Introduction
There has been an increase in the number of transactions in the modern era of globalization. There is a growing trend in terms of international trade. Cross-border payments are transactions where the payee and the recipient are both located in different countries. Individuals, companies, or banking institutions looking to transfer funds across borders can engage in these transactions.
Laws Governing International Payments
The Reserve Bank of India (“RBI”) is responsible for ensuring that individuals and companies follow the appropriate rules and laws governing international money transfers. When funds are transferred in or out of India, it is regulated by the Foreign Exchange Management Act, 1999 (FEMA). This legislation serves two purposes:
- To ensure that outward international money transfers are not the result of crime or other unlawful acts, as well as to limit the movement of Indian National Rupee (“INR”) out of the country to maintain the stability of the local currency.
- It assists the Reserve Bank of India in stabilizing local currency markets, by ensuring there is no rapid outflow of money from India that could harm the economy.
Outward Remittance Rules in India
The Liberalized Remittance Scheme (“LRS”) of the RBI regulates how Indian citizens can transfer money outside of the country. It allows individuals to remit a certain amount of money during a financial year to another country for investment and expenditure.
Residents may remit up to $2,50,000 per financial year, according to the prevailing regulations. This money can be used to cover expenses related to:
- Personal or business travel
- Medical treatment
- Overseas education
- Presents and donations
- Helping family members who live abroad
Apart from this, the money can be invested in shares, debt instruments and be used to purchase immovable properties in the international market. Individuals can also open and maintain foreign accounts with banks outside of India for carrying out transactions approved under the scheme.
Outward remittances falling in categories other than listed under the scheme are prohibited. For example:
- Buying and selling of foreign exchange abroad for the purchase of lottery tickets;
- Proscribed magazines etc.
Remittances for reasons specifically forbidden under Schedule II of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 are not permitted under the LRS. The scheme is not available for capital account remittances to the countries that are identified as “non-co-operative countries and territories” by the Financial Action Task Force.
Non-Resident Indian (“NRI”) Remittances
As per the FEMA, different money transfer rules apply to non-resident Indians (“NRI”) based on the bank account type, which is either:
- Non-Resident External (“NRE”): For NRIs who earn money from another country and want to remit them to India to hold as savings in INR, before transferring the funds back to the country of residence.
- Non-Resident Ordinary (“NRO”): An INR- dominated account suitable for non-residents who have earnings in India.
- Foreign Currency Non-Resident Bank Account (“FCNR B”): Foreign exchange account to deposit funds and limit currency conversion risks.
Inward Remittance Rules
Inward remittances to India are the highest in the world. There are two routes for inward remittances:
- The Rupee Drawing Arrangement (“RDA”): Under this route, there is no limit on the amount of money that can be transferred to India for personal transactions. However, there is a limit applicable in case of business transfers.
- The Money Transfer Service Scheme (“MTSS”): With MTSS transfers, you can send up to $2,500 to India in a single transaction. The RBI also limits the number of transactions at 30 to a single recipient in a year.
A Foreign Inward Remittance Certificate (“FIRC”) is also required. It acts as a receipt issued by banks as proof of money transfer from another country to India.
Conclusion
Cross-border transactions are on the rise, giving them a prominent position in the economy. Foreign exchange plays a critical function in the development of the economy.
The content of this article is intended to provide general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
References
A Sharma, What is Liberalised Remittance Scheme and what’s it used for? Mint, available at https://www.livemint.com/money/personal-finance/what-is-liberalised-remittance-scheme-and-what-s-it-used-for-1568743705625.html last seen on 23 July 2021
Foreign Exchange Management Act, Reserve Bank of India, available at https://rbi.org.in/scripts/Fema.aspx last seen on 23 July 2021
