How To Use LRS For Overseas Investment?

The Union Budget for 2024-25 introduced a slew of changes to India’s taxation policy, underscoring the government’s commitment to simplify the tax structure. The changes are expected to push high-net-worth individuals to take a fresh look at their investment strategies, particularly with regards to their international investments. 
 

To be sure, international investments already feature in the portfolio construct of HNIs as it helps in diversification with global asset classes but also provides and optimizes asset allocation. Among the changes, the one related to long-term capital gains is favorable for overseas investment for HNIs because it is expected to provide a level-playing field with domestic investments.
 

This comes at a time when there is heightened interest among high net-worth individuals (HNIs) to US equities given the buzz around the likes of Nvidia and Tesla. But do you know investing in an overseas market is easier than you would think? Let’s explore the Reserve Bank of India’s Liberalised Remittance.
 

What is LRS? 

Popularly known as the LRS, this foreign exchange policy was introduced in 2004. Under the LRS, resident Indians are allowed to remit $250,000 for a variety of purposes including investment, education, travel, medical treatment, and gifts.  The limit is applicable per individual and any unused limit is not allowed to be carried forward. Hence, it is advisable to plan your remittances much in advance. For the purpose of investment, LRS can be used to buy foreign bonds and stocks, overseas property, invest in mutual funds, and also set up ventures abroad. 
 

There are several benefits of using LRS for the purpose of investment. It enables HNIs to construct a diversified portfolio along with exposure to global assets and help mitigate fluctuations in the domestic market. In addition, it helps in global estate planning and also earn higher returns in case of appreciation in the currency of the underlying asset. 
 

However, there are two important taxation aspects that need to be kept in mind. Firstly, remittances of INR700,000 in a financial year will attract tax collected at source. The tax rate depends on the purpose of remittance and TCS can be reclaimed later while filing ITR. Secondly, it is important to check if India has a tax treaty with the country you are investing in order to avoid double taxation. 
 

To start overseas investment, investors will need to open a trading account. This can be opened with  foreign brokers that have operations in India or any domestic broker that has tied-up with their foreign broking firm. While services being offered are important deciding factors, investors also need to weigh different costs to make an informed decision on which broker to select. There are some key costs such as brokerage fees, currency conversion charges, remittances fees, etc. Some of the new-age fintech brokers also provide such services at lower costs. But it is to be noted that these investments are more D-I-Y (do-it-yourself) kind and hence are more suitable for low-ticket investors and retail investors.  
 

How To Start Investing Overseas With LRS?
 

The investors must open a trading account to initiate the overseas investments under the Liberalised Remittance Scheme (LRS scheme). This account may be with foreign brokers with a presence in India or domestic brokers with international firms. Selecting an appropriate broker is a crucial measure because service and fee schemes vary widely.
 

Some of the expenses that investors should consider include brokerage fees and account fees. Conventional brokers might provide end-to-end services, but fintech-led platforms tend to be cheaper and more digital. These are typically run on a do-it-yourself (DIY) basis, better fitting the needs of retail and small-ticket investors interested in controlling their own portfolios.
 

The Reserve Bank of India proposes the LRS scheme. This enables residents of a country to transfer money to other countries in order to do different types of transactions that are permitted by the law, such as investing in foreign stocks and other financial instruments. Investors need to adhere to RBI rules and regulations, keep good records of remittances, and they should be aware of taxation that could occur as a result.
 

Investors can optimise global market opportunities by simply choosing an appropriate platform and being aware of the associated costs through the LRS system.
 

Key Features of the LRS Scheme

The Liberalised Remittance Scheme of RBI (LRS) allows Indian residents a controlled method of sending money overseas to carry out certain activities. You need to know its structure to respond to the question most people ask: “What is LRS and how does it work?” Some of the significant features of it are explained below:
 

1. Annual Remittance Limit and Rules

Under the liberalised remittance scheme LRS, Indian residents are allowed to remit funds overseas each year within the prescribed limit set by the Reserve Bank of India. These remittances can be made in one go or spread out across multiple transactions. Individuals must ensure that their remittances comply with RBI guidelines, maintain proper documentation, and follow reporting requirements.
 

2. Permitted Transactions and Investments

The scheme allows for a wide range of permissible uses. Investors can use the LRS route to buy foreign equities, mutual funds, ETFs, and bonds. It also permits spending on education, travel, gifts, medical treatment, and maintaining bank accounts abroad. For those exploring global diversification, the scheme offers a simple channel to invest in international markets legally and securely.
 

3. Prohibited Transactions under LRS

While the LRS scheme provides flexibility, there are restrictions in place. It does not allow remittances for activities such as margin trading or investments in derivatives that are not permitted under RBI rules. These safeguards ensure that funds are used responsibly and within the regulatory framework.
 

Regulatory and Tax Changes

The appeal of using the liberalised remittance scheme (LRS) for investment overseas has grown stronger with the current regulatory changes and updates in taxation. Budget announcements and SEBI’s stance on overseas fund limits are reshaping how Indian investors can diversify globally. Here is a detailed breakdown:
 

1. Stronger Case For Using LRS

• Under the current regulatory landscape and following budgetary changes, the case for using LRS for overseas investments has strengthened.
• The scheme continues to offer HNIs a direct route to fast-growing US stocks.
   

2. Changes In Capital Gains Tax

• International funds, fund of funds, and gold funds have become more attractive after recent tax updates.
• International funds are a category of mutual funds that invest in companies listed outside of India.
• The Union Budget announced a reduction in the holding period for these funds to more than 24 months, compared to the earlier period of more than 36 months.
• Long-term capital gains on these funds are now taxed at 12.5%.
• No changes were made to the short-term capital gains tax.
   

3. Previous Tax Structure

• Earlier, investments held for less than three years were treated as short-term, and gains were taxed as per the investor’s income tax slab.
• Investments held for over three years were considered long-term and taxed at 20%.
   

4. Why International Funds Became Attractive

• The tax changes make international funds a better option for long-term wealth creation.
• Since these investments are made in Indian rupees, they are not included when calculating the LRS remittance limit.
   

5. The Catch: SEBI Restrictions
 

• Despite the tax benefits, fund houses are currently not accepting fresh investments in such schemes.
• The Securities and Exchange Board of India (SEBI) has barred mutual fund houses from fresh overseas stock subscriptions.
• This restriction was imposed because the mutual fund industry was close to breaching the available overseas limit of $7 billion.
• Fresh inflows may resume once space opens up, either due to a fall in portfolio values or a spike in redemptions.
   

6. Why LRS Still Works For HNIs
 

• While fund houses face restrictions, the LRS route is still open.
• High-net-worth individuals (HNIs) with access to professional advisors can continue investing in international markets through this channel.
• LRS remains a simple and effective way for Indian investors to get global exposure.