The Liberalised Remittance Scheme (LRS) regulation in India has been revised, making it difficult for wealthy Indians to accumulate wealth in offshore bank accounts. Under the new rule, if an individual has legitimate money outside India in the form of foreign exchange, they must either invest it or use it within 180 days of realisation. This means that individuals cannot keep their funds parked in offshore bank accounts for more than six months. The new rule has put many wealthy Indians in a fix as they are not able to retain money in the form of bank balance outside India indefinitely as they could earlier.
The LRS rule has several ambiguities regarding its interpretation, which has further added to the confusion of affluent Indians. The first ambiguity arises regarding the meaning of the term unutilised foreign exchange. Most of the authorised dealers (ADs) have taken the view that if the forex is lying in the overseas bank account of the individual, even in the form of Fixed Deposit (FD), can be construed as unutilised forex to be brought back into India within 180 days. This interpretation may force the individual to liquidate their assets outside India and bring back the money within 180 days.
Similar interpretation issues may arise in case the investment is made in money market instruments, etc. This could force individuals to liquidate their assets outside India and bring back the money within 180 days. The individuals may not be able to retain money/realisation beyond 180 days and wait for the right investment opportunities outside India. Another fallout of this regulation is that individuals cannot accumulate wealth in the form of bank balance outside India.
Additionally, the TCS (Tax Collected at Source) on the remittance has been increased from 5% to 20%, which is mandatory. There is no way to avoid or reduce taxes on foreign remittances. This is a mandatory levy on all LRS remittances, for which tax credit would be available to the remitter. One cannot reduce or avoid these taxes.
To sum up, the revised LRS regulation has made it difficult for wealthy Indians to accumulate wealth in offshore bank accounts for more than six months. The rule requires individuals to bring back unutilised foreign exchange within 180 days of realisation. The interpretation of the term unutilised foreign exchange has raised several ambiguities, making it challenging for individuals to hold funds outside India. Additionally, the TCS on remittances has been increased, making it mandatory to pay taxes on foreign remittances.
The author is a Chartered Accountant with 2 decades of experience into Accounting, Taxation, Auditing, Risk & Compliance, Credit Controls, Due diligence. Currently, the author is the founder and managing partner at RRL Global services.
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