Are you looking to invest in Apple shares on the NASDAQ Stock Exchange or give money to your children studying abroad? Before making an international financial deal, you should be comfortable with at least the fundamentals of foreign exchange laws to stay on the safe side of the law. What one wants to know is the amount of money one can spend or invest overseas and the requirements surrounding it, and the particular transactions forbidden by statute.
The Liberalised Remittance Scheme is responsible for the rules governing foreign exchange (forex) transactions (LRS). The rules state unequivocally that foreign exchange can only be remitted for applicable current account or capital account transactions or a combined effect of both.
The top five foreign exchange laws for Indian investors are listed below.
- The Upper Cap
Presently, any resident citizen, including a minor (countersigned by a guardian), is permitted to remit up to 2.5 lakh US dollars (USD 2,50,000) every financial year under the LRS regulations. That is approximately Rs 1,90,00,000 or Rs 1.90 crore at the cost of Rs 76 to a dollar. If the remitted balance is returned within the same year, no additional remittance is permitted since the cap is set for each financial year.
- Limitation Reduction System (LRS) Facility
The maximum bound for an individual is USD 2,50,000. Still, if a person wishes to remit a more significant sum by combining family members’ limits, it would be permitted as long as they are close relatives. Other family members would not be allowed to club their limits on capital account purchases such as opening a bank account internationally, making an investment, or buying a home whether they are co-owners or co-partners in the acquisition, house, or overseas bank account. In other words, clubbing of limits is allowed where the asset is held jointly.
- Requirements for receiving LRS
Both capital account remittances must be rendered by a branch of an AD, which must be designated. According to the law, one must have a deposit account (the AD) with the bank for a minimum of one year before electronic payments for capital account transactions. There is no such provision for current account expenses such as private or business travel overseas.
- Buying Forex
A licensed broker like Multibank must be used to buy forex (AD). Any individual or agency, usually a bank approved by the RBI to deal in foreign exchange, is referred to as an AD. To determine the source of funds, the AD may request a previous year’s bank statement. The AD can also request copies of the most recent Income Tax Return. Form A-2, stating the intent of the remittance and a self-declaration that the funds are from own-sources and will not be used for reasons forbidden or restricted by the Scheme, must be filled out and sent.
- Transactions that the LRS Bans
LRS regulations for remittances expressly prohibit certain transfers. There are the following:
- Schedule-I prohibits the use of forex to buy lottery or sweepstakes tickets, prescribed magazines, and other products.
- Consequently, Schedule-II prohibits foreign currency when traveling to Nepal or Bhutan or while transacting with a Nepalese or Bhutanese citizen.
- It is not permitted to send forex as margin money to stock exchanges or individuals located outside of the United States.
- Remitting forex to invest in Foreign Currency Convertible Bonds (FCCB) issued by Indian firms in the capital market outside of India is prohibited.
- It is illegal to trade in the forex market outside of the United States.