RBI LRS Update: Liberalised Remittance Scheme Changes for Foreign Operations

Why the 2025-26 LRS Changes Matter for Foreign Operations

The Reserve Bank of India's Liberalised Remittance Scheme (LRS) is the primary channel through which resident Indians move capital abroad for legitimate business and personal purposes. With the annual limit holding steady at USD 250,000 per individual per financial year, the scheme enables everything from overseas education funding to setting up wholly owned subsidiaries abroad.

However, the 2025-26 fiscal year has brought meaningful changes to the tax treatment, documentation requirements, and permissible scope of LRS transactions. For companies with Indian operations or Indian shareholders funding foreign ventures, these changes directly affect cash flow planning, tax efficiency, and compliance obligations.

The changes stem from two primary sources: the Union Budget 2025 amendments to Tax Collected at Source (TCS) provisions under Section 206C(1G) of the Income Tax Act, and the RBI's evolving Master Direction on the Liberalised Remittance Scheme. Together, they reshape how individuals and businesses approach cross-border remittances from India.

Current LRS Framework: Core Parameters

Before examining the changes, it is essential to understand the existing LRS architecture that remains unchanged:

• Annual Limit: USD 250,000 per resident individual per financial year (April to March)
• Eligibility: All resident individuals, including minors (with guardian acting on their behalf)
• Routing: All remittances must flow through Authorised Dealer (AD) Category I banks
• PAN Requirement: PAN card is mandatory for all LRS transactions regardless of amount
• Clubbing: The USD 250,000 limit is per individual; it cannot be clubbed with family members' limits

The scheme covers both current account and capital account transactions, providing a unified framework for diverse cross-border payment needs. AD banks verify KYC documentation, ensure the remitter has not exceeded the annual limit across all banks, and collect applicable TCS before processing the remittance.

TCS Threshold Increase: From INR 7 Lakh to INR 10 Lakh

The most significant change for FY 2026-27 is the increase in the TCS exemption threshold from INR 7 lakh to INR 10 lakh per financial year, effective April 1, 2025. This means the first INR 10 lakh of remittances under LRS are entirely free of TCS, regardless of the purpose.

Practical Impact on Foreign Operations

For a company founder remitting funds to set up overseas operations, this translates to approximately USD 11,900 (at INR 84/USD) that can be sent abroad without any upfront tax collection. While TCS is ultimately adjustable against income tax liability, the working capital benefit of the higher threshold is meaningful for early-stage foreign ventures.

The threshold is calculated cumulatively across all LRS purposes during the financial year. If an individual remits INR 5 lakh for education and INR 6 lakh for investment, the first INR 10 lakh is exempt, and TCS applies only on the remaining INR 1 lakh.

Revised TCS Rates by Purpose

The 2025-26 amendments also restructure TCS rates based on the purpose of remittance. The changes are designed to encourage legitimate expenditure on education and healthcare while maintaining higher rates on investment-oriented remittances.

Key Changes from Previous Rates

• Education and Medical (FY 2025-26): TCS is Nil up to INR 10 lakh, with 5% applying only above INR 10 lakh (the exemption threshold was raised from INR 7 lakh to INR 10 lakh). Education funded through a loan from a recognised institution remains entirely exempt.
• Tour Packages (FY 2025-26): 5% applies up to INR 10 lakh and 20% above INR 10 lakh for tour packages.
• Investment Remittances: The 20% rate above INR 10 lakh remains unchanged, reflecting the government's continued stance on discouraging capital flight through investments.
• From FY 2026-27 (1 April 2026): Finance Act 2026 further reduced TCS on LRS education and medical remittances to a flat 2% (above INR 10 lakh), and overseas tour packages now attract a flat 2% with no threshold. The 20% rate on other-purpose (investment, gift, property) remittances above INR 10 lakh remains unchanged.

Permitted Transactions Under LRS

LRS covers a broad spectrum of both current account and capital account transactions. Understanding the full scope is critical for structuring foreign operations efficiently.

Current Account Transactions

• Private visits abroad (tourism)
• Gift or donation to non-residents
• Going abroad on employment
• Emigration expenses
• Maintenance of close relatives abroad
• Business travel
• Medical treatment abroad (including attendant expenses)
• Education abroad (tuition, living expenses, hostel fees)

Capital Account Transactions

• Opening foreign currency accounts with overseas banks
• Purchase of immovable property abroad
• Acquisition of shares (listed and unlisted) of overseas companies
• Investment in debt instruments, mutual funds, ETFs, and venture capital funds abroad
• Setting up Wholly Owned Subsidiaries (WOS) or Joint Ventures abroad
• Extending loans to non-resident close relatives

For entrepreneurs planning foreign operations, the capital account permissions are particularly relevant. LRS allows direct investment in setting up overseas entities, purchasing equity in foreign companies, and funding working capital of foreign subsidiaries through structured lending arrangements.

Prohibited Transactions: What LRS Cannot Be Used For

The RBI maintains a clear list of prohibited uses, and violations can attract penalties under FEMA:

• Remittances for margin trading or margin calls to overseas exchanges
• Purchase of lottery tickets, sweepstakes, or proscribed publications
• Trading in foreign exchange abroad
• Capital account remittances to countries or entities identified by FATF as non-cooperative jurisdictions
• Remittances to individuals or entities identified as posing terrorism risks
• Purchase of Foreign Currency Convertible Bonds (FCCBs) issued by Indian companies in the overseas secondary market
• Investment in cryptocurrency or virtual digital assets held abroad (RBI stance remains restrictive)

Additionally, the RBI has proposed banning LRS remittances into offshore time deposits and lock-in interest-bearing foreign accounts. This proposal, if implemented, would prevent the passive accumulation of foreign assets through fixed-return instruments, pushing LRS usage toward active business and investment purposes.

Documentation and Process Requirements

The LRS remittance process involves several mandatory documentation steps that AD banks must verify before processing any transaction:

Step 1: KYC Verification

The remitter must have a fully KYC-compliant account with the AD bank. This includes valid identity proof (Aadhaar, passport, or voter ID), address proof, and a recent photograph.

Step 2: PAN Card Submission

PAN is mandatory for all LRS transactions. The bank uses PAN to verify the remitter's annual cumulative LRS usage across all banking channels.

Step 3: Form A2 Submission

The remitter must fill out Form A2 (the Application for Purchase of Foreign Exchange) along with the LRS declaration form. This form requires clear specification of the purpose of remittance, beneficiary details, and the amount in foreign currency.

Step 4: Supporting Documents

Depending on the purpose, additional documents may be required:

• Education: Admission letter, fee demand from the university, estimate of living expenses
• Medical: Letter from the Indian doctor/hospital recommending treatment abroad, estimate from the foreign hospital
• Investment: Details of the foreign entity, nature of investment, board resolution (if applicable)
• Property Purchase: Sale agreement, property details, title documents

Step 5: TCS Collection

The AD bank collects applicable TCS at the time of remittance. The TCS certificate (Form 27D) is issued to the remitter, who can claim credit against income tax liability while filing returns.

IFSC (GIFT City) and LRS Interactions

Resident individuals can use LRS to invest in entities and funds established in the Gujarat International Finance Tec-City (GIFT IFSC). While GIFT City is technically on Indian soil, investments there are treated as overseas investments for regulatory purposes. Key benefits of routing LRS through GIFT IFSC include access to USD-denominated funds and instruments, simplified regulatory structure compared to direct overseas investment, and exemption from certain Indian tax provisions including Securities Transaction Tax (STT) and Commodity Transaction Tax (CTT). Investors should note that GIFT IFSC investments count toward the USD 250,000 annual LRS limit, so they reduce the capacity available for other overseas remittances.

LRS for Setting Up Foreign Subsidiaries

For Indian companies and entrepreneurs looking to establish foreign operations, LRS provides a structured pathway for initial capitalization:

• Individual Route: Each Indian promoter can remit up to USD 250,000 per year under LRS to fund the overseas entity. With two promoters, this provides USD 500,000 of annual funding capacity.
• Corporate Route: For larger investments exceeding LRS limits, companies must use the Overseas Direct Investment (ODI) route under FEMA, which requires separate RBI approval and compliance.
• Step-Down Subsidiaries: Once a first-level subsidiary is established abroad using LRS funds, subsequent investments into step-down subsidiaries must comply with the overseas investment regulations of the host country.

The advantage of the LRS route is its simplicity: no prior RBI approval is required, and the AD bank processes the remittance upon satisfactory documentation. However, the USD 250,000 annual cap per individual can be limiting for capital-intensive foreign ventures.

Compliance Obligations and Reporting

LRS transactions create ongoing compliance obligations for both the remitter and the AD bank:

For Individuals

• Report all foreign assets acquired through LRS in Schedule FA of the income tax return
• Income earned on foreign investments (dividends, capital gains, rental income) must be declared in India
• Maintain records of all LRS remittances for at least 7 years
• File Form 67 for claiming foreign tax credit under DTAA provisions

For AD Banks

• Report LRS transactions to the RBI on a daily basis through the Online Returns Filing System (ORFS)
• Verify that the remitter has not exceeded USD 250,000 across all AD banks
• Maintain records for a minimum of 5 years
• Report any suspicious transactions to the Financial Intelligence Unit (FIU)

Penalties for Non-Compliance

Violations of LRS provisions attract penalties under FEMA Section 13. The penalty can be up to three times the sum involved in the contravention, or INR 2 lakh where the amount is not quantifiable. The RBI's updated compounding framework (April 2025) has capped penalties for certain miscellaneous non-reporting contraventions at INR 2 lakh per contravention, providing some relief for procedural violations. However, substantive violations such as exceeding the USD 250,000 limit or using LRS for prohibited purposes continue to attract stringent penalties.

Impact on FDI and Cross-Border Transactions

The LRS changes have indirect but important implications for cross-border investment flows:

• Outbound Investment: The higher TCS threshold encourages smaller outbound investments by reducing upfront tax friction. This particularly benefits angel investors and seed-stage funders investing in overseas startups.
• Return Path: While LRS governs outbound remittances, the return of profits and dividends from foreign investments follows separate FEMA channels. The Form 15CA/15CB requirements apply when receiving funds back into India.
• Tax Treaty Benefits: Income earned abroad through LRS-funded investments may qualify for relief under India's network of Double Taxation Avoidance Agreements, but proper documentation and Form 67 filing are essential.

Purpose Codes and RBI Reporting Classification

Every LRS remittance must be classified under a specific purpose code, which determines both the applicable TCS rate and the reporting classification. The purpose code system, maintained by the RBI, ensures accurate tracking of foreign exchange outflows by category.

Key Purpose Codes for Foreign Operations

Selecting the wrong purpose code is a common compliance error. While it may not trigger immediate penalties, it creates discrepancies in RBI data and can lead to queries from the AD bank or the RBI during audits. Companies funding foreign operations should work with their AD bank to identify the correct purpose code for each remittance.

Historical Evolution of the LRS Limit

Understanding how the LRS limit has evolved provides context for the scheme's trajectory and potential future changes:

The historical pattern shows that the RBI adjusts the LRS limit based on macroeconomic conditions, particularly the rupee's stability and India's foreign exchange reserves. With India's forex reserves exceeding USD 620 billion in 2025-26, there is limited pressure to reduce the limit, and some market participants anticipate a potential increase to USD 500,000 in the medium term.

Strategic Planning for Foreign Operations Using LRS

For Indian entrepreneurs and investors planning foreign operations, strategic use of LRS can significantly optimize the funding structure:

Timing of Remittances

Since the TCS exemption resets every financial year (April 1), timing remittances across two financial years can double the TCS-free amount. For example, remitting INR 10 lakh in March and another INR 10 lakh in April provides INR 20 lakh of TCS-free remittances across just two months.

Multiple Promoter Strategy

The USD 250,000 limit is per individual. A venture with four Indian co-founders can channel up to USD 1 million per year through LRS without any RBI approval. Each promoter makes their own remittance through their respective AD bank, and the funds are consolidated in the foreign entity's account.

LRS Plus ODI Structure

For ventures requiring more than USD 250,000 per promoter, a hybrid structure combining LRS (for individual promoter contributions) and ODI (for corporate investment) provides maximum flexibility. The LRS component requires no approval, while the ODI component allows for larger investments within the company's net worth limits.

Tax Efficiency Considerations

While TCS is adjustable against income tax, the 20% rate on investment remittances above INR 10 lakh creates a significant cash flow drag. For an individual remitting the full USD 250,000 (approximately INR 2.1 crore), the TCS liability would be approximately INR 40 lakh, which is locked up until the income tax return is filed and processed. Structuring remittances to minimize TCS impact through proper categorization and timing is essential.

Comparison with Other Remittance Routes

LRS is not the only channel for cross-border payments from India. Understanding how it compares with other routes helps in choosing the optimal structure:

For foreign operations requiring capital beyond USD 250,000, the ODI route through the company is typically more appropriate, while LRS serves as a supplementary channel for individual promoter contributions.

Common Mistakes and How to Avoid Them

Based on AD bank feedback and RBI compounding orders, these are the most frequent LRS compliance failures:

Mistake 1: Splitting Remittances Across Multiple Banks

Some individuals attempt to circumvent the USD 250,000 limit by remitting through multiple AD banks. The RBI's centralized reporting system tracks PAN-wise aggregate remittances across all banks. Exceeding the limit, even inadvertently through multiple banks, is a FEMA contravention that can attract penalties up to three times the excess amount remitted.

Mistake 2: Using LRS for Corporate Purposes

LRS is exclusively for resident individuals. Companies cannot use LRS to fund overseas operations. When individual promoters use their personal LRS to fund a company's overseas subsidiary, the funds must be structured as a personal investment in the foreign entity, not a corporate fund transfer. The distinction matters for both FEMA compliance and income tax purposes.

Mistake 3: Incorrect Purpose Code Declaration

Declaring an investment remittance as a gift or personal transfer to obtain lower or nil TCS is a deliberate misclassification that can result in penalties under both the Income Tax Act and FEMA. AD banks are required to verify the declared purpose against supporting documents, and the RBI conducts periodic audits of purpose code accuracy.

Mistake 4: Not Reporting Foreign Assets in ITR

Assets acquired abroad through LRS must be reported in Schedule FA of the income tax return. Failure to report foreign assets can attract penalties under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, with penalties up to INR 10 lakh for non-disclosure.

Mistake 5: Forgetting to Claim TCS Credit

TCS collected on LRS remittances appears in Form 26AS and must be claimed as a credit while filing the income tax return. If not claimed, the TCS amount is effectively a loss. Remitters should verify their Form 26AS before filing returns to ensure all TCS credits are captured.

Key Takeaways

• The USD 250,000 annual LRS limit per individual remains unchanged for FY 2026-27, but the TCS exemption threshold has increased to INR 10 lakh, reducing upfront tax friction on smaller remittances.
• TCS rates for education and medical remittances were reduced to 5% (above threshold) for FY 2025-26 and further to a flat 2% from FY 2026-27 (1 April 2026), while investment remittances continue to attract 20% TCS above INR 10 lakh.
• Education loan-funded remittances are entirely exempt from TCS, making this the most tax-efficient route for overseas education.
• The RBI's proposed ban on offshore time deposits could restrict passive foreign asset accumulation through LRS.
• For foreign operations, LRS provides a simple, approval-free route for initial capitalization up to USD 250,000 per promoter per year, but larger investments require the ODI route under FEMA.
• Comprehensive documentation, PAN verification, and Form A2 submission through AD banks remain mandatory for all LRS transactions.