Remittance of foreign exchange by individual residents is governed by the Foreign Exchange Management (Current Account Transactions) Rules, 2000 (“Current Account Rules”) and the Liberalized Remittance Scheme of the RBI (“LRS Scheme”) which is consolidated in the Master Directions – Liberalized Remittance Scheme (LRS) (“MD – LRS Scheme”).

Under the LRS Scheme, resident individuals are permitted to remit up to USD 2,50,000 per financial year (“LRS Limit”) for any permitted current or capital account transaction (subject to certain conditions). Any additional remittance in excess of the LRS Limit requires prior approval of the RBI. The LRS Limit is not applicable to payments made out of funds held in the Resident Foreign Currency account of the remitter. The restriction on remittance for individuals are linked to “drawal” of foreign exchange which essentially means drawal of foreign exchange from an authorized person and includes opening of letter of credit, use of international credit cards, international debit cards, ATM cards, prepaid cards, cheques, demand drafts / pay order, or any other thing by whatever name called which has the effect of creating foreign exchange liability.

The MD – LRS Scheme and the Current Account Rules have undergone a series of amendments and clarifications recently, including pursuant to the budget for FY 2023-24, with some of the key changes discussed below:

1. Usage of credit card for international travels:

• The Current Account Rules have always exempted the use of international credit cards for payments by a person towards meeting expenses while such a person is on a visit outside India, from being subject to the LRS Limit. However, the drawl of foreign exchange for current account transactions undertaken on debit cards or international credit cards while in India were subject to the LRS Limit.
• Following the budget for FY 2023-24, the Government notified amendments to the Current Account Rules removing the exemption given to the use of international credit cards while a person is on a visit outside Indiae., all drawls of foreign exchange on international credit cards (while outside India or otherwise) were made subject to the LRS Limit with effect from May 16, 2023.
• In a recent circular, the Government has postponed the removal of the aforesaid exemption, with retrospective effect from May 16, 2023. Thus, the use of international credit cards, while a person is on a visit outside India, continues to fall outside of the LRS Limit. The period for which it is postponed is not clarified at the moment.

2. TCS on remittance

• The rate of ‘tax collected at source’ (“TCS”) on funds remitted under the LRS Scheme (other than for medical or educational purposes) and for overseas tour programs has been recently revised from 5% to 20% (to be applicable from October 1, 2023). It has also been clarified that for remittances up to INR 7 Lakhs, TCS will not be applicable, except in the case of overseas tour package programs, where it will apply at the rate of 5% on remittances up to INR 7 Lakhs.
• For payments in connection with medical or educational purposes, the rate of TCS continues to be at 5%, chargeable on the remittances in excess of INR 7 Lakh.
• Further, for payments in connection with education, financed by loans from financial institutions, the rate of TCS continues to be at 0.5%, chargeable on the remittances in excess of INR 7 Lakh.
• In a recent circular, the Government took into account the comments received from stakeholders and decided to postpone the implementation of TCS on credit card transactions in order to provide more time to banks and card networks to put in place the requisite IT based solutions for such implementation. The period for which it is postponed is not clarified at the moment. Thus, there will be no TCS applicable on any expenditure through international credit card while being overseas till further updates.
• The Central Board of Direct Taxes (“CBDT”) has further clarified that the threshold of INR 7 Lakhs would apply independently for remittances for the LRS Limit and overseas tour package programs. CBDT has also clarified that where a resident individual remits funds abroad to purchase an overseas tour package program from a foreign tour operator under the LRS Scheme, the TCS applicable on such remittance will be for purchase of the overseas tour package program, i.e., 5% or 20%, as the case may be (depending upon amount of remittance), and not for remittance under the LRS Scheme.

3. Repatriation of funds back to India within 180 days under the LRS Scheme

• Previously, a resident individual was not required to repatriate back to India the unutilized / unspent funds remitted under the LRS Scheme, nor any income generated on such funds. The recent amendment to the MD – LRS Scheme provides that “Investor, who has remitted funds under LRS can retain, reinvest the income earned on the investments. The received/realized/unspent/unused foreign exchange, unless reinvested, shall be repatriated and surrendered to an authorized person within a period of 180 days from the date of such receipt / realization / purchase / acquisition or date of return to India, as the case may be, in accordance with Regulation 7 of Foreign Exchange Management (Realization, repatriation and surrender of foreign exchange) Regulations, 2015.”
• This amendment has caused ambiguity for resident individuals, as now there are two separate views possible, these being, i.e., (i) the above requirement for repatriation back to India of funds under the LRS Scheme is applicable to all the funds remitted overseas under the LRS Scheme, i.e., for every purpose including for travel, business, education etc., and (ii) the above requirement of repatriation back to India of funds under the LRS Scheme is applicable only to the funds remitted overseas towards ‘investments’, i.e., under the overseas direct investment (“ODI”) and overseas portfolio investment (“OPI”) routes.
• Many resident individuals (including HNIs) who travel globally, prefer to remit funds on a consolidated basis under the LRS Scheme for purposes of expenses related to frequent business travels, overseas stay, overseas education, overseas medical treatment and miscellaneous related expenses etc., which are in many cases facilitated by way of payments through debit cards, cheques etc., instead of arranging and carrying forex for every single occasion. For various such purposes, bringing repatriation of unused / unspent funds under the ambit of the aforesaid amendment to the MD – LRS Scheme will have the following unintended repercussions:
  • Since resident individuals are not permitted to invest in fixed deposits as part of the ODI and OPI routes, in order to avoid repatriating back to India of any unused / unspent funds for ease of activities, they would be compelled to make short-term liquid investments that tend to be risky.
  • The requirement of repatriating back to India any unused / unspent funds would require the resident individuals to enter into multiple forex transactions, which could potentially result in an exchange loss to the resident individuals.
    • The increase in the rate of TCS on funds remitted under the LRS Scheme (other than for medical or educational purposes) will cause an additional fiscal expense on the resident individuals utilizing the LRS Scheme for such purposes. With this, if, the remitted funds are required to be repatriated, then, there is a potential for double taxation where such funds are remitted again out of India in the future.
    • Any unused / unspent funds which would be repatriated back to India would result in the resident individual losing out on an equivalent portion of their remittance limit of USD 250,000 under the LRS Scheme, since, presently, the LRS Scheme does not provide for such funds to be added back to the said remittance limit.
• As also mentioned in the MD – LRS Scheme, the LRS Scheme was introduced as a “liberalization measure” to facilitate resident individuals to remit funds abroad for permitted current or capital account The public feedback is that the aforesaid repercussions of the amendments to the MD – LRS Scheme have the likelihood of resulting in reverse liberalization of the facility intended to be provided under the LRS Scheme. Further, the aforesaid time limit on spending the funds would result unnecessary hardship for resident individuals who frequently require such funds for non-investing activities.