Have you ever processed an LRS request at your bank and wondered whether the remittance truly falls under the permitted category? Have you ever felt confused between a
current account transaction and a capital account transaction? Or perhaps felt uncertain about the exact powers of the RBI and Enforcement Directorate (ED) under FEMA?
If the answer is yes, you are not alone—these questions trouble thousands of bankers every single day. The Liberalised Remittance Scheme (LRS) is one of the most widely used foreign exchange facilities available to resident individuals in India. Yet, because of its regulatory complexity and evolving nature,
many bankers struggle to fully understand what is permitted, what is restricted, and what are the compliance requirements involved. For students preparing for JAIIB, CAIIB, IIBF, or bank promotion examinations, clarity on LRS and FEMA is non-negotiable. For practicing bankers, it is essential to avoid errors, penalties, and compliance lapses.
This article gives you a complete, deeply detailed, easy-to-understand explanation of LRS, capital and current account transactions, FEMA rules, penalties, ED powers, and the
responsibilities of AD Category-I banks. Everything has been simplified using relatable examples, analogies, and real banking scenarios so that even difficult concepts become crystal clear.
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Before you continue reading, make sure you watch the video for a complete audiovisual understanding, and feel free to share your questions or experiences in the comments.
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Why Foreign Exchange Facilities & LRS Matter
Foreign exchange facilities form a crucial part of modern banking operations. In a globalized world, customers frequently seek to send money abroad—for education, medical treatment, travel, family support,
business transactions, and investments.
Because of this growing demand, the Liberalised Remittance Scheme (LRS) has become one of the most essential tools for banks. However, the scheme operates under the
Foreign Exchange Management Act (FEMA) 1999, which includes strict rules, guidelines, and compliance obligations.
For bankers preparing for CIB, JRB, JAIIB, CAIIB, and for employees aiming for promotion, understanding LRS deeply is not just important—it is essential.
What Exactly Is the Liberalised Remittance Scheme (LRS)?
The Liberalised Remittance Scheme (LRS) is a facility under which Resident Individuals in India can remit money outside India for permitted purposes.
The annual limit is USD 250,000 per financial year.
Permitted purposes include:
- Travel abroad
- Family maintenance
- Gift or donation
- Medical treatment
- Education abroad
- Investment in property or shares abroad
- Opening a foreign bank account
Understanding Capital Account Transactions Under FEMA
A Capital Account Transaction affects assets or liabilities outside India. As per Section 2(e) of FEMA:
If a resident Indian performs a transaction that changes his/her ownership, assets, or financial obligations abroad—it is a Capital Account Transaction.
Examples:
- Buying property outside India
- Purchasing foreign company shares
- Opening a bank account abroad
- Sending a loan to an NRI
Current Account Transactions
Current Account Transactions, defined under Section 2(j) of FEMA, cover routine, day-to-day expenditures that do not create assets abroad.
- Travel expenses
- Medical expenses
- Education fees abroad
- Remittances to family
- Trade payments
- Interest payments
Rule: If it does not create an asset abroad, it is a Current Account Transaction.
Key FEMA Framework Every Banker Must Know
The FEMA framework divides transactions into:
- Capital Account Transactions
- Current Account Transactions
Remittances under LRS must comply with: RBI guidelines, FEMA rules, Authorized Dealer regulations, and reporting requirements.
Who Is Considered a “Resident” Under FEMA?
A person is considered resident if they stay in India for 182 days or more in the preceding financial year.
Not considered residents:
- Students studying abroad
- People employed abroad
- Business owners abroad
- Persons leaving India permanently
A special category called RN-NR (Resident but Not Permanently Resident) includes foreign nationals staying temporarily in India.
Restrictions on Holding Forex (Section 4 of FEMA)
Residents cannot acquire, hold, or transfer foreign properties unless:
- They acquired them while they were non-residents
- They acquire them under LRS through permitted channels
Permitted Capital Account Transactions (Section 6)
Residents can use forex for:
- Overseas investments
- Property purchases abroad
- Opening foreign bank accounts
- Setting up JVs or WOS abroad
Proper Utilization of Forex (Section 10(6))
Foreign exchange must be used only for the declared purpose. Otherwise, it must be surrendered to the bank, or penalties apply.
RBI’s Powers Under Section 11
The RBI has the power to:
- Seek customer information
- Restrict or stop transactions
- Issue directions to banks
- Impose penalties
Penalty: ₹10,000 + ₹2,000 per day for continuing violation.
Enforcement Directorate (ED) & Its Role Under FEMA
ED acts as the investigating authority for FEMA violations. Under FEMA, ED has civil powers.
ED functions include:
- Investigating violations
- Issuing notices
- Conducting searches
- Assisting adjudicating authorities
- Cooperating with global agencies
Compounding of Offences
Offenders may apply for compounding to RBI or ED. After paying the compounding fee, the case closes without court intervention.
Role of AD Category-I Banks
Banks must:
- Verify the legitimacy of transactions
- Perform KYC and due diligence
- Confirm the source of funds
- Ensure the purpose of LRS is valid
- Monitor USD 250,000 limit
- Maintain LRS records
- Submit reports to RBI
AD Banks act as the first line of FEMA compliance.
Conclusion
The Liberalised Remittance Scheme (LRS) empowers Indian residents to meet global financial needs, but it also demands understanding and compliance. This detailed breakdown provides clarity on LRS, FEMA, ED powers, capital and current account transactions, and AD bank responsibilities.
Use this knowledge confidently in examinations and real banking operations. For more insights, feel free to subscribe, follow, and share your thoughts in the comments.
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