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Liberalised Remittance Scheme

Also written LRS · Liberalised Remittance Scheme (LRS)

The RBI facility letting a resident individual remit up to USD 250,000 per financial year abroad for any permissible current or capital account transaction, including investment in offshore funds.

In plain language

India runs capital controls. A resident individual cannot simply wire money abroad to buy into a foreign fund. The Liberalised Remittance Scheme is the standing permission that makes it possible without seeking approval each time.

Introduced by the RBI on 4 February 2004 with a ceiling of USD 25,000 per year, the limit was raised to USD 250,000 per individual per financial year in June 2015, where it remains. It covers any permissible current or capital account transaction, or a combination of the two, subject to the conditions of FEMA, 1999.

For this paper, LRS is the door through which a resident investor reaches an offshore fund — and, historically, the reason Indian money could not reach foreign hedge funds at all.

How it works

The limit is per individual, per financial year, which means a family multiplies it. It is a remittance limit, not an investment limit: the same USD 250,000 window covers education, travel, gifts and foreign securities together.

The scheme matters in two places in the workbook.

Historically. Before 2015, foreign hedge funds typically set minimum investments as high as USD 100,000 per investor. Against a USD 25,000 LRS ceiling, an Indian resident individual simply could not meet the ticket — which is one reason hedge fund capital had to be raised domestically once the Category III AIF regime arrived. The alternative route was to acquire foreign securities out of a Resident Foreign Currency (RFC) account.

Currently. Where a Category III AIF uses an offshore fund structure — a pooling vehicle in Mauritius or Singapore investing into Indian investee companies — a resident Indian investor subscribing to that offshore vehicle is remitting under LRS, and the limit caps what they can commit. The limit is revised under FEMA from time to time.

A worked example

A resident investor wants to commit to an offshore feeder of a Category III AIF strategy. Take the rupee at an assumed Rs 85 to the dollar — the exchange rate is not a workbook figure, it is here only to make the arithmetic visible.

LRS limit, one individual   USD 2,50,000  ≈  Rs 2.125 crore per financial year
Family of four              USD 10,00,000 ≈  Rs 8.50  crore per financial year

Against that, a domestic Category III AIF asks a minimum ticket of Rs 1 crore — comfortably inside one individual's annual LRS headroom, and reachable without any remittance at all.

Now run the clock back. A foreign hedge fund with a USD 100,000 minimum:

Under the pre-2015 limit:  USD 100,000 ticket vs USD 25,000 LRS limit
                           →  four years of an individual's entire LRS window,
                              for one subscription.   Not feasible.

Under the current limit:   USD 100,000 ≈ Rs 85 lakh, against USD 250,000
                           →  40% of one year's window.  Feasible.

That single change of ceiling is why the workbook treats June 2015 as a turning point in how Indian capital could reach alternative strategies — and why, before it, the strategies had to come onshore instead.

Why NISM asks about it

Chapter 2 (Growth of Alternative Investment Funds in India and Suitability of Category III AIFs) uses LRS to explain why hedge funds had limited options for marketing to Indian investors before the AIF Regulations, and Chapter 4 (Fund Structures and Service Providers) uses it again when setting out offshore fund structures and how resident investors reach them. Expect a direct figure question — the current limit is USD 250,000 per person per financial year — and a date-and-figure question on the 2004 introduction at USD 25,000 and the June 2015 increase.

Common exam traps

  • USD 250,000 is per individual per financial year, not per family, per transaction or per calendar year.
  • The limit is set by the RBI under FEMA, not by SEBI. LRS is an exchange control facility, not a securities regulation.
  • It covers current and capital account transactions together. Foreign fund subscriptions share the same window as education and travel.
  • USD 25,000 is the 2004 figure, not the current one. The workbook states both; questions exploit the pair.
  • LRS is a remittance permission, not a tax exemption. Money sent out under LRS remains taxable in India under the ordinary provisions, and a TRC governs what the destination country can charge.
  • The RFC account route is an alternative to LRS for acquiring foreign securities, not an extension of the LRS limit.

Check yourself

  1. 1.Under the Liberalised Remittance Scheme, an Indian resident may remit abroad up to:

    1. a)USD 25,000 per person per financial year
    2. b)USD 1,00,000 per person per financial year
    3. c)USD 2,50,000 per person per financial year
    4. d)USD 10,00,000 per person per financial year
    Show the answer

    Answer: (c) USD 2,50,000 per person per financial year

    The LRS issued by the Reserve Bank of India allows Indian residents to remit abroad up to USD 2,50,000 per person per financial year for any permissible current or capital account transaction or a combination of both, subject to the restrictions laid down in FEMA, 1999. The limit is revised under the FEMA laws and matters directly when resident Indian investors are investing in offshore funds.

  2. 2.Why did the Liberalised Remittance Scheme fail to bring significant Indian capital into foreign hedge funds before 2015?

    1. a)Because the LRS did not permit investment in foreign securities at all
    2. b)Because the LRS limit was USD 25,000 a year while foreign hedge funds had minimum investment limits as high as USD 100,000 per investor
    3. c)Because RBI prohibited Indian residents from investing in any fund structure
    4. d)Because Indian residents could only invest through a Resident Foreign Currency account
    Show the answer

    Answer: (b) Because the LRS limit was USD 25,000 a year while foreign hedge funds had minimum investment limits as high as USD 100,000 per investor

    "On FEBRUARY 4, 2004, RBI INTRODUCED A LIBERALISED REMITTANCE SCHEME (LRS) WHICH PERMITTED INDIAN RESIDENT INDIVIDUALS TO INVEST UP TO USD 25,000 PER YEAR FOR ANY PURPOSE INCLUDING INVESTMENT IN FOREIGN SECURITIES."

    The mismatch is stark: four full years of an investor's entire remittance allowance for a single subscription. The route was legally open and practically useless.

    The limit was raised later: "Subsequently, this ceiling was INCREASED UP TO USD 250,000 PER INDIVIDUAL, PER FINANCIAL YEAR, IN JUNE 2015" — but by then the domestic route through the AIF Regulations had already opened.

    Option (a) is contradicted by the scheme's own terms, which expressly covered "investment in foreign securities." Option (d) describes a separate, additional route rather than a restriction: "Alternatively, Indian resident individuals were permitted to ACQUIRE FOREIGN SECURITIES IF THE CONSIDERATION WAS PAID OUT OF A RESIDENT FOREIGN CURRENCY (RFC) ACCOUNT."

    The other two routes were narrower still: Indian mutual funds "COULD INVEST ONLY UP TO 10 PERCENT OF ITS NET ASSETS IN FOREIGN SECURITIES", and Indian listed companies only "IN FOREIGN COMPANIES LISTED ON A RECOGNISED STOCK EXCHANGE."

    Underlying all of it: "on account of THE ABSENCE OF FULL CAPITAL ACCOUNT CONVERTIBILITY, THE GENERAL PRINCIPLES OF CORPORATE LAW AND EXCHANGE CONTROL LAWS WERE APPLICABLE."

  3. 3.An Offshore Fund Structure is typically used when:

    1. a)there is no intent to pool capital at the domestic (India) level, so offshore investors commit capital to a fund domiciled in, say, Mauritius or Singapore, which invests in Indian investee companies
    2. b)commitments from domestic and offshore investors must be pooled in an onshore AIF
    3. c)offshore investors must invest through a feeder fund into a domestic master fund
    4. d)resident Indian investors wish to avoid the Liberalised Remittance Scheme
    Show the answer

    Answer: (a) there is no intent to pool capital at the domestic (India) level, so offshore investors commit capital to a fund domiciled in, say, Mauritius or Singapore, which invests in Indian investee companies

    "An Offshore fund structure is used when there is no intent to pool capital at the domestic (i.e. India) level." The pooling vehicle is domiciled in an offshore jurisdiction, such as Mauritius or Singapore. Offshore investors commit capital to it, and it "will make investments into Indian Investee companies as and when investment opportunities arise". The Offshore Investment Manager can take domestic investment advice for these investments. Option (b) describes the Unified Structure. Option (c) describes the Master-Feeder Structure. Option (d) confuses the purpose: the LRS is the route through which resident Indians remit money abroad, so this structure is not a way around it.

Where this is taught

Free preparation for NISM Series XIX-B

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