The Indian government has raised the tax on remittances from five percent to 20 percent beginning in July 2023, as per the adjusted Income-tax Act of 1961. The new tax increase will be charged on all amounts sent overseas for vacations, investments, and gifts, except in limited cases, such as for educational and medical expenses.
Previously, individuals could send up to INR 20.43 million ($250,000) per year overseas without paying any taxes through the Liberalized Remittance Scheme (LRS) by transferring less than INR 700,000 ($8,500) as part of the tranches.
Consequently, families of four could send up to $1 million abroad annually without being charged taxes. Under the new regulation, taxes will apply to all foreign transfers. Financial analysts think this move is aimed at ensuring High-Net-Worth Individuals (HNIs) pay their fair share before leaving India permanently. Over the last five years, about 30,000-35,000 HNIs have migrated to countries such as the US, UK, UAE, Canada, Australia, Singapore, and Europe, with 8,000 leaving only in 2022.
What are the revised tax rates for outbound remittances starting July 1, 2023?
|Old tax rates applicable till June 30, 2023||New tax rates applicable from July 1, 2023|
|PAN is available||PAN is unavailable||PAN is available||PAN is unavailable|
|Overseas tour program (payment for purchase of ticket, booking hotel, etc.)||5% of remittance amount||10% of remittance amount||20% of remittance amount||40% of remittance amount|
|LRS – for education and medical treatment||5% of remittance amount in excess of INR 700,000 in a financial year||10% of remittance amount in excess of INR 700,000 in a financial year||5% of remittance amount in excess of INR 700,000 in a financial year||10% of remittance amount in excess of INR 700,000 in a financial year|
|Remittance related to studies abroad, where source of fund is educational loan||0.5% of remittance amount in excess of INR 700,000 in a financial year||5% of remittance amount in excess of INR 700,000 in a financial year||0.5% of remittance amount in excess of INR 700,000 in a financial year||5% of remittance amount in excess of INR 700,000 in a financial year|
|LRS – other than education and medical treatment||5% of remittance amount||10% of remittance amount||20% of remittance amount||40% of remittance amount|
India’s Liberalized Remittance Scheme (LRS)
The Reserve Bank of India came up with the Liberalized Remittance Scheme or LRS to allow individuals residing in India to transfer funds overseas more conveniently. Under the LRS, individuals can transfer up to US$250,000 annually (April to March) for authorized current or capital account transactions, or both. This scheme facilitates easy foreign fund transfer for Indian residents.
FAQs on the LRS scheme
Q: Can remittances be made only in US Dollars under the LRS scheme?
A: No, remittances can be made in any freely convertible foreign currency.
Q: Is there any restriction on the number of remittances during a fiscal year under the LRS scheme?
A: There is no restriction on the number of transactions that can be made within a fiscal year under the LRS scheme. However, the total amount of foreign exchange remitted through all sources in India should not exceed the LRS limit for the current fiscal year.
Q: Who is eligible to remit funds outside India under the LRS scheme?
A: The LRS scheme is exclusively available for resident individuals, subject to certain terms and conditions. The scheme cannot be accessed by corporates, partnership firms, trusts, etc. The LRS declaration form must be countersigned by the natural guardian if the remitter is a minor.
Q: Do resident individuals require a Permanent Account Number (PAN) for outbound remittances under the LRS scheme?
A: Yes, residents must furnish their PAN details for all transactions made under the LRS scheme through authorized personnel.
Q: Which transactions are strictly prohibited under the LRS scheme?
A: Some transactions are prohibited under the LRS scheme, including remittances for purposes restricted under Schedule-I, remittances for margins or margin calls to overseas exchanges, remittances for Foreign Currency Convertible Bonds (FCCBs), remittances for forex trading abroad, foreign account remittances to “non-cooperative countries and territories”, remittances to individuals suspected of acts of terrorism, and gifting by a resident to another resident in foreign currency for credit to the latter’s foreign currency account abroad.
Q: What current account transactions are allowed under the LRS scheme?
A: The LRS scheme permits several current account transactions, including private visits, gifting or donating to NRIs or PIOs who are close relatives, overseas business trips, medical treatments abroad, pursuing studies outside India, going abroad for employment, and maintenance of close relatives abroad. However, these transactions are subject to a total limit of US$250,000 per financial year.
Q: Which capital account transactions are permissible under LRS scheme?
A: Investments in properties abroad, shares, securities, mutual funds, and establishment of wholly owned subsidiaries or joint ventures outside India for legitimate business purposes with specified terms and conditions are the capital account transactions allowed under the LRS scheme, along with the opening of foreign accounts and providing INR loans to relatives who are NRIs as per the definition in the Companies Act, 2013.
Q: Are resident individuals required to repatriate foreign investment income above the principal amount under the LRS scheme?
A: There is no obligation for investors who have transferred funds under the LRS scheme to repatriate the income generated from their investments. However, any unused foreign exchange received or realized must be repatriated and surrendered to an authorized person within 180 days from the date of receipt, purchase, acquisition, or return to India.
Q: Is it possible to consolidate remittances for family members under the LRS scheme?
A: Yes, remittances can be consolidated for family members under the LRS scheme, as long as each family member complies with the terms and conditions of the scheme. However, it is not permitted for non-co-owners or non-partners of an overseas bank account or investment to club together for capital account transactions.
Q: Are ADs required to verify the nature of the LRS transaction or rely on the remitter’s declaration?
A: The AD is required to verify the remitter’s declaration in Form A2 regarding the nature of the transaction under LRS. Based on this declaration, the AD will certify that the remittance is in line with the RBI’s guidelines. However, the final responsibility for compliance lies with the remitter.
Q: What are the compliance requirements for a remitter under the LRS scheme?
A: The remitter must have maintained a bank account with an AD branch for at least one year prior to the remittance, designate a branch of an AD through which all capital account remittances under the scheme will be made, furnish Form A-2 and confirm that the funds belong to them, and that the funds will not be used for purposes prohibited or regulated under the LRS scheme. Additionally, due diligence will be carried out if the remitter is a new customer, and the AD will verify the source of funds through a bank statement or income tax assessment order or return.