Liberalised Remittance Scheme Explained: The USD 250,000 Annual Limit and What It Actually Covers

The Liberalised Remittance Scheme (LRS) lets every resident individual send up to USD 2,50,000 abroad in a financial year (April to March) for almost any lawful purpose, according to the Reserve Bank of India's LRS FAQ last updated on 6 April 2023. For non-resident Indians the scheme sits at the centre of a persistent confusion: LRS is a resident's facility, and an NRI cannot use it at all. The moment a returning NRI's residential status flips back to "resident" under Section 6 of the Income-tax Act 1961, the USD 250,000 window opens - and the mirror-image USD 1 million route they relied on as an NRI closes in the same breath.

This guide sets out exactly what the USD 250,000 covers, what it does not, and how the tax treatment works on both sides of the border. Every figure below is drawn from the RBI FAQ dated 6 April 2023, the Foreign Exchange Management Act 1999, and India's bilateral tax treaties. If you are still a non-resident, the channels that apply to you are the NRE, NRO and FCNR(B) accounts and the USD 1 million repatriation scheme - not LRS. Read those first, then use this piece for the day your status changes.

FEMA / DTAA Position

LRS is a creature of Section 6 of the Foreign Exchange Management Act 1999, which governs capital account transactions. The statutory default under FEMA is restrictive: a capital account remittance needs Reserve Bank permission unless it is specifically permitted, and LRS is the standing permission that lets a resident move up to USD 2,50,000 per financial year without a separate approval. Current account transactions under Section 5 of FEMA 1999 are generally permitted, with a short prohibited list (gambling, lottery, and magazine subscriptions beyond a limit) carved out.

The single most important eligibility rule for our readers is who qualifies. The RBI FAQ of 6 April 2023 confirms that LRS is available to all resident individuals, including minors, but is not available to corporates, partnership firms, Hindu Undivided Families (HUFs) or trusts. Where a minor remits, the LRS declaration form must be countersigned by the minor's natural guardian. Because eligibility turns on residence, a non-resident Indian is outside the scheme entirely until residential status changes; the residential-status test is therefore the gateway, not the passport.

Two structural limits matter under FEMA. First, the USD 250,000 is a combined annual ceiling for permissible current and capital account transactions taken together; if part of the limit is used earlier in the year, the available balance for the rest of that April-to-March window is reduced by that amount, per the RBI FAQ of 6 April 2023. Second, LRS cannot be used for remittances to countries or territories identified by the Financial Action Task Force (FATF) as non-cooperative, nor for the prohibited purposes discussed below. The FEMA framework is the enabling statute, and the full text is published on indiacode.nic.in.

Where does a Double Taxation Avoidance Agreement (DTAA) enter? LRS itself is a foreign-exchange permission, not a tax event, so a treaty does not "cover" the act of remitting. The DTAA network becomes relevant on the far side of the transaction: once LRS money is invested abroad and starts earning dividends, interest or capital gains, the treaty between India and the destination country decides which country taxes what, and at which capped rate. That is why the sections below separate the FEMA permission from the downstream tax outcome.

Tax Treatment in India

For a returning NRI, Indian tax on anything connected to LRS is decided first by residential status under Section 6 of the Income-tax Act 1961. A Resident and Ordinarily Resident (ROR) is taxed on worldwide income; a Resident but Not Ordinarily Resident (RNOR) and a non-resident are generally taxed only on India-source income. The 182-day physical-presence test is the primary threshold, so a person who has just used LRS as a fresh resident may still be RNOR for a transition period, sheltering genuinely foreign income even though the remittance itself is fully permitted. Model your own position with the NRI tax calculator before assuming global income is in scope.

The remittance carries one direct Indian tax touchpoint: Tax Collected at Source (TCS) under the Income-tax Act 1961, collected by the authorised dealer bank at the point the money leaves. As our TCS glossary entry explains, LRS remittances above an annual threshold attract TCS at 20% for most purposes such as overseas investment, property purchase and gifts, with concessional treatment reserved for overseas education and medical remittances. The threshold in rupee terms is set by the Finance Act and has been revised more than once, so confirm the current-year figure with your bank before remitting. Crucially, TCS is a prepaid tax, not a cost: it is creditable against your total income-tax liability and refundable through your return, so it affects cash flow rather than the final tax bill. Full particulars are published on incometax.gov.in.

Once you are an ROR, income earned by deploying LRS funds abroad is taxable in India at the same rates as domestic income of that character. The capital-gains position is where NRIs most often misread the treaty, so it is worth stating the domestic rates plainly.

On top of the base rate, a surcharge applies to higher incomes - 10% between Rs 50 lakh and Rs 1 crore, 15% between Rs 1 crore and Rs 2 crore, and 25% above Rs 2 crore - and a health and education cess of 4% is added to tax plus surcharge. A frequent error is to assume the old 37% top surcharge still bites; under the new tax regime the surcharge is capped at 25%, so a returning NRI defaulting to the new regime never pays the 37% rate. The Section 87A rebate under the new regime now stands at Rs 60,000 for total income up to Rs 12 lakh, and the standard deduction is Rs 75,000, both for FY 2025-26.

Tax Treatment Abroad

LRS money invested abroad is usually taxed first in the destination country, and India then relieves the double charge through the foreign-tax-credit mechanism. Take a resident who remits under LRS and buys US-listed stock: dividends are taxed in the United States, and under Article 24 of the India-US treaty (in force from 12 September 1991) a foreign tax credit is available in the country of residence, so an Indian ROR offsets the US tax suffered against Indian tax on the same dividend. Compute the credit with the foreign tax credit calculator rather than estimating it.

The treaty also caps the rate the source country may charge, which is the practical value of a DTAA. The table below shows the ceilings that matter for LRS-funded foreign portfolios, all drawn from India's treaties with three common destinations.

Two points guard against the commonest mistakes. First, capital gains are never "exempt" under these treaties for an Indian resident; India retains taxing rights and the long-term rate sits at 12.5% across all three treaties above, so treating a foreign capital gain as tax-free is a filing error, not a planning strategy. Second, the US dividend ceiling is 25% for ordinary portfolio holdings and only drops to 15% where the recipient holds at least 10% of the voting stock (a direct parent-subsidiary style holding under Article 10), so most retail LRS investors sit at the 25% rate. The UAE treaty (in force from 22 September 1993) requires a Tax Residency Certificate backed by proof of a UAE establishment before its lower rates apply, and gains on shares of an Indian company remain taxable in India.

A returning NRI who becomes ROR should also remember that foreign income does not escape Indian tax merely because it stayed abroad. Once worldwide income is in scope under Section 6 of the Income-tax Act 1961, foreign dividends and gains must be reported in the Indian return and the foreign tax credited, not ignored. This is precisely the transition where RNOR status, discussed above, buys breathing room in the first years back.

Repatriation Mechanics

LRS and the NRI repatriation regime are two directions of the same door, and knowing which one you are standing in front of prevents costly compliance mistakes. As a resident, LRS sends money out. As an NRI, the relevant accounts are NRE, NRO and FCNR(B), and the outward route is the USD 1 million per financial year scheme for NRO balances and inherited assets, not LRS. Our detailed treatment of the USD 1 million scheme walks through the CA certification (Form 15CA/15CB) and the account mechanics in full.

Even inside LRS there are repatriation rules to respect. Income earned on LRS investments abroad may be retained and reinvested overseas, but funds that are no longer required must be repatriated back to India within 180 days, per the RBI FAQ of 6 April 2023. Remittances may be made in any freely convertible foreign currency, and there is no restriction on the frequency of transactions within the USD 250,000 annual cap. For capital account transactions specifically, the RBI FAQ requires the resident to have maintained the bank account with the remitting bank for a minimum period of one year.

Gifts are a common cross-over point between the two regimes. Under LRS, a resident may gift up to the USD 250,000 annual limit to a close relative abroad, but where the recipient is an NRI or PIO relative, the RBI FAQ of 6 April 2023 requires the gift to be credited to the recipient's NRO account rather than paid out freely. On the compliance paperwork, the resident must furnish a Permanent Account Number (PAN) for every LRS remittance and file Form A2 declaring that the transaction conforms to Reserve Bank instructions. If you are weighing account choices as your status shifts, the NRE, NRO and FCNR comparison and the repatriation calculator set out where each rupee can legally go.

FAQ

Can an NRI use the Liberalised Remittance Scheme?

No. The RBI FAQ of 6 April 2023 restricts LRS to resident individuals, including minors, and expressly excludes corporates, partnership firms, HUFs and trusts. An NRI's outward route is the USD 1 million per financial year scheme from NRO balances, not the USD 250,000 LRS window. LRS becomes available only after residential status returns to "resident" under Section 6 of the Income-tax Act 1961.

Does the USD 250,000 limit reset every year?

Yes. The ceiling is USD 2,50,000 per financial year running April to March, per the RBI FAQ of 6 April 2023. If part of the limit is used earlier in the year, the available balance for the remainder of that same April-to-March window is reduced by the amount already remitted, and the full USD 250,000 is available afresh from 1 April.

Is TCS on an LRS remittance a permanent cost?

No. TCS under the Income-tax Act 1961 is collected by your bank at 20% for most purposes above an annual threshold, but it is a prepaid tax that is creditable against your total income-tax liability and refundable through your return. As the TCS glossary entry notes, it affects cash flow rather than your final tax bill. Confirm the current-year threshold with your authorised dealer bank, as the Finance Act has revised it more than once.

Are capital gains on LRS-funded foreign shares tax-free under a DTAA?

No. Treating a foreign capital gain as "exempt" is a common and costly error. India retains taxing rights and the long-term rate is 12.5% across the India-US, India-UK and India-UAE treaties. The treaty relieves double taxation through a foreign tax credit under provisions such as Article 24 of the India-US treaty (in force from 12 September 1991), it does not exempt the gain.

Can I gift money abroad to my NRI child using LRS?

Yes, within the USD 250,000 annual limit, but with a routing condition. Where the recipient is an NRI or PIO relative, the RBI FAQ of 6 April 2023 requires the gift to be credited to the recipient's NRO account rather than paid out freely. You must furnish your PAN and file Form A2 for the remittance.

What happens to unused LRS funds abroad?

Income earned on LRS investments may be retained and reinvested overseas, but funds no longer required must be repatriated to India within 180 days, per the RBI FAQ of 6 April 2023. There is no restriction on the frequency of remittances within the USD 250,000 annual cap, and remittances may be sent in any freely convertible foreign currency.

Do I need a one-year banking relationship to use LRS?

For capital account transactions, yes. The RBI FAQ of 6 April 2023 requires the resident to have maintained the account with the remitting bank for a minimum period of one year before making a capital account remittance under LRS. This condition does not apply in the same way to eligible current account remittances such as travel or education.