Affluent Indians will find it difficult to park parts of their wealth abroad with the Reserve Bank of India introducing new remittance rules under its Liberalised Remittance Scheme. Earlier, wealthy Indians could invest their wealth in various instruments such as currencies, but the latest guidelines have left them unsure about how to proceed.
Under the new rules, depositors cannot keep money in offshore bank accounts for longer than six months. They are required to invest unused remitted funds in other permitted assets such as foreign securities, mutual funds, and properties. There is some confusion over whether fixed deposits (FDs) can be held with overseas banks, as there is no mention of them among the permitted assets.
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There is a need for the apex bank to clarify how investors can maintain a minimum balance in foreign bank accounts without the flexibility to park excess funds.
Liberalised Remittance Scheme explained
With the introduction of the LRS scheme, foreign exchange transactions became easier for the country’s residents. Before 2004, transferring money overseas was a laborious procedure involving red tape. While the rationale behind these strict regulations was multifold, with India solidifying its position in the global markets, analysts called for a scheme for liberalizing personal outward remittances, which was also crucial for holistic economic growth.
In 2004, the Committee on Procedures and Performance Audit on Public Services (‘CPPAPS’) recommended the LRS scheme, which the RBI introduced that year. With LRS, Indian residents were allowed to make individual foreign exchange transactions with relative ease. Under the scheme, Indian residents can freely remit up to $250,000 per financial year for current or capital account transactions or a combination of both. However, if a remittance exceeds the said limit, prior permission from the RBI is required. Analysts are of the opinion that there is a need to raise the upper threshold as the $250,000 cap may not be enough for a resident who wants to purchase a home abroad, get surgery, or go to school overseas.
LRS contributed tremendously in simplifying overseas expenses and investments for Indian residents. In 2021-22, New Delhi recorded $19.6 billion in outward remittances under LRS, marking an increase of $7 billion from the previous year. For the two decades since its inception, LRS was a useful tool for wealthy Indians to park their money. While the scheme lost its sheen during COVID-19 due to curbs, it is gaining popularity once again.
The scheme has been one of the most important instruments for promoting international trade and investment, as well as for facilitating capital flows into and out of India. Among other benefits of the scheme, Indians can transfer funds to their family members or friends who are residing abroad, which comes in handy during emergency situations where funds are needed urgently. Even non-resident Indians (NRIs) can also transfer funds to their relatives in India without any restrictions, making it easier for NRIs to maintain contact with their family members back home.
Presently, remittances under LRS are not permitted for certain activities such as real estate, the purchase of lottery tickets, margin trading, and speculation in foreign exchange markets.
Issues with LRS scheme
While the scheme has been useful for many Indians, there have been some issues and concerns with its implementation. There have been instances of individuals using the LRS to transfer money illegally, such as for money laundering, terrorism financing, or tax evasion. This has led to increased scrutiny and regulation of the LRS by the government.
As stated above, LRS’s yearly limit of $250,000 per person may not be sufficient for some individuals with higher financial needs. Additionally, there are restrictions on the types of transactions that can be made under the scheme, such as restrictions on remitting funds for overseas investments in prohibited sectors or for buying lottery tickets or banned magazines.
The LRS allows Indian residents to transfer money in foreign currency, which exposes them to the risks of currency fluctuations. This means that the value of the money transferred may decrease due to exchange rate fluctuations, resulting in a loss for the individual.