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RBI alters the definition of ‘relative’ to check outward remittances

Published on June 20, 2018
RBI in its latest move makes the ‘maintenance of close relative’, difficult!
  • The issue of people sending funds abroad under the ‘maintenance of close relative’ category of the Liberalised Remittance Scheme (LRS) is something that the Reserve Bank of India (RBI) is determined to tackle. 
  • The RBI in its latest move has narrowed the definition of relatives to check the flow of funds.
  • From now on, funds under the ‘maintenance of close relative’ category can be sent only to immediate relatives such as parents, spouses, children and their spouses.
  • The RBI in its statement said that “In the context of remittances allowed under LRS for maintenance of close relatives, it has been decided to align the definition of ‘relative’ with the definition given in Companies Act, 2013 instead of Companies Act, 1956”.
  • Its interesting to know that outward remittances under maintenance of close relatives had shot up to almost $3 billion in 2017-18 from mere $174 million in 2013-14. The funds sent under this category have more than doubled since 2015-16. Overall outward remittances under LRS went up to $11 billion from $1 billion in the same period.
  • That is a huge increase that warrants attention by the central bank and in June 2018 in order to keep things in check, the RBI had made PAN mandatory for anyone using LRS for remitting money outside the country. 
  • Earlier, PAN was not insisted upon for putting current account transactions of up to $25,000.
  • It is possible that the facility of "maintenance of relatives" under the Liberalised Remittance Scheme is used for commercial purposes which is not its objective. That may have prompted the regulator to narrow the definition of relatives.
  • Also, the RBI has introduced a system for daily reporting of individual transactions under the LRS by banks.

Liberalised Remittance Scheme

  • LRS is facility provided by RBI for all resident individuals including minors to freely remit up to a certain amount in terms of US Dollar for current and capital account purposes or combination of both.
  • The scheme was introduced in February 2004 and its regulations are provided under Foreign Exchange Management Act (FEMA), 1999.
  • At present, LRS limit for all resident individuals, including minors, is the US $2,50,000 (Rs. 1.5 crores) per financial year.
  • Under LRS, individuals can make remittances for overseas education, travel, medical treatment, maintenance to relatives living abroad, gifting and donations.
  • The remitted money can be used for purchase of shares and property as well.
  • Individuals can also open, maintain and hold foreign currency accounts with overseas banks for carrying out transactions under it.
  • Under LRS, remittances cannot be used for trading on foreign exchange markets, purchase of Foreign Currency Convertible Bonds issued abroad by Indian companies and margin or margin calls to overseas exchanges and counterparties.
  • Similarly, individuals are not allowed to send money to countries identified as ‘non-cooperative jurisdictions’ by Financial Action Task Force (FAFT).
  • It also prohibits remittances to entities identified as posing terrorist risks.

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