What is the Liberalized Remittance Scheme (LRS)
Vested’s mission is to make investing in the US stock market simple for investors from India. Many Indian investors seem to believe that they are not allowed to invest in foreign stocks. This is not true! In fact, it is via the LRS that Indians can legally invest abroad. Read below for more details.
What is the LRS:
Prior to 2004, Indian residents required approval from the Reserve Bank of India (RBI) every-time they sent money overseas because the RBI wanted to limit capital outflow. The RBI was concerned that excessive outflow of money would destabilize the rupee and make it lose value.
The RBI feared that if everyone starts selling rupees and buying USD, the value of the rupee would fall and the value of the dollar would increase. Since India’s economy heavily relies on foreign imports which are paid in USD, the prices of everyday goods would go up and destabilize the economy.
However, the RBI realized that open cross-border flow of capital is important for economic growth. Therefore, in 2004 the RBI instituted a new policy to relax cadivital outflow control. This new policy is called the Liberalized Remittance Scheme (LRS). Under the LRS, individuals can send money across borders without seeking approval from the RBI. The LRS has made it easier for Indian residents to study abroad, travel, and make investments in other countries.
How much can you remit or send:
Over the years, the maximum amount you can remit has changed (Figure 1). Currently, the limit is at US $250,000 per year per individual. The RBI continues to monitor its current account deficit and the value of the rupee. It may adjust the maximum limit of LRS over time.
What is OK under the LRS:
Under the LRS, Indian residents can remit money overseas for travel, education, medical care, purchase of shares and property, care of relatives living abroad, gifts, and donations. Individuals are also permitted to open, maintain, and hold foreign currency accounts with overseas banks for carrying out transactions.
What is not OK under the LRS:
Generally, you cannot remit money that comes from certain sources, such as winnings from gambling and lottery, dividends from certain companies, and interest payments from non-resident rupee bank accounts. Individuals also cannot remit money for any prohibited or illegal activities such as margin trading.
Furthermore, once an individual hits the maximum US $250,000 per year per individual limit, the individual must acquire special permission from the RBI. There are also some countries and organizations you are not legally allowed to remit money to as listed by the Financial Action Task Force (FATF).
To monitor the total amount of remittance sent by individuals, the RBI requires remitters to fill out and submit a Form A2, which is provided by RBI-appointed Authorized Dealers. The form captures the remittance amount, the purpose, and the individual’s PAN number. Once the form is received, the Authorized Dealer will verify the information and process the remittance.
It is a common misconception that Indian residents cannot invest in the US. Under the LRS, residents of India can remit USD and invest in US stocks, as long as investors follow the maximum limit guidelines outlined above and purchase USD through an Authorized Dealer. In fact, in 2017, Indian residents remitted a total of USD 442 million to invest in foreign equities and debt.
For the most up to date regulations regarding the LRS please visit here. Please see article 6(iii) for specific LRS regulations regarding investments in equity.
We are hard at work building a platform that enables investors from India to invest in US stocks, and we will help you go through the remittance process. Interested in learning more? Please visit us at https://www.vested.co.in/.
Please note that this article is meant to be informative and not to be taken as an investment/tax advice. Tax laws are subject to change and may vary depending on your circumstances. Thanks for reading!