Top 5 forex rules for Indian investors

Updated: May 12, 2020 11:57:42 AM

What one essentially needs to know is – The amount of dollars one is allowed to either spend or invest abroad and the conditions around them.

Top 5 foreign exchange rules for Indian investorsThe rules governing foreign exchange (forex) transactions come under the ambit of the Liberalised Remittance Scheme (LRS).

Looking to buy an Apple stock on the NASDAQ Stock Exchange or send money to your children abroad for higher studies? To be on the safer side of the law, you need to be familiar with at least the basics of the foreign exchange rules before making an international financial transaction. What one essentially needs to know is – The amount of dollars one is allowed to either spend or invest abroad, the conditions around them and the specific transactions which are prohibited by law.

The rules governing foreign exchange (forex) transactions come under the ambit of the Liberalised Remittance Scheme (LRS). The rules clearly mention that one can remit foreign exchange only for any permissible current account transaction or capital account transaction or a combination of both.

Here are the top 5 foreign exchange rules for Indian investors.

1. Maximum limit

Currently, under the LRS rules, any resident individual including a minor (countersigned by a guardian) is allowed to remit up to 2.5 lakh US dollars (USD 2,50,000 ) in each financial year. At an exchange rate of Rs 76 to a dollar, it is about Rs 1,90,00,000 or Rs 1.90 crore. There is no restriction on the frequency of transactions in a year. Even if one brings the remitted amount back in the same year, no further remittance will be allowed as the limit pertains to each financial year.

2. LRS facility – Consolidation of limit

For an individual the upper cap is USD 2,50,000, but if one wants to remit a higher amount by consolidating the limits of family members, it will be allowed, provided they are close family members. However, for capital account transactions such as opening a bank account abroad or for making an investment or purchasing a property, the clubbing of limit will not be permitted by other family members unless they are the co-owners or co-partners of the investment, property or overseas bank account. In other words, under the joint holding of the asset, clubbing of limits is permitted.

3. Conditions before availing LRS

One will have to designate a branch of an AD through which all the capital account remittances will be made. As per the rules, one needs to maintain the bank account with the bank (the AD) for a minimum period of one year prior to the remittance for capital account transactions. However, for current account transactions such as private or business trips abroad, there is no such requirement.

4. Buying for forex

Forex purchase needs to be made from an authorised dealer (AD). An AD is any person or entity, usually bank, which is authorised by the RBI to deal in foreign exchange. The AD may ask for the bank statement of the previous year to establish the source of funds. Additionally, the AD may ask for copies of the latest Income Tax Return. One needs to fill and submit Form A-2, indicating the purpose of the remittance, and a self-declaration that the funds are from own-sources and will not be used for purposes prohibited or regulated under the Scheme.

5. Transactions prohibited under LRS

LRS rules clearly spell out certain transactions that are not allowed for remittances. These are:

  • Schedule-I restricts the purchase of lottery tickets or sweepstakes, prescribed magazines, etc. using forex.
  • Additionally, Schedule-II restricts forex utilisation while travelling to Nepal or Bhutan or for a transaction with a person resident in Nepal or Bhutan.
  • One is not allowed to remit forex as margin money to stock exchanges situated abroad or to someone abroad.
  • One is not allowed to remit forex for investing in Foreign Currency Convertible Bond (FCCB) issued by Indian companies in the stock market abroad.
  • Trading in the forex market abroad is prohibited.
  • Remittance directly or indirectly to certain countries identified by the Financial Action Task Force (FATF) as ‘non- cooperative countries and territories’ is prohibited.
  • Remittance directly or indirectly to any individual or an entity which has been identified as posing a significant risk of committing acts of terrorism as per the RBI directive to banks.

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