Forex

What you need to know about RBI Guidelines for Foreign Remittance

There are a lot of loopholes when it comes to RBI guidelines for foreign remittances. 

This issue becomes bigger by the fact that the union budget changes its taxation rules every year. 

Businesses ultimately suffer the most. 

To avoid this for your business, it might be important for you to understand all the taxes and tax exemptions that come under the RBI guidelines for foreign remittance.

What are they? 

Let’s find out! 

RBI Guidelines for Foreign Inward Remittance

RBI regulations for inbound remittances differ from outbound transfers. India, a major recipient of remittances, sees major contributions from NRIs investing in businesses and real estate, as well as those supporting families abroad. 

First and foremost, under the RBI guidelines for foreign remittances, the RBI offers two methods for foreign remittances:  the Rupee Drawing Arrangement (RDA) and the Money Transfer Service Scheme (MTSS) for overseas money transfers. 

While RDA has no specific cap, MTSS allows 30 transfers annually, each capped at USD 2,500. Transactions must go through authorized dealer banks, and recipients need a Foreign Inward Remittance Certificate (FIRC) for authenticity. 

RBI Guidelines for Foreign Outward Remittance

The Reserve Bank of India (RBI) oversees outward remittances through two main ways: the Liberalised Remittance Scheme (LRS) and the Foreign Exchange Management Act of 1999 (FEMA). These regulations are in place to ensure the legality and transparency of remittances. 

Under the LRS, resident individuals can remit up to USD 250,000 annually for current or capital account transactions. FEMA law enables residents to remit funds for various purposes, including overseas education, living expenses for students abroad, support for close relatives overseas, gifts remittances, emigration, medical treatment abroad, and more.

The RBI guidelines for foreign remittance specify the methods for outward remittances it considers to be fair and just, such as online bank transfers, wire transfers, demand drafts, and cheques. Payments must be made to the bank or authorized money changer's account through online bank transfers (NEFT, RTGS, or Payment Gateway). 

Cash, cheques, or card payments are not permitted. The remitter must choose an authorized dealer (AD) bank or an authorized money changer (AMC) and undergo identity verification. 

The AD bank or AMC reports the details of the outward remittance to the RBI through specified forms and systems.

What is the remittance transfer rule?

Under the Income Tax Act in India, foreign remittances received by an individual are not taxable in most cases. This means that money sent to India from abroad, as say as a gift or for other purposes, is generally not subject to income tax.

However, there are some specific scenarios where taxation may apply:

Tax on Income Earned Abroad: Any income earned by an individual abroad, even if remitted to India, may be subject to taxation in India if the individual qualifies as a resident and ordinarily resident (ROR) for tax purposes.

Gift Tax: While foreign remittances themselves are not taxable as gifts, if the money is considered a gift from a non-relative and the total value of gifts received during the financial year exceeds a certain threshold, it may be subject to gift tax under the Gift Tax Act.

Transfer of Assets: In cases where an individual transfers assets located outside India to someone in India, there may be tax implications under the Income Tax Act.

What are the RBI restrictions on foreign remittance?

Here are some common restrictions on foreign remittances as per the guidelines at that time:

  • Purpose Restrictions: RBI guidelines for foreign remittance specified permissible purposes for outward remittances, and transactions were required to strictly adhere to these purposes. Certain types of transactions, such as capital account transactions for speculative activities, were prohibited.

  • Limits on Remittance Amounts: RBI may have imposed limits on the maximum amount that an individual or business could remit abroad within a specified period. These limits varied based on the residential status of the remitter and the purpose of the remittance.

  • Prohibitions on Specific Countries: Outward remittances to certain countries might have been restricted or prohibited due to sanctions, political reasons, or international regulations. Remitters were required to check the RBI's list of restricted countries before initiating any transaction.

  • Compliance Requirements: Outward remittances were subject to specific documentation, declarations, or forms that needed to be provided to the authorized bank or financial institution. Non-compliance with these requirements could have led to delays or rejection of the transaction.

  • Investment Limits: For investments made by Indian residents in foreign securities or properties, RBI might have imposed restrictions on the total investment amount or the sectors in which investments were allowed.

  • Gift and Donation Limits: There might have been limits on the amount of money that an individual or business could gift or donate to someone residing outside India.

  • Educational and Medical Expenses: While outward remittances for educational or medical expenses were generally allowed, there could have been limits on the maximum amount or the frequency of such remittances.

  • Business Transactions: Remittances related to business transactions, such as payments for imports or exports, could have been subject to specific guidelines and documentation requirements.

What is the maximum limit for outward remittance?

As of my last knowledge update in September 2021, the maximum limit for outward remittance under the Liberalized Remittance Scheme (LRS) in India was set at USD 250,000 per financial year per individual. This means that an Indian resident could remit up to USD 250,000 in a financial year for permissible purposes such as travel, education, medical expenses, investments, and other transactions allowed under the LRS.

However, please note that foreign exchange regulations and limits are subject to change, and it's essential to verify the current maximum limit for outward remittance by referring to the official website of the Reserve Bank of India (RBI) or consulting with an authorized financial institution. Additionally, different limits and guidelines may apply based on the purpose of the remittance and the residential status of the remitter.

What are the general RBI guidelines for all foreign payments?

The Reserve Bank of India (RBI) guidelines for foreign remittance govern various transactions involving the transfer of money from India to other countries. 

  1. Permissible Purposes: There is an upper limit up to which foreign remittances can be made according to the RBI guidelines. These may include travel expenses, education fees, medical expenses, trade-related payments, investments, and other legitimate transactions.

  1. Authorized Channels: The guidelines dictate the approved channels through which foreign payments can be made. Generally, such payments are routed through authorized banks and money transfer agencies.

  1. Documentation and Reporting: Depending on the purpose and amount of the foreign payment, certain documents and information need to be provided to authorized banks or agencies. Additionally, certain transactions may require reporting to RBI or other regulatory authorities.

  1. Limits and Restrictions: RBI may impose limits on the amount of foreign payment allowed for specific purposes. Additionally, there might be restrictions or prohibitions on payments to certain countries or individuals based on prevailing government policies.

  1. Foreign Investment and Trade: The guidelines also cover foreign investment by Indian residents and businesses, including regulations related to direct investments abroad (overseas direct investments) and the acquisition of foreign securities.

  1. Export and Import Transactions: RBI guidelines for foreign remittance govern foreign payments related to trade transactions, including the export and import of goods and services.

  1. Liberalized Remittance Scheme (LRS): The LRS is an essential aspect of RBI guidelines for foreign remittance that allows Indian residents to remit a certain amount abroad for various purposes without seeking prior approval from RBI.

What is the new rule for foreign remittances?

TCS rule from next month: In the Union Budget 2023, the tax collection at source (TCS) for foreign remittances under the Liberalised Remittance Scheme (LRS) was raised from 5% to 20%. The government has also clarified that payments made overseas using one’s credit card will remain outside the purview of TCS for the time being. Other payment modes, like debit cards, cash, and wire transfers will continue to attract TCS 

Bottom Line 

Understanding that the specifics of RBI guidelines for foreign remittance may vary based on factors such as the nature of the transaction, and the residential status of the individual or business, is highly important. 

RBI imposes stringent regulations on money that leaves the country, making outward remittances subject to more rules compared to their inward counterparts. hus, understanding the intricacies of these regulations proves highly beneficial.

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