The Liberalized Remittance Scheme

**Amisha Sah and Urja Joshi 

The Foundation: Understanding India’s Liberalized Remittance Scheme

The Liberalized Remittance Scheme (“LRS”) was introduced by the Reserve Bank of India (“RBI”) through A.P. (DIR Series) Circular No. 64 dated 04 February 2004 under the powers conferred by the Foreign Exchange Management Act, 1999 (“FEMA”). It was aimed at facilitating cross-border payment systems and simplifying the process for Indian resident individuals to remit money abroad without prior RBI approval.

Over the years, the annual remittance limit under LRS has been gradually increased, and currently stands at USD 250,000 per financial year per resident individual. Permitted purposes include education, medical treatment, family maintenance, and gifting funds to relatives. The LRS was hailed as a progressive move to liberalise India’s external sector and promote ease of doing legitimate international transactions, requiring minimal compliance, primarily just the submission of Form A2.

However, recent investigations by the Enforcement Directorate (“ED”) have exposed the systemic misuse of this Scheme by High Net-Worth Individuals (“HNIs”), raising concerns over regulatory arbitrage and the circumvention of FEMA.

How the Scheme Works and How It’s Misused

While the LRS is governed by the RBI’s Master Direction -LRS, its misuse has been brought under the radar due to systematic abuse of remittances made by HNIs. Under LRS, HNIs invest in foreign securities through the Overseas Portfolio Investment (“OPI”) route as permitted by the Overseas Investment Rules, 2022.

Direction A.17 of the Master Direction on LRS allows individuals to retain and reinvest income from such investments. However, it mandates that this income must be repatriated and surrendered to an authorised dealer in India within 180 days from the date of receipt, purchase, realisation, acquisition, or return to India, whichever is applicable.

Instead of following this process, funds are often routed to non-resident family members in the form of gifts or family maintenance. This tactic effectively bypasses the annual USD 250,000 cap under LRS without attracting immediate regulatory attention.

While such remittances may appear permissible, they contradict with FEMA provisions. Notably, Regulation 22(4) of the RBI’s Master Direction on Overseas Investment, 2024, explicitly prohibits the transfer of overseas funds/investments by a resident individual to a person resident outside India as a gift.

This method of financial structuring not only dilutes the very purpose of India’s capital control regime under FEMA but also undermines transparency and accountability.

The Misuse of LRS: From Individual Cases to a Systemic Concern

The LRS was enforced to facilitate genuine overseas expenditures considering the increasing globalisation. However, there has been consistent misuse of LRS by treating it as a financial product for parking funds offshore under the guise of legitimate remittances.

Recently, the ED’s 2024 raid on the Hiranandani Group’s Mumbai offices uncovered an offshore trust worth over USD 60 million, far exceeding the LRS ceiling. The trust was structured using the OPI route and masked under the guise of permissible transactions like maintenance support or gifts to non-resident family members.

This directly violates Regulation 22(4) of the RBI’s Master Direction on Overseas Investment and Direction A.17 under LRS, which mandates repatriation within 180 days.

Further, in May 2023, the ED seized properties worth Rs. 41.64 crore in Mumbai against Zavareh Soli Poonawalla and his family under FEMA. They were alleged of have misused the LRS by remitting funds abroad under false pretexts and investing in the UK properties through a controlled offshore entity. This case has raised multiple serious concerns over the growing misuse of LRS and the need for more stringent regulatory oversight.

The Global Context: Panama Papers and MAG Investigations

The 2016 Panama Papers leak revealed the widespread use of offshore structures by HNIs and Ultra-HNIs (UHNIs), including Indian residents. The leak exposed how shell entities in jurisdictions like Panama, the British Virgin Islands, and Seychelles were used to conceal beneficial ownership and avoid tax obligations.

In response, the Government of India constituted a Multi-Agency Group (“MAG”) comprising the CBDT, RBI, FIU-IND, and ED. The MAG found that LRS had been exploited to funnel funds abroad into undisclosed accounts, often bypassing KYC norms and misusing India’s tax treaties.

Although RBI had clarified in 2010 that LRS could not be used to establish overseas companies, this was only relaxed in 2013 with specific conditions—creating a regulatory vacuum during the intervening years that was exploited by several individuals.

In light of this, the government enacted the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, which introduced stringent penalties and up to 10 years of imprisonment. Amendments to the Income-tax Act also followed, mandating foreign asset disclosures and allowing reopening of assessments up to 16 years under Section 149(1)(c).

Nonetheless, enforcement challenges remain due to lack of comprehensive Double Taxation Avoidance Agreements (DTAAs) with several tax havens. Such gaps continue to hinder the effective coordinated and information sharing action, allowing the sophisticated financial networks to exploit the legal loopholes. 

Looking Forward: The Cost of Non-Compliance

The original purpose of LRS was to ease legitimate overseas spending and investments. However, HNIs have begun exploiting its liberal structure to restructure offshore wealth. For example, proceeds from the sale of unlisted foreign securities which are realised in foreign currency accounts, must be repatriated within 180 days under Direction A.17. Once repatriated, those funds may again be sent abroad under LRS.

But instead of following this cycle, individuals often directly transfer the amounts to non-resident family members, avoiding repatriation and effectively sidestepping the LRS limit. These practices, though appearing compliant, represent a clear circumvention of both the spirit and the letter of the law. 

While appearing compliant on the surface, these practices reflect a substantial pattern of circumventing the structure and spirit of FEMA. In response to such activities, India’s regulatory agencies, particularly ED, have greatly bolstered their international cooperation capabilities. The average response time to foreign counterparts has dropped from 1,000 days in 2018 to 195 days in 2022. According to an artcile by The Week, over Rs. 10,786 crore in assets have been seized through cross-border enforcement in the last five years, and the ED has achieved a 78% success rate in money laundering requests (83 out of 106 cases). These statistics show a decisive shift in oversight and it effectively signal the end of an era of  so-called “creative compliance.”

The ED has rightly taken action against such misuse and has sent a very clear message to all that the attempts to disguise capital transfers as permissible remittances will not go unchecked. These arrangements not only compromise the legitimacy of cross-border transactions but also erode the foundational principles of FEMA. The message is unambiguous: Family support cannot be a facade for financial engineering.

**Amisha Shah is a Senior Legal Executive at The Phoenix Mills Limited.

**Urja Joshi is an Associate at Khaitan Legal Associates.

**Disclaimer: The views expressed in this blog do not necessarily align with the views of The Phoenix Mills Limited and Khaitan Legal Associates.

**Disclaimer: The views expressed in this blog do not necessarily align with the views of the Vidhi Centre for Legal Policy.