Loans to NRI Relatives and Overseas Investing: The LRS Capital-Account Rules Explained

The Liberalised Remittance Scheme (LRS) lets a resident individual send up to USD 250,000 per financial year out of India for a defined list of purposes, and one of the least-understood entries on that list is an interest-free loan to a Non-Resident Indian relative. The scheme sits inside the Reserve Bank of India's LRS Master Direction, which reads the USD 250,000 envelope as a single annual ceiling spanning both current-account spending and capital-account transactions (rbi.org.in).

Because the remitter is resident and the recipient is an NRI, the transaction straddles two tax systems at once. This NRI Corner explainer maps the four questions a family actually asks: what the Foreign Exchange Management Act, 1999 (FEMA) and the tax treaties permit, how India taxes the money and anything it later earns, how the NRI's country of residence treats it, and how the funds legally move back and forth. Every figure below is drawn from the RBI Master Direction, the relevant Double Taxation Avoidance Agreement (DTAA), or Oquilia's central rate configuration.

FEMA / DTAA Position

The starting point is Section 6 of FEMA, 1999, which governs capital-account transactions and requires RBI permission unless a transaction is specifically permitted; the LRS is the standing permission window through which a resident individual may remit up to USD 250,000 in a financial year (indiacode.nic.in). Extending a loan abroad and acquiring foreign assets are both capital-account acts, so they draw down the same annual cap rather than sitting outside it.

Within that USD 250,000 limit, the RBI Master Direction lets a resident individual open a foreign-currency account abroad, acquire overseas immovable property, make Overseas Direct Investment and Overseas Portfolio Investment under the Foreign Exchange Management (Overseas Investment) Rules, 2022, and extend interest-free loans to NRI relatives. The loan leg is conditional: it must be interest-free, and the borrower must be a "relative" as that term is defined in the Companies Act, 2013, which the RBI adopts for LRS purposes.

Certain remittances are carved out of the scheme entirely. Remittances prohibited under Schedule I of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, and those restricted under Schedule II, cannot be routed through the LRS, and remittances to jurisdictions identified by the Financial Action Task Force (FATF) as non-cooperative are also excluded (rbi.org.in).

The table below separates what the USD 250,000 envelope covers from what it does not.

On the treaty side, a DTAA never taxes the loan itself, because a repayable loan is not income; the treaties matter only once the NRI invests the money and starts earning. It is worth stating plainly, because it is a common error, that no DTAA treats capital gains on Indian assets as exempt for an NRI. India retains its taxing right, and long-term capital gains on listed equity are taxed at 12.5% regardless of the treaty (learn the term in our DTAA glossary).

Tax Treatment in India

For the NRI borrower, the loan principal is not taxable income in India, because it is repayable and carries no element of gift. That distinction matters: money received without consideration from a person who is not a "relative" is taxable under Section 56(2)(x) of the Income-tax Act, 1961, once it crosses the monetary limit prescribed in that section, whereas a genuine loan and any receipt from a relative fall outside the charge (incometax.gov.in). Documenting the arrangement as a loan, not a transfer, is therefore the single most important compliance step.

Because the LRS loan must be interest-free, no interest income arises in India for the resident lender to declare. Were the same money lent at interest, the position would flip: interest paid to a non-resident is India-source income, and the payer would have to withhold tax under Section 195, at the DTAA rate or the Income-tax Act rate, whichever is lower (incometax.gov.in). The interest-free condition is what keeps the transaction free of any Indian withholding.

Tax re-enters the picture the moment the NRI channels the funds back into Indian assets. Gains on listed equity and equity mutual funds are long-term after the statutory holding period and taxed at 12.5% on gains above the annual exemption of Rs 1,25,000, while short-term gains on the same assets are taxed at 20% (Budget 2024, effective 23 July 2024). Land, buildings and gold acquired on or after 23 July 2024 attract long-term capital gains tax at 12.5% without indexation; assets acquired before that date are grandfathered to the older 20% with indexation basis, and the taxpayer takes whichever computation is lower.

On top of the base tax, a surcharge applies to higher incomes at 10% between Rs 50 lakh and Rs 1 crore, 15% from Rs 1 crore to Rs 2 crore, and 25% from Rs 2 crore to Rs 5 crore of income, with a health and education cess of 4% levied on tax-plus-surcharge. Crucially for large portfolios, the surcharge on incomes above Rs 5 crore is capped at 25% in the new regime, against 37% in the old regime (surcharge, explained). You can model an NRI's slab, surcharge and cess position with the NRI income-tax calculator.

A separate obligation sits on the resident remitter, not the NRI: an LRS remittance is subject to Tax Collected at Source under Section 206C(1G) of the Income-tax Act. Because the rate and the exemption threshold have been revised more than once, confirm the prevailing figures on incometax.gov.in before remitting rather than relying on an older number.

Tax Treatment Abroad

Once the NRI invests the loaned funds and earns income, the country of residence taxes that income under its own rules, and the DTAA exists to stop the same income being taxed twice. The India-USA treaty makes this explicit: Article 24 grants the resident a foreign tax credit in the country of residence for tax paid in the source country, so Indian tax on Indian-source income is set off against the US liability on the same income (foreign tax credit calculator).

The DTAA rates that cap India's tax on the NRI's Indian-source income differ by country, which is why the choice of where the NRI invests and resides changes the arithmetic. The comparison below is drawn from the treaty rate schedule for the three most common corridors.

Two treaty details temper those headline numbers. Under Article 10 of the India-USA treaty (in force since 12 September 1991), the 15% dividend rate applies only where the recipient holds at least 10% of the voting stock; portfolio holdings bear the 25% rate shown above. Under the India-UAE treaty (in force since 22 September 1993), capital gains on shares of an Indian company remain taxable in India, and claiming the treaty rate requires a valid Tax Residency Certificate supported by proof of a UAE establishment.

The mechanism that actually delivers the lower rate at source is Section 195 read with the treaty: the payer in India withholds at the DTAA rate or the Income-tax Act rate, whichever is lower, provided the NRI furnishes a Tax Residency Certificate and Form 10F (incometax.gov.in). Without that documentation the payer defaults to the higher domestic rate, and the NRI is left to reclaim the difference.

Repatriation Mechanics

The LRS loan travels outward first: the resident lender's authorised dealer bank debits a rupee account and remits foreign currency to the NRI abroad, all within the USD 250,000 annual ceiling set by the RBI Master Direction (rbi.org.in). The remittance must be to the NRI relative's own account, and the purpose has to be declared truthfully on the LRS application, because a loan and a gift are treated differently downstream.

Repayment flows the other way and is tightly channelled. Under FEMA, the NRI repays an LRS loan either by inward remittance through normal banking channels or by debit to the NRI's own NRO, NRE or FCNR account; it cannot be settled in cash or routed through a third party. Since the loan is interest-free, only the principal is ever repaid, which keeps the repayment free of any Indian interest-withholding question.

The account the NRI uses determines how freely the money can move. Balances in NRE and FCNR accounts are fully and freely repatriable, principal and interest alike, whereas an NRO account is a resident-rupee holding whose repatriation abroad is subject to an annual ceiling and to CA certification on Form 15CA and Form 15CB before the bank will release funds (NRO account basics and NRE account basics). If the NRI wants to send loan proceeds or investment returns back out of India, the NRI repatriation calculator helps sequence which account to draw from.

Where the NRI holds Indian property or lets it out, the rental income is taxable in India and subject to TDS before repatriation of the net proceeds; the rental-income tax calculator shows the net figure available for repatriation after the applicable withholding under Section 195.

FAQ

Can a resident give an interest-bearing loan to an NRI relative under the LRS?

No. The RBI Master Direction permits loans to NRI relatives under the LRS only if they are interest-free, within the USD 250,000 per financial year ceiling. Charging interest would take the loan outside the LRS permission and create India-source interest income subject to withholding under Section 195.

Is the loan taxable in the hands of the NRI in India?

A genuine, repayable loan is not income, so it is not taxed under Section 56(2)(x) of the Income-tax Act, 1961. That section taxes money received without consideration from a non-relative above the prescribed limit; a documented loan, and receipts from a relative, sit outside the charge (incometax.gov.in).

Does the USD 250,000 limit apply per person or per family?

The LRS ceiling of USD 250,000 is per resident individual per financial year, so each eligible family member has a separate envelope. Minors are covered too, with the LRS declaration signed by a natural guardian, per the RBI Master Direction (rbi.org.in).

If the NRI invests the loan in Indian shares, how are the gains taxed?

Long-term capital gains on listed equity are taxed at 12.5% above the annual exemption of Rs 1,25,000, and short-term gains at 20% (Budget 2024, effective 23 July 2024). No DTAA treats these gains as exempt; India retains the taxing right, and any treaty relief operates through a foreign tax credit in the country of residence.

Can the loan be remitted to a country on the FATF non-cooperative list?

No. Remittances to jurisdictions the FATF identifies as non-cooperative are excluded from the LRS, as are purposes prohibited under Schedule I or restricted under Schedule II of the Current Account Transaction Rules.

How does the NRI repay the loan back to India?

Repayment must come by inward remittance through banking channels or by debit to the NRI's own NRO, NRE or FCNR account; cash and third-party settlement are not allowed under FEMA. As the loan is interest-free, only the principal is repaid.

What documents lower the tax withheld on the NRI's Indian income?

To have TDS deducted at the DTAA rate rather than the higher domestic rate under Section 195, the NRI must furnish a valid Tax Residency Certificate and Form 10F; for UAE residents the treaty rate also needs proof of a UAE establishment (incometax.gov.in).