,000 is utilized in an FY, no further remittances allowed. even if the proceeds of investments have been brought back in to the country in respect of investments abroad.
If a sole proprietorship firm intends to remit the money under LRS by debiting its current account then the eligibility of the proprietor in his individual capacity has to be reckoned.
International Credit Cards, International Debit Cards and ATM Cards can be used for current account transactions.
Citizens of a foreign state (other than Pakistan) and resident in India on account of employment or deputation of specified duration or for a specific job or assignments, the duration of which does not exceed 3 years, is a resident but not permanently resident.
Such individuals are eligible to make remittances under LRS subject to deduction of taxes, contributions to Provident Fund and other deductions.

Documentation

RBI does not prescribe the documents which should be verified by the AD while permitting remittances for various transactions, especially, current account transactions.

The following are the documents which generally need to be obtained while handling requests from Residents for remittances towards LRS:

Form A2 vis-à-vis FEMA Declaration – Online submission of Form A2 allowed.
Simplified documentation for individuals for amounts up to USD 25,000, subject to the satisfaction of the AD Bank*
Declaration of source of funds.
PAN, irrespective of the amount.
Copy of confirmed ticket and VISA, if the remittance is for travel abroad.
Where the services of Tour Operators are being availed, the tour operator can collect the amount from the resident individual either in INR or in FC. In which case the tour operator can open a Special foreign currency account with a Bank in India.
Tax Collected at Source (TCS) applicable in respect of release of exchange by the tour operators irrespective of the threshold limits.

Remittances Under LRS For Current Account Transactions

Private visits to any country (other than Nepal & Bhutan)

Transactions freely allowed up to an overall limit of USD 250,000 per FY
Irrespective of the number of visits undertaken in a FY, cash towards release of exchange can be accepted up to Rs. 50,000/- beyond which transaction to be routed through the a/c.
Unutilized foreign exchange to be surrendered to the AD within 180 days from the date of return to India.

Note:

Release of foreign exchange in form of foreign currency notes (cash):

Foreign exchange in full may be released in the form of FC Notes or up to the cash limit specified by the Haj Committee of India, to the Haj Pilgrims.
Travelers proceeding to Islamic Republic of Iran, Russian Federation (including erstwhile CIS countries) – full exchange may be released in the form of FC Notes.
Travelers proceeding to Iraq and Libya - USD 5000/-
All other countries - USD 3000/-

Gift to a person resident outside India

Companies Act, 2013 defines "relative" as one who is related to another if:

(a)They are members of HUF,

Documentary evidence, wherever applicable

(b) they are husband and wife,

under the Act. i.e., father (including step father), mother (including step mother), son (including step son), daughter, daughter's husband, brother (including step brother), sister (including step sister), etc.

Note:

(i)Certain relatives who were included which was included under Companies Act 1956 are not included under the definition of relative for gifting.

These excluded persons are: Step daughter, father's father, father's mother, mother's father, mother's mother., Son's son., Son's son's wife, son's daughter, son's daughter's husband, daughter's son, daughter's son's wife, daughter's daughter's husband, brother's wife, sister's husband.

(ii) A resident cannot gift to another resident, in foreign currency or foreign security, for the credit of the latter's foreign currency account held abroad, under this scheme.

Donation to a person outside India or to an Organization outside India

Emigration – as prescribed by the country of Immigration

Note:

Foreign exchange beyond USD 250,000 may be released if it is so required by the country of Emigration for meeting any incidental expenses in the country of Immigration subject to suitable documentary evidence submitted by the individual to the satisfaction of the AD Bank.
This should not, however, be for earning points/credits to become eligible for Immigration by way of Overseas Investments in Government Bonds, Lands, Commercial Enterprises, etc.
Foreign Bank guarantees towards Overseas employers/Immigration not permitted.

Going abroad for employment

Maintenance of Close relatives abroad – relative as defined u/s 2(77) of Companies Act 2013.

Purchase of Objects of Art

Subject to Foreign Trade Policy, Resident Individuals importing objects of art for personal purposes not connected with trade or commercial purpose.

Business trips

Travel for business.*1
Attending conferences.*2
Specialized training. *3

*1, *2, *3 If an employee is being deputed by an entity for any of the above and expenses are borne by the Company, these are outside the purview of the LRS and may be permitted without any limit.

Expenses in connection with medical treatment abroad –

Authorised Dealers may release foreign exchange up to an amount of USD 2,50,000 or its equivalent per FY without insisting on any estimate from a hospital/doctor.
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.
A person who has fallen sick after proceeding abroad may also be released foreign exchange by an Authorised Dealer (without seeking prior approval of the Reserve Bank of India) for medical treatment outside India.
In addition to the above, an amount up to USD 250,000 per financial year is allowed to a person for accompanying as attendant to a patient going abroad for medical treatment/ check-up.

Studies abroad –

After having obtained admission in the Overseas University

Note:

Foreign exchange beyond USD 250,000 may be released if it is so required by the University where the admission is secured, subject to suitable documentary evidence submitted by the individual to the satisfaction of the AD Bank.
Foreign Bank guarantees towards educational purposes in favor of Overseas Universities/entities are not permitted.
In terms of FEMA, students going abroad for studies are considered as NRIs and the existing resident account needs to designated as NRO in which case they can make use of remittance facilities available to NRIs.
They can remit up to USD 1 Mn from their NRO accounts per FY provided the credits in the NRO are legitimate dues, due in India, to the erstwhile resident.

Tax Collected At Source (TCS)

1st October 2020: The Finance Act, 2020 has a new insertion in the Income Tax Act on Tax Collected at Source (TCS) at 5% on foreign remittance LRS.
The threshold for TCS is Rs 7 lakhs for an entire FY and TCS is applicable > 7 lakhs.
In case of non-availability of PAN/Aadhar – TCS is at 10%.
TCS is also applicable for transactions involving transfer from domestic rupee account to the NRO account under LRS.
Remittances under LRS, towards studies abroad where the source of funds is educational loan, 0.5% will be the TCS and applicable over the threshold limit of Rs. 7 lakhs.

Given below are some examples for levy and calculation of TCS, under LRS:

LRS VIS-À-VIS Capital Account Transactions

Remittances to International Financial Services Centres (IFSCs)

With a view to deepen the financial markets in the International Financial Service Centres (IFSCs), an opportunity is provided to the resident individuals to diversify their portfolio wherein residents are permitted to make remittances under LRS to IFSCs, set up in India under the Special Economic Zone guidelines, subject to the overall limit permissible under the extant guidelines.

The following provisions need to be adhered to by the resident individuals:

The remittances shall be made only for making investments in IFSCs in securities, other than those issued by entities/companies resident (outside IFSC) in India.
Opening of a non-interest-bearing Foreign Currency account (FCA) in IFSCs permitted for making the above permissible investments under the LRS.
Any funds lying idle in the account for a period up to 15 days from the date of credit into the account shall be immediately repatriated to domestic INR account of the investor in India.
No domestic transactions are permissible to be settled with other residents through these FCAs held in IFSC.
AD Banks allowing such remittances on behalf of resident individuals shall comply with all other terms and conditions including reporting requirements under the Scheme.

Remittances of capital account nature can be made, under LRS, for the following:

Opening of foreign currency accounts abroad.

Purchase of Immovable Property abroad.

Making Investments abroad in the form of:

Acquisition & holding of shares both in Listed/Unlisted Cos
Acquisition of debt instruments
Acquisition of qualification shares of an Overseas Co., for holding the post of Director,
Acquisition of shares of a foreign company towards professional services rendered or in lieu of Director's remuneration,
Units of Mutual Funds, Venture Capital Funds, Unrated debt securities, Promissory Notes, etc.,
Setting up of JVs/WOS outside India where the JV/WOS is engaged in a bonafide business activity*.

Extending loans including loans in INR to NRIs who are close relatives.

A resident individual is prohibited from making direct investments in a JV/WOS which is engaged in the following:

In real estate business,
Banking business, or
In the business of financial service activities.

The following are also to be complied with reference to LRS for capital account transactions:

The resident individual to designate a Branch of an AD Bank through which all the remittances relating to Capital account transactions are to be effected.
The individual should have maintained account with the Branch for a minimum period of one year prior to the date of remittance and the dealings should be satisfactory.
Investment in Property by resident individuals up to the limit of USD 250,000 in a FY.
No Credit facilities to be extended to facilitate capital account transactions.
Remittances can be consolidated in respect of family members subject to individual family members complying with the terms & conditions & all the family members are co-owners, co-partners of the Overseas Property, ie., Joint ownership.

Remittances under LRS for Overseas Direct Investments (ODI)

A resident individual (either singly or in association with another resident individual/Indian party), may make Overseas Direct Investments in equity shares and compulsorily convertible preference shares of a JV/WOS outside India.

Direct Investment outside India means (Regn. 2 (e))

Investments by way of contribution to the capital
Subscription to Memorandum of Association of the foreign entity
Purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange but does not include Portfolio Investments.

A resident individual is prohibited from making direct investments in a JV/WOS which is engaged

In real estate business
Banking business, or
In the business of financial service activities.

Investments can be either in listed companies or unlisted companies or a combination of both subject to a maximum overall limit for all purposes put together at USD 250,000/FY.
No credit facilities to be extended to facilitate capital account transactions.
Opening of Bank account abroad permitted for facilitating and putting through the investment transactions.
Remittances can be consolidated in respect of family members subject to individual family members complying with the terms and conditions and all the family members are co-owners, co-partners of the Overseas Investments.

In respect of investments in the existing JV/WOS, valuation shall be as follows (Regn. 6 (6)):

Where investments are more than USD 5 Mn (or equivalent in other currencies): valuation by Category I Merchant Banker registered with SEBI or an Investment Banker/Merchant Banker outside India registered with appropriate regulatory authority in the host country.
Where investments is less than USD 5 Mn (or equivalent in other currencies), a Certificate by a C.A. or a C.P.A.
Repatriate all dues , Dividends, Royalties, Technical fees, etc., within 60 days of such amounts falling due.
Disinvestments shall be allowed only after one year from the date of making the first investment.
No write-off allowed in respect of disinvestments by resident individuals.
A resident individual is prohibited in making Direct Investments in FATF Non-compliant countries.
The JV/WOS should be engaged in bonafide business activity.
The JV/WOS should be an operating entity only and no step-down subsidiary is allowed to be acquired by the JV/WOS.
The permissible ceiling shall be within the overall limit under LRS and the investments made out of balances in the EEFC/RFC accounts shall be restricted to the LRS limit.
Resident individuals should not be on the RBI Caution list or list of defaulters to the banking system or under Investigation by any Investigation or Enforcement Agency or regulatory body concerned.

Documentation for ODI

Form A2 vis-à-vis FEMA Declaration – Online submission of Form A2 allowed.
Simplified documentation for individuals for amounts up to USD 25,000, subject to the satisfaction of the AD Bank*
Declaration of source of funds
PAN
Form ODI (in respect of investment in WOS/JV abroad)

Part I of Form ODI to be submitted within 30 days of making the first remittance.

Designated AD Bank to report to RBI in Form ODI (Part I & II) within 30 days from the date of making the remittance by the resident individual.

* Documentary evidence, wherever applicable.

Resident individual should submit share certificates/any other document as evidence, within 6 months from the date of making the remittance.
Post investment changes/alterations in share holding pattern to be reported to the Designated AD within 30 days from date of such changes.
Submit every year, before 31st December, the Annual Performance Reports - APRs. FLA not required.
Disinvestments allowed after one year from the date of remittance. Disinvestments shall be repatriated to India immediately and in any case not later than 60 days from date of disinvestment & same is to be reported to the designated AD within 30 days from the date of receipt of disinvestment proceeds.

Loans by resident individuals to NRI close relatives

The following are required to be complied:

Loan is free of interest.
Minimum maturity: one year.

For borrower's personal requirements or for business purposes. Loan shall not be utilized for:

Business of chit funds/Nidhi funds.
Agricultural, plantation or real estate activities, construction of farm houses, trading in TDRs, etc.

Proceeds may be credited to the NRO account of the NRI/PIO.
The loan amount shall not be remitted outside India.
Repayment shall be from inward remittances or transfer from NRO/NRE/FCNR accounts.

Reporting Requirements Under LRS

Earlier reporting of LRS by the AD Banks was based on the declarations made by the resident individuals and no independent reliable sources for verification were available.

However, with effect from April 2018, a daily reporting system by AD Banks of transactions undertaken by the resident individuals has been put in place by RBI.

ADs are required to upload daily transaction-wise information undertaken by them under the LRS.
The reporting of daily transactions are to be reported on the XBRL platform by close of business of the next working day.*
NIL report to be uploaded if there are no transactions on a particular business day.
The data on such daily reporting is made available to all the AD Banks.

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CAIIB Paper 2 BFM Module A Unit 2-Liberalised Remittance Scheme (LRS) and Other Remittance Facilities for Residents (Ambitious Baba)