Liberalised Remittance Scheme (LRS)

Context

Under the Liberalised Remittance Scheme (LRS), India’s outward remittances declined by about 2% to $28.98 billion in FY26, mainly due to lower spending on foreign education and travel. The Union Budget 2026–27 also reduced tax on certain remittances from 1 April 2026.

About LRS

1. Regulatory Framework: Introduced by the RBI (Reserve Bank of India) under FEMA, 1999 (Foreign Exchange Management Act, 1999).
2. Core Function: Allows resident individuals to freely remit money abroad for permissible capital and current account transactions without prior approval.
3. Remittance Limit: Launched in 2004 ($25,000 limit) and revised to $250,000 per financial year (since 2015).
4. Processing & Compliance: Operations are routed through ADs (Authorised Dealers); maintaining a PAN (Permanent Account Number) is mandatory.
5. Higher Thresholds: Remittances exceeding $250,000 per financial year strictly require prior RBI approval.

Key Features

1. Eligible Users: Open only to resident individuals (including minors via guardians); excludes companies, firms, HUFs (Hindu Undivided Families), and trusts.
2. Annual Limit Scope: The $250,000 ceiling per financial year covers both current account (travel, education, gifts) and capital account (property, foreign stocks) transactions.
3. Transaction Frequency: No limit on the number of transfers, as long as total funds remain within the annual limit.
4. Permitted Uses: Includes opening foreign bank accounts, buying property, making ODI (Overseas Direct Investment) and OPI (Overseas Portfolio Investment), lending to NRI relatives, foreign travel (except Nepal and Bhutan), and funding overseas studies.
5. Prohibited Uses: Strictly bans lottery purchases, margin trading abroad, buying FCCBs (Foreign Currency Convertible Bonds) in foreign secondary markets, terror funding, and transfers to FATF (Financial Action Task Force) non-cooperative countries.

Tax Collected at Source (TCS) under LRS

1. Nature of TCS: TCS (Tax Collected at Source) is collected upfront by banks under Section 206C(1G) of the Income-tax Act. It acts as an advance tax credit adjustable in your ITR (Income Tax Return), not a permanent tax.
2. Exemption Threshold: Set at ₹10 lakh per financial year per person across all remittances (up from ₹7 lakh).
3. Revised TCS Rates:

• Education & Medical: 2% on amounts above ₹10 lakh; 0% (NIL) if funded through an approved education loan.
• Overseas Tour Packages: Flat 2% from the first rupee.
• Other Purposes (Investments/Gifts): 20% on amounts exceeding ₹10 lakh.

Trends in LRS Outflows

1. Overall Outflows: Total remittances peaked at $31.74 billion (FY24), dropping to $29.56 billion (FY25) and $28.98 billion (FY26).
2. Travel Dominance: Foreign travel is the largest component, making up $16.87 billion (about 58%) of total outflows in FY26.
3. Overseas Education Decline: Education remittances fell by 21% in FY26, driven by rupee depreciation and stricter global visa rules.

Significance of LRS

1. Capital Account Liberalisation: Helps residents invest and spend globally, supporting India’s gradual move toward full Capital Account Convertibility.
2. Global Diversification: Enables individuals to diversify financial risks by holding foreign assets and provides easier access to overseas education.
3. Regulatory Tool: Remittance caps and TCS (Tax Collected at Source) help the RBI (Reserve Bank of India) monitor capital outflows and track foreign transactions for tax compliance.

FAQs

Q1. Who is eligible under LRS?
Ans. Resident individuals, including minors through guardians; companies, partnerships, HUFs and trusts are excluded.

Q2. What is the annual limit under LRS?
Ans. $250,000 per financial year, covering both current and capital account transactions.

Q3. What is the difference between current and capital account transactions?
Ans. Current account covers routine expenses like travel and education, while capital account involves changes in assets or liabilities, such as overseas investments.

Q4. Which component dominates LRS outflows?
Ans. International travel, accounting for about 58% of total outflows in FY26.

Q5. When was LRS introduced?
Ans. On 4 February 2004, with an initial limit of $25,000, later increased to $250,000.