Introduction:
Regulations under the Liberalized Remittance Scheme (LRS) allow Indian citizens to remit funds abroad for various purposes, such as education, travel, medical treatment, etc. The Reserve Bank of India (RBI) has recently introduced new rules for LRS which have become a cause of concern among wealthy Indians who have been parking their funds abroad.
As per the new rule, which came into effect in August 2022, and then updated guidelines were released in April 2023, in case an individual has earned any foreign exchange outside India which is legitimate, he must either utilize such income or invest it within 6 months of realization of such income. This means that Indians can no longer keep their money in foreign banks for an indefinite time period.
Background:
The LRS was introduced by the RBI in 2004 to facilitate the remittance of funds by resident Indians for various purposes, such as education, travel, medical treatment, purchase of property abroad, and investment in foreign stocks and mutual funds. The scheme was later liberalized in 2007, allowing remittances up to $200,000 per financial year for any purpose.
Since then, the LRS has been used extensively by wealthy Indians to park their funds abroad, primarily in countries such as the United States, the United Kingdom, Singapore, and Dubai. According to a report by Kotak Wealth Management, Indian High-NetWorth individuals (HNIs) hold an estimated $1.5 trillion in wealth, of which about 25% is invested abroad.
Concerns:
The various aspects of the new rule have been welcomed with criticism. Some of them have been listed below:
- Unutilized Foreign Exchange: The term itself is quite ambiguous. ADs (Authorised Dealers) are of the view that if the forex is lying in the overseas bank account of the individual, even if in the form of a Fixed Deposit, it shall fall under the definition of “unutilised forex” and thus shall be subject to the 180-day utilization rule.
- Increase in rate of TCS: The rate of TCS on foreign remittance has been increased from 5% to 20%. This is mandatory and an individual can claim tax credit on the same. However, there is no way of avoiding or evading tax on such payments. Read more about our analysis in TCS at 20% on Overseas Spends: New LRS Regulations.
- Impact on investments: Wealthy Indians have been using the LRS to invest in foreign stocks and mutual funds. The new regulations could impact their investments and reduce their ability to diversify their portfolios.
This would mean that individuals would be forced to liquidate their foreign assets and bring those funds back to India. Furthermore, this would mean that individuals may not be able to maintain foreign bank balances or invest in foreign assets.
- Tax implications: Wealthy Indians who have been using the LRS to park their funds abroad could face tax implications. For instance, they may be subject to capital gains tax in the country where they have invested their funds.
- Lack of alternative options: Wealthy Indians who have been using the LRS to park their funds abroad may not have alternative options that offer similar benefits. This could force them to hold their funds in India, where they may not get the same returns as they would in other countries.
Response:
The RBI has defended the new regulations, stating that they are aimed at ensuring that the LRS is used only for genuine purposes and to prevent money laundering and terrorist financing. The Central Bank has also clarified that the new regulations do not apply to foreign direct investments (FDI) and foreign portfolio investments (FPI).
However, the new regulations have been criticized by many, including the Confederation of Indian Industry (CII), which has called for a review of the regulations. The CII has argued that the regulations will adversely affect India’s economic growth and discourage foreign investments.
Many experts have also suggested that the new regulations could lead to a surge in illegal remittances and money laundering. They have argued that wealthy Indians who have been using the LRS to park their funds abroad may resort to illegal means to move their funds out of the country, which could harm the economy.
Some experts have also suggested that the new regulations could lead to a reduction in foreign exchange inflows, as wealthy Indians may hold on to their funds in India rather than remitting them abroad.
Conclusion:
The new LRS regulations have caused concern among wealthy Indians who have been using the scheme to park their funds abroad. While the RBI has defended the regulations as a measure to prevent money laundering and terrorist financing, many experts and industry bodies have criticized them for potentially harming India’s economic growth and discouraging foreign investments.
The long-term impact of the new regulations remains to be seen. However, it is clear that wealthy Indians who have been using the LRS to park their funds abroad will need to explore alternative options or adjust their investment strategies to comply with the new regulations. As always, it is important for investors to stay up-to-date with regulatory changes and seek professional advice to ensure that their investments remain safe and compliant.
