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Many Indian investors believe they cannot invest in foreign stocks, but this is a misconception! Through the Liberalized Remittance Scheme (LRS), Indians can legally remit money abroad for investments and other purposes.In FY24, outward remittances under the scheme reached a record $31.73 billion, reflecting a 16.91% increase from the previous year.
Where Did the Remittances Go?
A significant portion of these remittances, around $17 billion, was allocated to international travel, marking a 24.84% increase from FY23. This surge is largely attributed to the post-pandemic recovery and increased travel demand. Additionally, funds for overseas education amounted to $3.58 billion, while remittances for the maintenance of close relatives stood at $4.61 billion. There was also notable growth in investments, with equity and debt investments rising by 20.29% to $1.51 billion.
Growth Trends
Over the past decade, remittances under LRS have consistently increased, driven by rising per capita income and growing discretionary spending. As people continue to travel, invest, and pursue education abroad, LRS remittances are expected to maintain a positive trajectory.
What is the LRS?
Before 2004, Indian residents needed approval from the Reserve Bank of India (RBI) every time they sent money overseas. This was because the RBI aimed to limit capital outflow to protect the rupee from devaluation and stabilize the economy. However, realizing the importance of open cross-border capital flow for economic growth, the RBI introduced the Liberalized Remittance Scheme (LRS) in 2004. This policy allows Indian residents to remit money abroad without prior approval..
How much can you remit?
Currently, the maximum remittance limit under LRS is $250,000 per financial year per individual. The RBI monitors this limit closely and may adjust it based on India’s current account deficit and rupee stability.
What’s allowed under LRS?
Indian residents can remit money for:
- Travel, education, and medical expenses
- Investments in foreign stocks and property
- Care of relatives living abroad
- Gifts and donations
- Maintaining foreign currency accounts overseas
Purpose codes in remittances: Ensuring compliance
Another critical aspect of LRS and international remittances is the use of purpose codes. These unique identifiers, issued by the Reserve Bank of India (RBI), ensure the proper classification and compliance of foreign currency transactions.
For Indian entities, receiving payments from abroad is categorized as inward remittance, while sending payments overseas for goods or services is classified as outward remittance. Each of these transactions must be tagged with the correct purpose code to avoid compliance issues and delays.
- Export purpose codes typically begin with ‘P’.
- Import purpose codes begin with ‘S’.
For example, for travel-related remittances, the appropriate code would be:
P0301 – Purchases towards travel (includes purchases of foreign TCs, currency notes, etc., over the counter by hotels, hospitals, emporiums, educational institutions, etc., as well as amounts received by TT/SWIFT transfers or debit).
It is mandatory to add these purpose codes during international payment enablement. Failure to do so will result in compliance issues and delays in transactions.
You can refer to this document by RBI for the purpose codes. Ensure you select the correct purpose code for each transaction to avoid regulatory issues.
What’s prohibited under LRS?
Money cannot be remitted for activities like:
- Gambling, lotteries, or margin trading
- Transactions involving prohibited entities or countries listed by the Financial Action Task Force (FATF)
- Illegal or unlawful purposes
If an individual exceeds the $250,000 annual limit, they must obtain special permission from the RBI.
Forms and compliance
To track remittances, the RBI mandates the submission of Form A2 through Authorized Dealers (banks or financial institutions). This form includes details like the remittance amount, purpose, and the individual’s PAN number.
Recent updates: 20% TCS on foreign remittance transactions
The Union Budget 2023 introduced significant changes to the Tax Collected at Source (TCS) framework under LRS. Starting October 1, 2023, the TCS rate for most foreign remittance transactions has increased from 5% to 20% for amounts exceeding ₹7 lakh. Let’s break down the changes:
Updated TCS rates
| Type of Remittance | Old TCS Rate | New TCS Rate (from Oct 1, 2023) |
| Education (with loan) | 0.5% above ₹7 lakh | 0.5% above ₹7 lakh |
| Education (without loan) | 5% above ₹7 lakh | 5% above ₹7 lakh |
| Overseas tour package | 5% (no threshold) | 5% up to ₹7 lakh, 20% thereafter |
| Other purposes (e.g., investments) | 5% above ₹7 lakh | 20% above ₹7 lakh |
Why the change?
The increase in TCS aims to widen the tax net and ensure compliance. A study by the Income Tax Department found that 36% of individuals making foreign remittances did not file tax returns. The higher TCS rate ensures better tracking and accountability.
How TCS works
- Threshold: No TCS is deducted for remittances up to ₹7 lakh in a financial year.
- Excess amount: TCS applies only to the amount exceeding ₹7 lakh.
- Example: For a remittance of ₹10 lakh, TCS will apply to ₹3 lakh (20% of ₹3 lakh = ₹60,000).
- Refund/credit: TCS is not an additional tax. It can be claimed as a credit when filing income tax returns (ITR). If your TCS exceeds your tax liability, you can claim a refund.
Relief under Budget 2024: TCS credit for salaried individuals
Previously, individuals paying large amounts as TCS had to wait until filing their ITR to claim a refund. For instance, if someone purchased an overseas tour package costing more than ₹7 lakh, they would incur a 20% TCS charge, resulting in a significant amount being stuck for months. This was especially burdensome for those making such payments early in the financial year, as they had to wait over a year to receive their refund after filing their ITR.
However, the Finance Minister’s Budget 2024 proposal introduced a major relief by allowing TCS credit to be offset against TDS deducted from salaries. This change simplifies the tax process, increases cash flow for salaried individuals, and eliminates the need to wait for refunds. Employees will now see reduced TDS deductions on their salaries, ensuring more liquidity and quicker access to their funds.
Investing in US equities under LRS
Under LRS, Indian residents can invest in foreign stocks, including US equities. However, the revised 20% TCS applies to such investments for amounts exceeding ₹7 lakh annually. For instance:
- If you invest ₹15 lakh in US stocks, TCS will apply to ₹8 lakh (₹15 lakh – ₹7 lakh).
- The TCS collected (20% of ₹8 lakh = ₹1.6 lakh) will reflect in your Form 26AS and can be adjusted when filing your ITR.
How to claim TCS credit
- Log in to the Income Tax portal and access your Form 26AS.
- Verify the TCS amount deposited by your bank or Authorized Dealer.
- While filing your ITR, adjust the TCS against your total tax liability.
- If your TCS exceeds your tax payable, claim a refund.
Closing thoughts
It’s a myth that Indian residents cannot invest in foreign markets. The LRS provides a clear and legal pathway for individuals to diversify their portfolios globally. While the increased TCS rate may seem like a burden, it’s an advance tax that can be reclaimed.
With platforms like Vested, you can easily navigate the remittance process and invest in US stocks seamlessly. If you’re ready to explore global investment opportunities, visit Vested Finance today!
