After independence, India had limited foreign exchange reserves. This changed after liberalisation, India strengthened its position in the global market, and capital flows around the world became important for economic growth. Soon, the Reserve Bank of India (RBI) introduced the Liberalized Remittance Scheme (LRS) in 2004. LRS is a scheme that allows residents to remit money outside India. The scheme allows Indians to remit up to $250,000 in a financial year without any approval from the RBI, provided the transaction is not prohibited, and the amount is within the prescribed limit. Examples of permitted transactions are: higher education in foreign universities, medical treatment abroad, maintenance of close relatives living outside India, investment in securities abroad, emigration, going abroad for employment, etc. Remittance is prohibited for purchase of Lottery Tickets/Sweep Stakes. Remittance for purchase of foreign currency convertible bonds issued by Indian companies in the overseas secondary market and remittance for trading in foreign currency abroad.
Every year there is an increase in the number of students going abroad for pursuing higher education. According to the Ministry of Education, there was a 68% increase in students going abroad in 2022. India recorded a six-year high with 750,365 students going abroad, a huge jump from 444,553 in 2021.
With so many students going abroad, the LRS allows parents to send money abroad and invest in foreign securities. An RBI report revealed that parents sent $4,991 million to their children abroad in 2019-20 to cover education costs. The number decreased to $3836 million in 2020-21 due to Covid-19 and again increased to $5165 million in 2021-22. There has been a huge increase in the number in the last 10 years. Parents spent only $114 million on education abroad in 2011-12.
The cost of education includes tuition fees and living expenses. It should be noted that the $250,000 amount is applicable for all transactions put together and not separately for tuition fees and accommodation. However, the resident can withdraw more than the prescribed limit of $250,000 if required by the University. In that case, documentary evidence, such as an estimate of tuition fees from the university, will be required.
Another important factor of LRS is the ability to invest in foreign securities for education abroad. Parents can invest money in the US market and save dollars to easily afford foreign tuition fees in the future. Investing abroad can give them a huge advantage as they will not lose their savings due to currency depreciation, which will happen if they save in Indian Rupees.
Data from the Reserve Bank of India shows a rise in the amount Indians invest abroad through LRS in recent times. Investment in equity and debt to reach $747 million in 2021-22 from $472 million in 2020-21. It also revealed that Indians invested only $195 million in 2014-15.
Note that any additional remittance above $250,000 can be made with the prior approval of the RBI. To send money outside India one must have PAN. Remittance can be made in any freely convertible foreign currency.
The Union Budget has increased the Tax Collection at Source (TCS) for foreign remittances under the LRS, and the proposed changes will be effective from July 1. As per the proposed changes, no tax will be deducted on the shortfall from the remittance for education or medical expenses 7 lakhs, 5% tax will be deducted on the excess amount if the amount of remittance for the same is more 7 lakh and any remittance for education abroad through education loan will attract TCS of 0.5% for the amount exceeding 7 lakhs.
LRS can be an effective plan for parents to support their children while studying abroad. Parents can also take advantage of LRS by investing in the US market to fulfill their child’s overseas education dream.
Ila Dubey is the co-founder of Edufund
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