Liberalised Remittance Scheme (LRS)

The Liberalised Remittance Scheme was introduced by the Reserve Bank of India in 2004 as part of India's ongoing capital account liberalisation and replaced a more complex prior framework that required separate approvals for different categories of overseas remittance. Over successive amendments, the remittance limit was raised from the initial USD 25,000 to USD 250,000 per financial year per individual, a level that accommodated most legitimate personal financial needs.

LRS covered an expansive list of permissible transactions. On the current account side, these included overseas education fees and living expenses for students, medical treatment abroad, travel including tourism and business trips, maintenance of close relatives overseas, gifts and donations to individuals and charitable institutions, and subscriptions to foreign publications. On the capital account side, residents could invest in overseas equities and debt instruments, purchase property abroad, open foreign currency accounts at overseas banks, and fund overseas joint ventures or wholly owned subsidiaries subject to FEMA guidelines.

A significant practical implication of LRS was for investing in US equities and ETFs. The growing interest in international diversification among Indian investors — particularly in technology-heavy US indices — relied entirely on the LRS framework. Platforms that offered direct US stock investing to Indian residents routed remittances through the LRS mechanism, with the USD 250,000 annual ceiling providing ample room for individual investors though it constrained institutional-scale allocations.

In the Union Budget 2023, the government introduced Tax Collected at Source (TCS) on LRS remittances above Rs 7 lakh per financial year at a rate of 20 percent (applicable from October 2023), with exceptions for education and medical treatment loans that attracted lower TCS rates. TCS was not an additional tax but a credit that could be adjusted against the remitter's total income tax liability or claimed as a refund — however, it created a significant upfront cash flow impact for investors and travellers who needed to fund the TCS amount at the time of remittance.

LRS remittances required disclosure in ITR filings where applicable, and banks were required to report LRS transactions to the Income Tax Department through the Statement of Financial Transactions (SFT) mechanism. This made LRS remittances visible to tax authorities, ensuring that overseas investments and income generated from them were appropriately disclosed and taxed in India.