Liberalised Remittance Scheme (LRS)

ALL YOU WANTED TO KNOW ABOUT: LIBERALISED REMITTANCE SCHEME

• In India, any money you send overseas is subject to controls, as the government is wary of excessive outflows of foreign exchange draining its reserves and destabilising the rupee.
• But there has been an effort to gradually liberalise these controls.
• The window that was opened up in 2004 for individuals to remit money across the border, without seeking specific approvals, was called the Liberalised Remittance Scheme (LRS).

WHAT IS IT?

• Under LRS, all resident individuals can freely remit $250,000 overseas every financial year for a permissible set of current or capital accounttransactions.
• Remittances are permitted for
  • overseas education, travel, medical treatment and
  • purchase of shares and property,
  • apart from maintenance of relatives living abroad,
  • gifting and donations.
• Individuals can also open, maintain and hold foreign currency accounts with overseas banks for carrying out transactions.
• However, the rules do not allow remittances for trading on the foreign exchange markets and the purchase of Foreign Currency Convertible Bonds issued by Indian companies abroad.
• Sending money to certain countries and entities is also barred.
• Under LRS, people can’t send money to countries identified as ‘non cooperative’ by the Financial Action Task Force.
• Remittances are also prohibited to entities identified as posing terrorist risks.

WHY IS IT IMPORTANT?

• The LRS represents India’s steps towards dismantling controls on foreign exchange movements in and out of the country.
• It has allowed large numbers of Indians to study abroad and diversify their portfolios from purely desistocks and property.
• Ideally speaking, capital controls in any form have no place in a liberalised economy.
• But for India, which is heavily dependent on imports of critical goods and perpetually spends more foreign exchange than it earns, it is difficult to free up remittances because of the havoc this can wreak on exchange rates.
• This is why, having opened up the LRS to Indian residents in 2004, the RBI has tweaked the rules with an eye on the exchange rate situation.
• For example, in mid 2013, when the country was faced with a large current account deficit and there were murmurs of a run on the rupee, the LRS limit was slashed to $75,000. This has since been hiked again in phases.
• Parents who have sent their wards abroad for studies are the largest users of the LRS, using this window both to pay the fees and regularly meet the student’s living expenses.
• People who made use of the LRS window to invest in US-listed stocks in 2008 would have made much better returns over the next five years than those who put faith in Indian stocks.
• The LRS gives you the freedom to put your money to work anywhere in the world. Until India is ready to free all capital controls, the LRS remains the most viable way for individuals to legally remit money overseas.

BACKGROUND:

• The Reserve Bank of India had announced a Liberalised Remittance Scheme in February 2004 as a step towards further simplification and liberalization of the foreign exchange facilities available to resident individuals.
• Under the Scheme, resident individuals can acquire and hold shares or debt instruments or any other assets including property outside India, without prior approval of the Reserve Bank.
• RBI had reduced the eligibility limit for foreign exchange remittances under LRS to $75,000 in 2013 as a macro-prudential measure.
• With stability in the foreign exchange market, this limit was enhanced to $125,000 in June 2014.