Liberalised Remittances Scheme (LRS) – why it is good

The Reserve Bank of India (RBI) is all set to develop new Tax Collection at Source (TCS) norms under Liberalised Remittances Scheme (LRS). Also, commercial banks are developing systems to track spending on outward remittances. The outward remittances under LRS stood at $27,140.65 million for the financial year 2022-23 and $19,610.77 million for FY 2021-22.

This article will discuss the Liberalised Remittances Scheme and TCS norms under it. Moreover, basic knowledge of remittances, banks and foreign exchange will be addressed. Holistically, it is an article on economic issues.

Remittances  

Liberalised Remittances Scheme

Balance of Payments (BOP) is an accounting practice where the record of transactions for one country to the outside world within a specific period, usually 1 year is kept. BOP have two accounts:

  1. Current Account – Current account consists of the sum of the balance of trade (goods and services exports minus imports), net income from abroad, and net current transfers. Therefore, Remittances are also the part of current account as they are part of the net current transfers.
  2. Capital Account – Capital account mainly records foreign investment and loans, banking, and other forms of capital, as well as monetary movements or changes in the foreign exchange reserve.

The current Account and Capital account always add up to zero because the deficit or surplus in the capital account is balanced by the surplus or deficit in the current account. similarly, a deficit or surplus in the current account is balanced by the surplus or deficit in the capital account.

India was the largest recipient of the remittances for FY 2022-23 in the world followed by Mexico, china, Philippians and Pakistan. Among Indian states, Maharashtra was the topper in the remittances received for FY 2020-21 followed by Kerala, Tamilnadu, Delhi and Karnataka. On the other hand, 30% of the remittances for FY 2022-23 came from the US, UK, Canada, and South Africa. The highest remittances were from the US followed by UAE, UK, Singapore, and Saudi Arabia

Current Trend of Remittances

The remittances to  India in 2022 were $111 billion where Indians registered a growth of 24%  while transferring remittances to India. Moreover, Remittances were 3.3% of the total GDP of India for FY 2022. However, for the year 2023 experts are claiming a mere growth of only 0.2% in remittances to India.

The reason for the low growth rate of remittances in India is attributed to the hawkish stand of the Organization for Economic Cooperation and Development (OECD). OECD is a unique platform where 37 market-oriented economies and democracies collaborate for sustainable growth. It is an organisation of mainly developed economies.

Another reason is the low fuel prices and high food inflation in the middle east and Gulf region. As West Asia is one of the most important sources of remittances to India, these conditions would lead to low growth in the remittances to India.

However, outward remittances have also shown a significant increase. Specifically, the outward remittances have increased from around $20,000 million in FY 2021-22 to around $27,000 million in FY 2022-23 under the Liberalised Remittances Scheme (LRS).

Liberalised Remittances Scheme (LRS)?

The scheme was implemented by the Reserve Bank of India (RBI) in the year 2004. Under the scheme, all the resident individuals including the minors are allowed to freely remit up to $2,50,000 per financial year (April to May) for any permissible current or capital account transfer. However, the Hindu Undivided Family (HUF), corporations, partner firms, trusts etc. are not allowed to participate in the scheme.

Remitted money could be utilized for travel expenses, medical purposes, study, gifts, donations etc. Also, it could be used for investment and opening, maintaining and holding foreign currency accounts with banks outside India to carry out transactions permitted in the scheme.

All the items prohibited under Schedule 1 and Schedule 2 of Foreign Exchange Management Rules, 2000 are prohibited to be transacted in the scheme. Furthermore, trading foreign exchange abroad is prohibited. Also, transactions to countries identified as ‘non-cooperative’ by FATF and transactions involving a risk of an act of terrorism (as prescribed by RBI) are prohibited under the scheme.

A PAN card is mandatory for the Scheme eligibility.

Outward Remittances under LRS

RBI has directed Commercial Banks to develop a mechanism to track outward remittances under the LRS mechanism. The tax collection at source (TCS) structure for outward remittances is as follows:

  1. If the amount is remitted for study from an education loan obtained from any specific institution defined in section 80E of the scheme, there would be a TCS of 0.5% of the amount or the aggregate amount over Rupee 7 Lakh per FY.
  2. For Education (not in the form of an education loan) or for medical treatment, TCS would be 5% of the remitted amount or the aggregate amount over Rupee 7 lakh per FY.
  3. For an overseas tour package, there would be a TCS of 20% without any threshold limit.
  4. For any other purposes (other than those mentioned above) under LRS there would be a TCS of flat 20% without any threshold limit.
  5. Resident Individuals falling under the ‘specific person’ category or non-PAN or inoperative PAN cases will be liable to pay double the statutory rate of TCS or 5% whichever is higher. However, the TCS rate should not exceed 20%

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