LRS: Regulatory aspects of overseas investments

The Indian economy has evolved drastically in the last two decades. An economy dominated by large state-run companies has transformed into one populated by domestic as well as foreign MNCs. The presence of large MNCs coupled with the increasing penetration of the internet in the country has led to improved awareness about overseas investment options.

A wide variety of investment options overseas has made investing in a foreign country a compelling option for Indian investors. With a large number of global companies listed in the US, one can build a global portfolio by investing in stocks and ETFs in the US. However, investors should keep in mind that all overseas investments come under the purview of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 and the Liberalized Remittance Scheme.

Liberalised Remittance Scheme

The Liberalised Remittance Scheme of the Reserve Bank of India is the most important regulation for individual investors. Under the scheme, resident Indians are allowed to remit a certain amount of money in a financial year to another country for investments and expenditures. The current limit has been set at $2,50,000 in a financial year. The amount can be utilised for travel, medical, educational and other expenses. Besides taking care of expenses, the remittance can also be used to buy shares, debt instruments and even immovable property. The central bank has also placed certain restrictions on the utilization of the money.

Some of the transactions that are not permitted are:

• Purchase of lottery tickets, sweepstakes, prohibited magazines or any items that are restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000.
• For margin or margin calls to overseas exchanges
• Trading in foreign exchange
• Remittance to countries identified by Financial Action Task Force as ‘non-cooperative countries and territories’
• Remittance to individuals or entities identified as posing the risk of committing terrorist acts

Besides buying financial instruments in foreign countries, individuals can also acquire foreign securities by way of a gift from a person outside India. The RBI also allows resident individuals to invest in overseas companies without any limit if the company has at least 10% shareholding in an Indian company listed on a recognised exchange.

How to invest?

The broad scope of the LRS may give the impression that investing overseas must be a complex process. The reality is different though. One just has to send the money to start with overseas investing. It can be done in offline mode by filling out the respective bank’s remittance form, that is usually quite simple requiring only basic details in terms of beneficiary account details and purpose of remittance. With the advent of digital payment, several banks have introduced online remittance as well. The timeline for the completion of the remittance process may vary across banks but is usually within 24-48 hours.

Similar to the timeline, the remittance charges too vary from bank to bank. Banks generally charge a flat fee that usually ranges between ₹500 to ₹1000 depending on the amount being sent. Besides the fee and the timeline, another point worth noting is the taxation of remittance. A new provision under the LRS has come into effect from October 1 2020, under which all individuals remitting funds under the scheme will have to pay TCS or tax collected at source at the rate of 5%. The tax will only be levied on the amount exceeding Rs 7 lakh in a financial year. Remitters are also allowed to adjust the amount paid as TCS against their overall tax liability.   

Conclusion

Overseas investments can be excellent opportunities for domestic investors to diversify and reduce risk. If used smartly, the limit allowed under the LRS - $2,50,000 per person, per financial year - could be adequate to create a meaningful global investment portfolio. Through Globalise, you can manage your international investments is in a secure manner and convenient way. The platform also assists you extensively for guided global investing across a wide universe of stocks and ETFs.