Obligations of Individual Foreign Investor Under FEMA and LRS

For individuals and expatriates living in India, sending money to a foreign country can be a daunting process. The amount of money that one can remit is regulated by the Foreign Exchange Management Act (FEMA) 1999, which approves outward remittances involving foreign exchange. The act came into effect in 2004 under the Liberalized Remittance Scheme (LRS), which is made available by the Reserve Bank of India (RBI) allowing individuals to remit up to USD 250,000 (revised from USD 25,000) in a financial year. When remitting money under the scheme, individual foreign investors are required to follow certain obligations. For clarity, the LRS applies to resident individuals in India only (includes foreign citizens who is a tax resident in India).

One of the main requirements of the LRS is that the individual should to have a bank account with an authorized dealer (AD) or an approved bank for at least a year before making the remittance. This may be any local / international bank authorized by the RBI under the FEMA Act to deal in foreign exchange (AD). When the applicant willing to make foreign remittance is a new customer to the bank, then an authorized dealer is required to carry out the due diligence before the opening of the account. Either way, one is required to provide a bank statement to the authorized dealer for the previous year to certify their sources of money. If one cannot provide their bank statement, copies of the latest Return filed or Income Tax Assessment Order may be used.

Apart from providing bank statement, one is required to furnish Form A-2 indicating the purpose of the remittance and the amount that will be regulated under LRS or will used for purposes prohibited. The Permanent Account Number (PAN) is also required for all transactions under LRS. For foreign investors, they are issued PAN through a valid visa, which acts as a universal identification to all financial transactions and prevent tax evasion. Therefore, no remittance transactions involving foreign exchange can be processed with furnishing the PAN number.

The LRS scheme is not available to partnership firms or corporates. For sole proprietorship businesses, the owner and the business are treated the same. In other words, no legal distinction is made between the business and its owner. The business owner can only remit USD up to the permissible limit under LRS. This means that when a sole proprietorship firm remits money under LRS, the individual capacity of the owner is also reckoned. For instance, if the business remits USD 250,000, the business owner cannot remit another USD 250,000 in his own capacity.
The purpose of the FEMA legal framework is to allow Indian residents to freely remit foreign exchange for any permissible current or capital account transactions under the LRS. There are only Two categories under which the remittance can be done e.g. (i) Current Account Transaction and, (ii) Capital Account Transaction. The remittances can be made for overseas travel, education, gifting and donation, and medical treatment except for maintenance of relatives living abroad (Current Account Transactions). The LRS also allows one to acquire and hold shares outside India without prior approval of the RBI (Capital Account Transactions). Some of the remittances prohibited under the scheme include remittances out of lottery winnings, dividend by companies, remittances for purchase of lottery tickets, or remittance of income from racing.

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