SLATE. 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).

Under LRS, all resident individuals can freely remit $250,000 overseas every financial year for a permissible set of current or capital account transactions. 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, margin or margin calls to overseas exchanges and counterparties 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.

The LRS represents India’s baby 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 desi stocks 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.

For investors, LRS has meant a chance to buy up a piece of property in London or New York (provided you can manage it through instalments within the limit specified). 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 (and that day may be a long way off), the LRS remains the most viable way for individuals to legally remit money overseas.

With India ‘shining’ better today, the greener pastures overseas may be hard to sight. But if you’re smart, you will use the LRS to diversify your bets.

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