Why NRIs Cannot Use the Liberalised Remittance Scheme — and What the USD 250,000 LRS Limit Actually Covers

For resident Indians, the Liberalised Remittance Scheme (LRS) is the headline route for sending money abroad: under the scheme notified by the Reserve Bank of India, a resident individual may remit up to USD 250,000 per financial year for permitted current and capital account transactions. The figure is large, familiar and quoted in the press every time a family plans an overseas degree or a foreign holiday. The trouble is that a large number of non-resident Indians assume the same USD 250,000 window applies to them. It does not.

The RBI's own Frequently Asked Questions on LRS, last updated on 06 April 2023, are unambiguous: the scheme is available to resident individuals only. An NRI cannot remit a single dollar under LRS. This guide sets out why the scheme excludes non-residents, what the USD 250,000 limit actually covers for those who qualify, and which separate FEMA channels an NRI must use instead — channels that, in one specific case, are ten times more generous than LRS itself.

The confusion is understandable, because two different definitions of "residence" sit at the heart of Indian cross-border money law: one in the Foreign Exchange Management Act, 1999 (FEMA) and a separate one in the Income-tax Act, 1961. Get the FEMA classification wrong, and a remittance routed through the wrong scheme can be treated as an unauthorised dealing in foreign exchange under Section 3 of FEMA. The stakes for a wrong turn are real, which is why the residency test deserves a section of its own.

FEMA / DTAA Position

LRS is a creature of FEMA, not of the tax code. It was introduced by the RBI on 04 February 2004 with an initial cap of USD 25,000, and the ceiling has been revised several times to reach the current USD 250,000 per financial year (April to March). The scheme draws its authority from Section 6 of FEMA, 1999, which governs capital account transactions and provides that any such transaction needs RBI permission unless it is specifically permitted. LRS is the standing permission that lets a resident individual move money out without seeking case-by-case approval.

Eligibility turns on the FEMA definition of a "person resident in India" in Section 2(v) of the Act, which hinges on having resided in India for more than 182 days during the preceding financial year, read with the purpose of the person's stay. An NRI, by definition, fails that test. The RBI FAQ dated 06 April 2023 therefore states plainly that LRS is not available to corporates, partnership firms, Hindu Undivided Families (HUFs), trusts or non-resident individuals. The scheme is open to resident individuals, and from 2015 it has expressly included minors, provided Form A2 is countersigned by a guardian.

It is worth being precise about who is who. FEMA residency is not the same as the residential status used for income tax under Section 6 of the Income-tax Act, 1961, which counts 182 days (or 60 days plus 365 days over four years) in the relevant previous year. A person can be a tax resident in one year and a FEMA non-resident in another, because the two statutes test different periods and different intents. For LRS, only the FEMA classification matters.

What does the USD 250,000 actually buy for an eligible resident? The RBI lists permitted purposes that span both current and capital account: private travel, gifts and donations, employment abroad, emigration, maintenance of relatives, medical treatment, overseas education, the purchase of immovable property abroad, and overseas portfolio or direct investment. The single annual ceiling of USD 250,000 is shared across all of these heads combined, so a resident who has already remitted USD 200,000 for a child's tuition has only USD 50,000 of headroom left for any other purpose in that same financial year.

Tax Treatment in India

Because LRS is closed to NRIs, the more useful question is how the money an NRI does send abroad is taxed in India before it leaves. A remittance is not itself a taxable event; what matters is the character of the underlying income and whether tax has been deducted at source. For an NRI, most domestic income flows through a Non-Resident Ordinary (NRO) account, and tax is collected under the deduction-at-source machinery of Section 195 of the Income-tax Act, 1961.

Interest credited to an NRO account suffers TDS at 30%, plus the applicable surcharge and a health and education cess of 4% on the tax-plus-surcharge. By contrast, interest on an NRE or FCNR deposit is exempt from Indian income tax under Section 10(4) so long as the account holder remains a non-resident, which is why those balances carry no TDS. The gap between a 30%-plus-cess deduction on NRO interest and a nil deduction on NRE interest is one of the most consequential numbers in NRI planning, and our NRI tax calculator is built to model exactly that split.

Capital gains follow the post-Budget-2024 regime that took effect on 23 July 2024. Long-term capital gains on listed equity and equity mutual funds are taxed at 12.5% above the annual exemption of Rs 1.25 lakh, while short-term gains on the same assets are taxed at 20%. Long-term gains on immovable property are taxed at 12.5% without indexation for assets acquired on or after 23 July 2024, with a grandfathering option of 20% with indexation for property acquired before that date. An NRI selling Indian property should note that the buyer is obliged to deduct TDS on the gross sale consideration, not merely on the gain, which routinely traps far more cash than the eventual liability; our rental income tax calculator helps non-residents project the annual position on let-out property before the return is filed.

A point that trips up high earners: surcharge on income taxed under Sections 111A, 112 and 112A — that is, on most capital gains — is capped at 15%, even where total income would otherwise attract a higher slab of surcharge. The overall surcharge under the new tax regime is in any case capped at 25%, so the headline 37% rate that once applied to the very highest incomes no longer operates under the new regime.

Tax Treatment Abroad

An NRI who is taxed in India on Indian-source income is usually also taxable on worldwide income in the country of residence, which raises the spectre of the same rupee being taxed twice. The relief is the Double Taxation Avoidance Agreement (DTAA), which either exempts the income in one country or, more commonly, grants a foreign tax credit. The India-USA treaty, in force since 12 September 1991, illustrates the mechanics: under Article 24, a US-resident taxpayer claims a credit for Indian tax paid against the matching US liability, so the effective burden is the higher of the two rates rather than the sum.

The treaty also caps the Indian tax on certain passive income. Under the India-USA DTAA, interest is taxed at 15%, royalties and fees for technical services at 15%, and dividends at 15% where the recipient holds at least 10% of the voting stock but 25% in all other (portfolio) cases under Article 10. Crucially, the treaty does not make capital gains exempt: India retains the right to tax gains on Indian assets, and the domestic 12.5% long-term rate continues to apply, with treaty relief delivered as a credit in the United States rather than an exemption in India.

To claim the lower treaty rate on Indian income, the NRI must furnish a Tax Residency Certificate from the country of residence together with Form 10F, and the foreign tax credit abroad is then claimed on the basis of Indian tax actually paid. The "make available" test in Article 12 means that fees for technical services are taxed at the treaty rate only where the service transfers know-how that the recipient can apply independently, a distinction that has generated extensive litigation but does not change the headline 15% ceiling.

Repatriation Mechanics

Since LRS is unavailable, the practical question for an NRI is how to move money out lawfully. The answer lies in the account architecture prescribed under FEMA. There are three account types, and the repatriation rules differ sharply between them.

An NRE account holds income earned abroad, converted to rupees, and both principal and interest are fully and freely repatriable without any annual ceiling. An FCNR deposit holds the balance in foreign currency, insulating it from rupee depreciation, and is likewise fully repatriable on maturity. The NRO account is the constrained one: it captures India-source income such as rent, dividends and pension, and balances in it may be remitted abroad only up to USD 1 million per financial year under the Remittance of Assets framework, after taxes are paid and Forms 15CA and 15CB are filed.

The USD 1 million NRO window is, notably, four times the USD 250,000 a resident gets under LRS — a useful corrective to the assumption that non-residents are disadvantaged on outward remittance. It is governed by FEMA rather than by LRS, requires a chartered accountant's certificate in Form 15CB confirming that applicable tax has been deducted, and the corresponding Form 15CA must be filed on the income-tax portal before the bank executes the transfer. Our repatriation calculator models the USD 1 million limit alongside the tax that must be cleared first.

Before initiating any outward transfer, an NRI should confirm three things: first, that their FEMA residential status is correctly recorded with the bank, because using a resident savings account after becoming an NRI is itself a contravention; second, that the source account matches the nature of the funds — NRE for foreign income, NRO for Indian income; and third, that Forms 15CA and 15CB are in hand for any NRO remittance. Get those right, and the USD 1 million annual route is both larger and, for India-source wealth, the only correct path — LRS is simply the wrong door.

FAQ

Can an NRI use the USD 250,000 LRS limit at all?

No. The RBI FAQ updated on 06 April 2023 confirms that LRS is available to resident individuals only. A non-resident cannot remit any amount under LRS, regardless of the purpose, and must instead use the NRE, FCNR or NRO routes prescribed under FEMA, 1999.

What is the USD 250,000 LRS limit meant for?

For an eligible resident individual, the USD 250,000 per financial year covers a combined basket of permitted purposes — travel, education, medical treatment, gifts, maintenance of relatives, purchase of overseas property and overseas investment. The single ceiling is shared across all heads, so amounts used for one purpose reduce the headroom available for the rest in that year.

How much can an NRI repatriate from an NRO account?

Up to USD 1 million per financial year under the Remittance of Assets framework, after applicable Indian taxes are paid and Forms 15CA and 15CB are filed. NRE and FCNR balances, by contrast, are fully repatriable with no annual cap.

Is NRO interest taxed differently from NRE interest?

Yes. NRO interest suffers TDS at 30% plus surcharge and 4% cess under Section 195, while NRE and FCNR interest is exempt under Section 10(4) of the Income-tax Act, 1961, so long as the holder remains a non-resident. The difference can be substantial on large balances.

Does the India-USA DTAA make capital gains tax-free?

No. The treaty does not exempt capital gains; India retains the right to tax gains on Indian assets, and the domestic long-term rate of 12.5% applies. Relief from double taxation is given as a foreign tax credit in the United States under Article 24, not as an exemption in India.

Why are there two definitions of residence?

FEMA, 1999 defines a "person resident in India" in Section 2(v) using a 182-day test read with the purpose of stay, to decide which exchange-control rules apply. The Income-tax Act, 1961 defines residence separately under Section 6 to decide the scope of taxable income. A person can be classified differently under the two laws in the same year.

What documents does an NRI need to remit money abroad?

For an NRO remittance, the NRI needs Form 15CB (a chartered accountant's certificate) and Form 15CA filed on the income-tax portal, plus a Tax Residency Certificate and Form 10F to claim any lower DTAA rate on the underlying income. NRE and FCNR remittances are simpler because those funds are already designated as repatriable.