GS Paper II & III
News Excerpt:
According to Reserve Bank of India data, Indians took out a total of $17 billion (Rs 1,41,800 crore) in 2023-24 for overseas travel under the RBI’s liberalised remittances scheme (LRS).
About Liberalised Remittance Scheme (LRS):
- Liberalised Remittance Scheme is a foreign exchange policy initiative introduced by the RBI to simplify and streamline the process of remitting funds outside India.
- Before 2004, the act of fund transfer from India to other countries came with severe restrictions under the Foreign Exchange Management Act of 1999.
- Thus, RBI introduced the LRS in 2004 to facilitate smooth foreign transactions.
- Under LRS, all resident individuals, including minors, can remit up to US $250,000 (approximately Rs 2.08 crore) abroad a year without prior approval from the RBI.
- The LRS limit for education, medical treatment, employment, emigration, travel, investment, etc., is the same as mentioned.
- However, one can not use the remittances for margin trading, buying lottery tickets, real estate, etc.
- This scheme has facilitated easier outward remittances for various purposes, including travel, education, investments, and supporting relatives abroad.
Changes in Outward Remittances:
- Over the last 10 years, there's been a significant change in the nature of outward remittances from India.
- In FY14, 'gifts' had the highest share in India's outward remittance, followed by 'others'.
- Other major categories were maintenance of close relatives and investment in equity/debt.
- The share of these categories has declined significantly in subsequent years.
Increase in Overseas Travel Expenditure:
The RBI data shows a dramatic increase in Indians' spending on overseas travel over the past five years:
- In 2023-24, Indians spent an average of $1.42 billion (about Rs 12,500 crore) per month on overseas travel. This is a substantial increase from just $400 million (about Rs 3,300 crore) per month in 2018-19.
- The total amount spent on overseas travel in 2023-24 reached $17 billion (Rs 1,41,800 crore), which is a 24.4% increase from the previous year's $13.66 billion.
- Travel has become the primary reason for outward remittances from India, accounting for 53.6% of total outflows in FY24. This is a dramatic increase from just 1.5% in 2013-14 and 35% in 2018-19.
Factors contributing to this trend:
- Increase in disposable income among Indians.
- Growth of an aspirational middle class.
- Lifting of Covid-19 travel restrictions, leading to pent-up demand for international travel.
Other Significant Outward Remittances:
While travel dominates, other categories of outward remittances are also significant:
- Foreign Investments: Indians invested an average of $100 million abroad every month in 2023-24 ($1.51 billion for the full year) in foreign equity and debt. This is up from $1.25 billion in 2022-23.
- Maintenance of Close Relatives: Remittances for this purpose totaled $4.61 billion in 2023-24. Interestingly, this category has maintained a consistent share of about 15% of total remittances over the past decade.
- Studies Abroad: Indians sent $3.47 billion abroad for education in 2023-24. However, the share of education in total remittances has declined sharply over the last 10 years.
Tax Collection at Source (TCS):
- TCS is a method where tax is collected at the point where a specified transaction occurs, rather than later when filing tax returns.
- The government introduced new TCS rates for remittances under the Liberalised Remittance Scheme (LRS) starting October 1, 2023.
- TCS is not an additional tax liability; people can claim a refund while filing income tax returns.
TCS Rates Under LRS (as per 2023-24 Budget):
- Overseas tour packages: 20% TCS from October 1 (up from 5%).
- Credit card spending abroad: No TCS levied.
Education-related TCS:
- The government has different TCS rates for education-related remittances, depending on the source of funds and the amount.
- For education funded by loans:
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- If the amount is less than Rs 7 lakh per individual per year, no TCS is applied.
- For amounts of Rs 7 lakh or more, a low TCS rate of 0.5% is applied.
- For self-funded education:
- Again, if the amount is less than Rs 7 lakh, no TCS is applied.
- For amounts of Rs 7 lakh or more, a higher TCS rate of 5% is applied.
